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1
7
Responsive in
every environment
Annual Report & Accounts 2017
Strategic report
Governance
Overview
2 Our investment
proposition
8 Chairman’s statement
10 Business model
Strategy
12 Chief Executive’s review
14 Strategy
Performance
16 Financial review
18 Key performance
indicators
20 Underwriting review
24 Business review
31 Enterprise risk
management
34 Principal risks
36 Corporate responsibility
42 Chairman’s introduction
44 Board of Directors
46 Our Board’s year
47 Corporate governance
report
50 Committee reports
60 Directors’ remuneration
report
80 Directors’ report
84 Statement of Directors’
responsibilities
Consolidated
Financial Statements
85 Independent auditors’
report
90 Consolidated primary
financial statements
94 Accounting policies
100 Risk disclosures
126 Notes to the accounts
Additional information
152 Shareholder information
153 Glossary
157 Contact information
Return on
equity
Combined
ratio
(Loss) Profit
after tax
-5.9%
(2016: 13.5%)
124.9%
(2016: 76.5%)
$-71.1m
(2016: $153.8m)
Total
investment
return
2.5%
(2016: 2.1%)
Dividend
yield
1.6%
(2016: 10.5%)
Total
shareholder
return
9.4%
(2016: 2.4%)
2017
2017
-5.9
2017
124.9
2017
-71.1
2017
2017
2.5
1.6
2016
2016
13.5
2016
76.5
2016
153.8
2016
2.1
2016
10.5
2015
2015
13.5*
2015
72.1
2014
2014
14.7*
2014
68.7
2013
2013
18.9*
2013
70.2
2015
2014
2013
181.1
2015
0.7
229.3
2014
1.0
222.5
2013
0.3
2015
2014
2013
* RoE including the impact of warrants was 10.9% in 2015, 13.9% in 2014 and 18.9% in 2013.
2017
2016
9.4
2.4
17.3
2015
25.9
17.8
2014
-24.2
12.3
2013
21.3
Lancashire is a provider of
global specialty insurance and
reinsurance products operating
in Bermuda and London across
three platforms: rated company,
Lloyd’s and collateralised security.
The Group focuses on
short-tail, mostly specialty
(re)insurance risks under five
general segments: Property,
Energy, Marine, Aviation
and Lloyd’s.
Please refer to our glossary
on pages 153 to 156 for
key definitions.
The consistency and
adaptability of our core
principles enable us to
deliver strong returns
across the market cycle.
Whatever conditions
the market brings, we are
disciplined in the risks that
we underwrite and manage,
staying nimble to seize
opportunities wherever
they present themselves.
NASA Earth Observatory images by Joshua Stevens and Jesse Allen, using VIIRS day-night band data from the Suomi National Polar-orbiting
Partnership and Terra MODIS data from the Land Atmosphere Near real-time Capability for EOS (LANCE)
www.lancashiregroup.com
1
2017 has proven to be a challenging
year but no matter what environment
we find ourselves in, underwriting comes
first. This focus on our core principle has
allowed us to deliver sector-leading
returns across the cycle.
We are
guided by
our core
strategic
principles
2
Lancashire Holdings Limited | Annual Report & Accounts 2017
Our investment proposition: Underwriting comes first
Delivering superior returns across the cycle
and moderating downside risk
Ten-year Return on Equity1
)
%
(
y
t
i
u
q
E
n
o
n
r
u
t
e
R
30
25
20
15
10
5
0
-5
-10
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Description
Our strategy is designed to
cope with hard and soft markets,
managing capital and exposures
to maximise risk-adjusted returns
across the cycle whilst moderating
our exposures according to
market conditions.
Our strategic cross-cycle aim is to
be profitable four years out of five,
acknowledging there will be years
when we incur losses. 2017 is the
first full year we have incurred a
loss since inception.
(1) RoE excluding the impact of warrants.
Experienced underwriters produce higher
returns across the cycle
Ten-year combined ratio
)
%
(
o
i
t
a
r
d
e
n
b
m
o
C
i
140
120
100
80
60
40
20
0
2008
2009
2010
2011
Lancashire
Lancashire – 10-year average1
2012
2013
Sector2 average
2014
Sector average – 10-year average1
2016
2015
Description
Group management and our
underwriters have decades of
experience in rated companies,
Lloyd’s and collateralised security
markets. Across the cycle our
combined ratio outperformed
the sector average.
(1) Ten-year average based on 2008 to
2017 reporting periods. Lancashire
ratios weighted by annual net
premiums earned. Annual sector
ratios are weighted by annual
net premiums earned.
(2) Sector includes Arch, Argo, Aspen,
Axis, Beazley, Everest, Hanover, Hiscox,
RenaissanceRe, Validus and XL Catlin.
The 2017 result for Hiscox is not
available at the time of the report.
Source: Company reports.
2017
www.lancashiregroup.com
3
This year has shown why it is critical to
balance risk and return and to understand
the implications of over exposure in
the market. The comprehensive risk
management procedures our teams
undertake every day allow us to strike
the right balance of risk and return.
In particular, we expect volatility in the
occurrence of the catastrophe events
to which our products respond.
We
navigate
risk
confidently
4
Lancashire Holdings Limited | Annual Report & Accounts 2017
Our investment proposition: Effectively balance risk and return
Managing our exposures across segments and geographies
Gross premiums written by class and region
Property
Energy
Marine
Aviation
Lloyd’s
33.5%
17.2%
11.4%
2.9%
35.0%
30.0%
U.S. and Canada
Worldwide offshore
27.5%
Worldwide, including the U.S. and Canada 16.7%
6.6%
Europe
Far East
4.7%
Worldwide, excluding the U.S. and Canada 1.9%
Middle East
1.2%
11.4%
Rest of the world
Protecting our assets
Investment asset allocation
Duration
1.7 years
Cash
Short-term investments
Fixed maturity funds
Government debt
Agency debt
Agency MBS, CMBS
Non-agency RMBS, ABS, CMBS
Corporate bonds
Bank loans
Fixed maturity – at FVTPL
Equity securities
Hedge funds – at FVTPL
10.2%
6.0%
1.7%
17.0%
3.8%
7.7%
8.5%
28.2%
5.8%
1.4%
1.3%
8.4%
Total portfolio at 31 December 2017 $1,842.7m
Credit quality AA-.
Description
A well-diversified portfolio across
multiple lines and geographies
operates as a base to trade across
the cycle.
During 2017, Lancashire
has balanced the needs of its
shareholders, wider stakeholders
and importantly met the needs
of its clients following the impact
of the multiple catastrophe events.
Description
We hedge our interest rate
risk with risk assets and aim
to minimise the downside
on our investment portfolio.
www.lancashiregroup.com
5
In volatile and harsh conditions, we
operate nimbly to achieve the maximum
return for our shareholders across the
market cycle. As new opportunities
emerge in the future, our focused yet
diversified books will give us the ability to
capitalise on opportunities and deliver our
cross-cycle strategic goal of maximising
risk-adjusted returns across the cycle.
We are
able to
react quickly
to seize
opportunities
6
Lancashire Holdings Limited | Annual Report & Accounts 2017
Our investment proposition: Operating nimbly through the cycle
Managing our capital proactively in volatile markets
Proven record of active capital management
500
400
)
m
$
(
300
200
100
0
2008
2009
Share repurchases
2010
2011
Special dividend
2012
2013
Ordinary dividends
2014
Description
Despite the difficult market
and a significant number of
catastrophe events in the year,
Lancashire’s capital base
remains strong and positions
us to remain relevant in the
current market environment.
300
250
200
150
)
%
(
100
50
2015
Percentage of IPO capital returned
2016
2017
0
Managing the cycle by reducing net exposures
Net PMLs by key catastrophe perils
500
400
300
200
100
0
)
m
$
(
L
M
P
t
e
n
p
u
o
r
G
300
250
200
150
100
50
0
Pan-European
windstorm
(1/100)
Japan
earthquake
(1/250)
California
earthquake
(1/250)
Gulf of Mexico
hurricane
(1/100)
Non-Gulf of
Mexico hurricane
(1/100)
01/01/14
01/01/15
01/01/16
01/01/17
01/01/18
Description
We continued to modify our
exposure to key catastrophe
perils as the market became
more competitive, demonstrating
our discipline and nimbleness
across the market cycle.
www.lancashiregroup.com
7
Chairman’s statement
Chairman’s statement
Responding to challenge
For Lancashire the recent catastrophe events have
afforded a real world ‘stress test’ to our strategy
and business model, and one which has validated
our strategic decision to moderate our risk exposures
during the softer part of the insurance cycle.
How did Lancashire respond to the
sequence of natural catastrophes
during 2017?
One of the central challenges for any board
or management team is to understand the
principal factors which can stress a business.
What are they, where do the risks and
opportunities lie and how best to respond?
In recent years, Lancashire had faced
the challenge of a relatively benign loss
environment (subject to exceptions in
certain lines of business) resulting in the
accumulation of capital across the global
(re)insurance sector and a gradual decline
in premium rates. In general terms, the
(re)insurance sector has tended to be paid
less for the risks underwritten. Put simply,
the business has been operating in the softer
part of the (re)insurance cycle. Lancashire’s
strategic response has been to focus on
maintaining market-leading underwriting
and to carefully manage risk exposures,
through the disciplined underwriting of
inwards insurance and reinsurance risks and
through careful planning and purchasing
of outwards reinsurance protections.
Insurance (and reinsurance), as a product,
is designed to help insured businesses plan
for and respond to damage and disruption
arising from fortuitous and unpredictable
events, in particular natural catastrophes.
Events such as hurricanes and earthquakes
are the result of natural processes which
are certain to occur as part of the cycles
of nature. However, in the short term, their
location, frequency and severity cannot
be accurately predicted, although human
ingenuity has produced probability models
which have enhanced our understanding of
the risks and, combined with the benefits of
practical underwriting experience, helped
inform our commercial assumptions.
Please see my introduction to the
Governance Report on page 42 for an
account of the work of the Board and our
governance arrangements for the year.
Will strategy change in 2018?
I do not expect Lancashire’s strategic
priorities to change in 2018. We will continue
to focus on underwriting expertise and
discipline, to effectively balance the equation
of risk and return, and to operate nimbly
through the cycle. What we do cautiously
hope to see in this post-loss environment
is an improvement in general pricing
conditions, which may lead to greater
opportunity in the underwriting space
and a rebalancing of the risk and return
equation. Alex discusses these dynamics
in greater detail in his review on page 12.
From a Board perspective our job is to
ensure that we afford the business the capital
and human resources necessary to develop
any opportunities whilst ensuring that we
establish and operate within appropriate
risk tolerances. Predicting the future is never
straightforward, but on the assumption that
pricing improves and that the catastrophe
loss environment is less extreme in 2018 than
it proved to be in 2017, the Board would
hope to see returns improving and more
aligned with our cross-cycle expectations.
In the second half of 2017, we witnessed
the occurrence of three major hurricanes:
Harvey, Irma and Maria, two earthquakes
in Mexico as well as wildfires in California.
These catastrophes impacted upon areas
of higher asset values and insurance market
penetration, in particular in the U.S. and
the Caribbean. For Lancashire, these recent
catastrophe events have afforded a real world
‘stress test’ to our strategy and business
model, and one which has validated our
strategic decision to moderate our risk
exposures during the softer part of the
insurance cycle.
The Board was pleased at the way in
which Lancashire proved itself capable
of balancing the expectations of all its
significant stakeholders in the face of
the recent loss events. Most importantly,
Lancashire has addressed the insurance
needs of its clients within a transparent and
robust risk framework. We have operated a
business which has met the expectations of
the Group’s regulators whilst ensuring that,
in a year which has seen a higher than usual
sequence of natural catastrophe events, the
Group’s investors and capital providers have
not been subject to outsize or unexpected
losses. All this has been made possible
through the contributions of our skilled
employees. On behalf of the Board I would
like to thank Alex, his management team
and all our employees for a job well done.
8
Lancashire Holdings Limited | Annual Report & Accounts 2017
“Predicting the future is
never straightforward,
but on the assumption
that pricing improves
and that the catastrophe
loss environment is less
extreme in 2018 …, the
Board would hope to see
returns improving and
more aligned with
our cross-cycle
expectations.”
Dividend
Yield
1.6%
Total investment
return
2.5%
As a business we carefully consider the
balance of risk and return when setting our
capital levels. In previous years this approach
enabled us to return capital that we did not
need to support our underwriting. As we
enter 2018, we believe there is a realistic
prospect that the balance of risk and return
will change in the current market. In the
current fluid environment, the Board has
decided to retain more of the Group’s capital
to best support our underwriting strategy
and to position the business to take a lead
in establishing improved pricing and
terms of coverage following a period
of market dislocation.
An important element to Lancashire’s
active capital management strategy is the
flexibility afforded to us by shareholders
during the last six years to issue up to
15 per cent of Lancashire’s shares on a non
pre-emptive basis. The best opportunities
in the insurance and reinsurance sectors
typically arise following major loss events,
and the flexibility to issue shares and raise
capital quickly is a central pillar of our
business strategy and will help Lancashire
maximise underwriting opportunities for
the business. Once again, the Company is
seeking shareholder support for resolutions
at the 2018 AGM allowing this capital
management flexibility, and I would
encourage all shareholders to vote in favour.
Peter Clarke
Non-Executive Chairman
www.lancashiregroup.com
9
Peter Clarke
Non-Executive Chairman
Has Lancashire’s dividend and capital
management strategy changed?
The short answer is ‘no’, our dividend
and capital management strategy has not
changed. The dividend policy is set out on
page 80 of this Annual Report and Accounts.
However, due to the exceptional loss
environment during 2017 and our changing
view of the (re)insurance markets, the Board
decided not to pay an exceptional special
dividend that our investors have enjoyed
in recent years. Lancashire has however
declared standard ordinary dividends for
the 2017 year amounting in aggregate
to $0.15 per common share.
OverviewStrategyPerformanceGovernanceFinancial statements Business model
Three platforms
weathering all storms
We leverage our deep underwriting expertise with
efficient management of capital and resources across our
three platforms to provide our clients and brokers with
excellent solutions for their insurance and reinsurance
needs. We always focus on the risk-adjusted return.
c a s h i r e Holdings Limited
n
a
L
Responsibility
s
t
n
e
i
l
C
Lancashire
Underwriting
and capital
management
R
e
t
u
r
n
M
a
r
k
e
t
s
Cathedral
Kinesis
Risk
10
Lancashire Holdings Limited | Annual Report & Accounts 2017
Our responsibilityWe recognise that our responsibility as a company and as individuals reaches wider than our shareholders and our clients. We strive to be a good employer, a good corporate citizen and a responsible preserver of resources. Through the Lancashire Foundation, we make financial contributions and provide human support to a number of good causes in the places we operate around the world (for further details see pages 36 to 41).
c a s h i r e Holdings Limited
n
a
L
s
t
n
e
i
l
C
M
a
r
k
e
t
s
Lancashire Companies
Cathedral
Kinesis
• Strong brand with clients and brokers
• Recognised for significant capacity
and leadership ability in well-defined
business sectors
• Proven track record of supplying
capacity across the cycle with
consistently high performance
• A lean business operation allows
us to remain nimble and make
decisions efficiently
• A stable core book of business and
disciplined underwriting
• Strong record of capital management
actions to optimise and adjust capital
and navigate market cycles
• Experienced management team with
proven ability
• Maintain key client, broker and
reinsurer relationships to ensure
the continued flow of business
• Continue the use of reinsurance
solutions to uphold risk-adjusted
balance across the insurance
market cycle
• Retain ‘underwriting comes first’
culture and discipline without
being tempted into innovation
or diversification for its own sake
• Provide profitable growth in
areas experiencing an improved
rating environment
• Manages two active syndicates
• Strong relationships with clients
and brokers
• Experienced, fully dedicated
management with strong relationships
with clients, brokers and investors
• Recognised for long-term consistency
• Ability to leverage Group relationships
of relationships
• Efficient Lloyd’s capital model allowing
Cathedral greater premium leverage
• Worldwide licensing maintained by
Lloyd’s allows Cathedral to write
business worldwide with limited
regulatory overheads
• Use of world’s oldest insurance third
party capital, the Names, who provide
support and capacity to Syndicate 2010
• Proven track record with more
than four years as part of the
Lancashire Group
and reputation with investors
and clients
• Highly specialised multi-class product
with barriers to entry in terms of data
and modeling expertise
• Ability to raise and deploy capital quickly
• Strong investor base since 2014
• Proven track record with Kinesis now
in its fifth year
• Maintain core portfolios in
• Ensure product is correctly calibrated
the syndicates
• Continue to look for new
opportunities for bolt-on
business lines in both syndicates
• Leverage the Group’s balance sheet
and cross-sell where opportunities arise
to meet clients’ needs in terms of
responding to events and providing
capital relief
• Deliver returns in line with expectations
for modeled ranges given market losses
and pricing
• Continue to increase number
of investors
• Provide bespoke and flexible products
to match investor and client appetite
• Influx of new capacity and further
• Pressure on signings and participation
development of broker facilities with
less robust underwriting controls
• Pressure on insurance rates across the
market cycle
• Widening terms and conditions being
accepted by the insurance market
without adequate pricing or exclusions
given relatively small line sizes
• Expanded burden of regulatory
oversight or overlapping regulation
from Lloyd’s, the PRA and the FCA
• Increased competition from
traditional and collateralised
markets, with attempts to replicate
the Kinesis product
• Possible waning of investor interest in
insurance allocations as interest rates
begin to increase and yields return to
capital markets
• Resistance to complex reinsurance
products amongst clients, given cheap
availability of traditional products
www.lancashiregroup.com
11
Key strengthsGoalsRisksOverviewStrategyPerformanceGovernanceFinancial statements
Chief Executive’s review
Responding to opportunity
“For the first time in
several years I am
cautiously optimistic
that we will see a halt in
the year-on-year decline
in premium rates and
a return to stronger
underwriting discipline
across the whole
insurance and
reinsurance sector.”
We are strongly positioned, with the right expertise and
good relationships with our clients, their brokers and our
capital providers, to take the lead in establishing better-
priced and more sustainable insurance and reinsurance
markets and to remain a relevant and valued provider
of insurance and reinsurance solutions.
Did Lancashire perform as you expected
in 2017?
Our results for 2017 have generated a return
on equity of negative 5.9 per cent and a
combined ratio of 124.9 per cent, which may
at first sight seem lacklustre compared with
Lancashire’s performance in previous years.
Whilst no CEO likes losing money, this is to
be expected in what has been a significant
year for catastrophe insurance losses across
the market. On balance I am satisfied with
this outcome during a year in which we had
worked hard to moderate our risk exposures
whilst remaining relevant to the needs of
our policyholders and the expectations of
our investors during the soft part of the
market cycle.
The recent run of catastrophe losses, which
regrettably caused much human suffering
and property damage, has resulted in losses
to the global insurance markets which are
estimated to be in excess of $100 billion,
placing the 2017 year within the top three
years for aggregate industry insured losses
in recent history and ultimately could end
up being the costliest on record. Over the
last few years, I have spoken regularly about
the oversupply of capital and the resulting
imbalance which this has generated, leading
to downwards pricing and pressure on
coverage terms within the international
insurance and reinsurance markets.
Lancashire’s response to those market
conditions has been to demonstrate good
inwards risk selection through underwriting
discipline and to manage down its aggregate
risk exposures through the judicious
purchase of more and better-priced
reinsurance coverage. We have bided our
time for precisely the moment when there
would be a marked increase in major
catastrophe losses. That moment came
in 2017. Faced with the 2017 loss events,
our combined ratio is indicative of the
success of our strategy to moderate our
risk exposures in what has been a lower-
yield underwriting environment.
As we enter 2018, we find ourselves
well positioned, with the right people
and expertise and a robust balance sheet.
We have strong relationships with our
clients, their brokers and our capital
providers. Lancashire stands ready to take
the lead in establishing better-priced and
more sustainable insurance and reinsurance
markets and to remain a relevant and
valued provider of insurance and
reinsurance solutions.
How do you view current
market conditions?
After 25 years’ experience as an underwriter,
I firmly believe that the (re)insurance business
is cyclical in its fundamentals. Due to an
overabundance of capital and a protracted
period of lower loss activity over a number
of years, the beginning of 2017 marked a low
point in the cycle of pricing and terms and
conditions. Recent experience suggests to me
that the market cannot continue to operate
at the very margins of profitability. The 2017
catastrophe events should mark a point at
which the balance of capital and underwriting
opportunity will readjust, at least in the short
to medium term. For the first time in several
years I am cautiously optimistic that we will
see a halt in the year-on-year decline in
premium rates and a return to stronger
underwriting discipline across the whole
insurance and reinsurance sector.
12
Lancashire Holdings Limited | Annual Report & Accounts 2017
Return on equity
-5.9%
Combined ratio
124.9%
Loss after tax
$71.1m
Alex Maloney
Group Chief Executive Officer
In which classes of business do you
expect to see the greatest change?
The early evidence suggests that pricing
has started to improve, in particular in the
U.S. property insurance and reinsurance
lines, which have been directly affected
by the recent losses. But I am also hopeful
that a return to the fundamentals of good
underwriting will extend to those other
specialty lines which we underwrite. There
is, at the very least, a likelihood that the
decline in pricing will come to a halt and
a reasonable prospect of improved and
more sustainable pricing across many
of our lines of business.
Paul Gregory, our Group CUO, sets out his
view of the likely trends in our core lines of
business on page 20 of this Annual Report
and Accounts. I believe that a move to a
market which is more realistically and
sustainably priced is ultimately in the best
interests not only of the (re)insurance
sector itself but also of our clients, who
value continuity and professionalism from
their insurance and reinsurance partners.
Price is not the sole determinant of value for
our products.
How is Lancashire different from
other businesses?
We remain a business with a relatively small
headcount of around 200 and we continue to
pride ourselves on having a lean and nimble
‘can do’ business culture. During 2017,
we implemented a reorganisation of our
London office and, whilst that may seem
a mundane step, it has helped us become
even more joined-up between our businesses
in London and Bermuda, our Cathedral
Lloyd’s platform and Kinesis, our third party
reinsurance facility. We are a business with
a very flat hierarchy and efficient lines of
communication. We have the operating
structure to respond quickly to the insurance
and reinsurance needs of our clients
and their brokers and to offer a level of
underwriting and claims service, security
and professionalism which often exceeds
that of many of our larger competitors. We
pride ourselves on doing what makes sense
as disciplined underwriters. Rather than
targeting growth or faddish diversification
we have focused on management of the
(re)insurance cycle, if necessary refusing
business and exposures which have been
underpriced. This positions Lancashire
well to develop the best opportunities,
which should arise when we enter what
I hope may become a more rewarding
phase of the market cycle.
I would like to thank all our staff across
the Group for having contributed to the
successful negotiation of what has been
a challenging phase of the (re)insurance
market cycle. I know that the skill and
dedication of our people is key to the success
of Lancashire and I look forward to leading
our excellent team as we develop the market
opportunities and face the challenges which
lie ahead in the coming year.
Alex Maloney
Group Chief Executive Officer
www.lancashiregroup.com
13
OverviewStrategyPerformanceGovernanceFinancial statements Strategy
Our strategy
Our strategy
The Group executes its strategy by
concentrating on three strategic priorities
that enable the Group to meet its goal
of maximising risk-adjusted returns
for shareholders: underwriting comes
first; effectively balance risk and return;
and operate nimbly through the cycle.
These strategic priorities enable the Group
to serve clients and brokers with significant
capacity across the cycle, not just in the core
business the Group aims to renew every year,
but also in times or in areas where capacity is
scarce: the opportunistic part of the Group’s
portfolio. The Group maintains a lean
structure and keeps overheads under strict
control so that resources may be refocused
quickly. The Group tests its assumptions
and performance constantly through its
structure, using its daily underwriting calls
or exception reporting to management,
its fortnightly RRC meeting with all
disciplines within the Group represented,
and a series of supporting committees at
management and board levels. The Group’s
risk function and internal audit supply
challenge and provide assurance to
management and the boards through a
simple and continuous reporting process.
Underwriting
comes first
Operate nimbly
through the cycle
Effectively balance
risk and return
Cross-cycle
return of risk-free plus 13%
Profitable 4 years out of 5
Peak-zone
PML limits of 25% of capital
SHAREHOLDER
RETURN
Our culture – The bedrock of our strategy
Lancashire encourages a culture of co-operation and respect based on open challenge.
This can be seen clearly in the LICL and LUK daily underwriting and marketing call where
junior and senior underwriters debate the risks they want to write and their fit to the portfolio
and market. It also characterises the Group-wide RRC which brings together underwriting,
actuarial, modeling, finance, treasury, risk and operations to challenge the assumptions
used in all areas of our business.
14
Lancashire Holdings Limited | Annual Report & Accounts 2017
Underwriting
comes first
Effectively balance
risk and return
Operate nimbly
through the cycle
We focus on maintaining our portfolio
structure, with the bulk of our exposures
balanced towards market-moving events,
and a strong commitment to core clients.
We use the principle of peer review
throughout the Group, usually prior
to underwriting business for LICL,
LUK and Kinesis, the platforms that
accept larger net exposures, and
post-underwriting at Cathedral,
with its much smaller net exposures.
By bringing together all our disciplines
– underwriting, actuarial, modeling,
finance, treasury, risk and operations –
at our fortnightly RRC meetings, we are
able to look at how different parts of
our operations are working together.
We stress test our business plans and
gauge where we can be most effective
without undue volatility.
We have reduced our written premium
and PMLs by turning down underpriced
business, whilst retaining our core book.
We have grown the number of Kinesis
investors and the number of cedants
to double figures.
Cathedral was successful in renewing
its business, despite intense competition.
We have had to reduce income in some
areas of our business in response to a
weakening market in the first half of
2017. However, we have been able to
find substantial outwards reinsurance
opportunities that allowed us to mitigate
some of the effects of price reductions,
and reduce our net exposures until the
time is right for us to retain more risk.
Combined ratio
124.9%
A respectable combined ratio, even in a
year where the global insurance industry
sustained a significant level of catastrophe
losses, evidencing the continued focus on
underwriting, superior risk selection and
portfolio construction.
Gross premiums written
$591.6m
We focused on protecting our
core portfolios, but maintained the
discipline to decline or restructure our
participation on underpriced or poorly
performing business.
The key risk in the current market phase
is the loss of relevance to brokers and
clients. With so much surplus capacity,
insurers need to have a unique selling
point. For the Group, that is found in
its mixture of underwriting capacity,
leadership capability, claims service
and multiple balance sheet options.
Return on equity
-5.9%
A good result despite a challenging
market and the incidence of catastrophe
risk losses in our major portfolios of
business, helped by our improved
outwards reinsurance programme.
Probable maximum loss
$161.8m*
We continued to reduce our exposure
to key catastrophe perils as the market has
become more competitive, demonstrating
our discipline and nimbleness.
* 1 in 100 year Gulf of Mexico Hurricane
expected net loss at 1 January 2018.
The key issue for Lancashire is to
continue to serve our clients and brokers
with significant capacity, whilst ensuring
that the portfolio is balanced. This means
constantly reassessing our business mix,
and testing key risk assumptions.
As capital continues to accumulate in
the (re)insurance market, the need to
be nimble is more important than ever.
This means being ready to deploy capital
quickly when it is needed, and having the
discipline to return it when it is not.
Lancashire renewed its 15 per cent
disapplication of pre-emption rights at
the 2017 AGM to assist potential future
capital raises.
Ordinary dividends paid
$29.9m
Lancashire continues to exercise
the discipline of maintaining sufficient
capital headroom to support underwriting
operations and take advantage of new
opportunities as they emerge or
returning capital to shareholders
it cannot profitably use.
Dividend yield
1.6%
Capital is retained following loss events
to take advantage of any underwriting
opportunities that may follow.
Lancashire has developed an expectation
among its shareholders that it will
produce a consistent return and pay
ordinary dividends with special dividends
only when it makes sense to do so. All
shareholders understand that in harder
markets Lancashire will retain, and
potentially even raise, capital to take full
advantage of underwriting opportunities.
Read more on page 18
Read more about our risk management on page 31
www.lancashiregroup.com
15
DescriptionAchievementsPerformanceAssociated strategic risksOverviewStrategyPerformanceGovernanceFinancial statements Financial review
Strong performance
in challenging conditions
Lancashire produced a loss for the year.
What drove that?
There were a number of significant
and costly catastrophe events in 2017
– Hurricanes Harvey, Irma and Maria, two
Mexican earthquakes plus the Californian
wildfires being the larger events and the
ones with the most impact on Lancashire’s
performance. We have therefore produced a
return on equity of negative 5.9 per cent and
a comprehensive loss of $66.2 million. Given
the nature of our book, and that 2017 could
end up being one of the costliest natural
catastrophe years on record, we are actually
pretty pleased with the way our book
performed. Our loss experience across
these events was very much in line with
expectations. Overall, for these events we
have recorded a net loss after recoveries and
reinstatement premiums of $189.2 million,
with our equity pick-up from our investment
in Kinesis also included in that number.
Looking forward to 2018 we do expect
to benefit from the post-loss improved
pricing environment.
How does the Group establish reserves
for such significant events?
It’s quite an involved process. Our CUOs
and Active Underwriters work with our
claims and actuarial teams to establish which
lines of business are impacted. There is then
a detailed review on an account-by-account
basis by our underwriting teams, in
conjunction with claims, to identify the
individual accounts which may be exposed.
With a combination of experience, history
and feedback from the brokers and clients
themselves, they put together a preliminary
estimate of loss per client. The gross loss is
then fed through our various reinsurance
programmes to get to a net loss position.
This goes through a rigorous internal
review process and we overlay our view of the
industry loss size. Lastly, all of this is provided
to the Reserve Committee who review and
challenge the underlying estimates.
Elaine Whelan
Group Chief Financial Officer
In 2017, we carried a little bit more of a capital buffer
than we typically would – a bit of an insurance policy
given the market conditions we were dealing with.
That strategy served us well and our balance sheet
remains strong.
16
Lancashire Holdings Limited | Annual Report & Accounts 2017
“Given the nature of
our book, and that 2017
could end up being one
of the costliest natural
catastrophe years on
record, we are actually
pretty pleased with
the way our book
performed.”
What does that mean for Lancashire’s
capital position?
We always work out the business we want
to write and then we work out the capital we
need to support that. We add a buffer on top
of that and typically any excess is returned
to shareholders. In 2017, we carried a little
bit more of a capital buffer than we typically
would – a bit of an insurance policy given
the market conditions we were dealing with.
That strategy served us well and our balance
sheet remains strong. Given current
expectations of post-loss pricing, we expect
to fully utilise our current capital base. As a
result, we did not declare a special dividend
in 2017. Depending on loss activity in 2018,
a better rating environment should lead
to better returns.
Have the events had any impact on
the Group’s strategy?
In short, no. Our goal has always been
to maximise risk-adjusted returns for our
shareholders across the cycle. Our strategy
remains to manage the cycle appropriately
and match our capital to the underwriting
opportunity. Over the last few years we have
reduced our top line and bought more
reinsurance as the market softened. In 2018
we expect to be able to take advantage of
the post-loss pricing environment.
Elaine Whelan
Group Chief Financial Officer
Financial highlights
Gross premiums written
Net premiums written
Net premiums earned
Net insurance losses
Net underwriting (loss) income
Net investment income
Net realised gains (losses) and impairments
Net operating (loss) profit
(Loss) profit after tax
Net change in unrealised gains/losses on investments
Comprehensive (loss) income
Dividends1
Diluted (loss) earnings per share
Diluted operating (loss) earnings per share
Fully converted book value per share
Return on equity
Return on equity excluding warrant adjustments
Net loss ratio
Net acquisition cost ratio
Expense ratio
Combined ratio
Accident year loss ratio
Net total return on investments2
(1) Dividends are included in the financial statement year in which they were recorded.
(2) Net return on investments includes internal foreign exchange hedge.
2017
$m
591.6
398.0
427.9
335.4
(23.1)
30.5
9.1
(86.0)
(71.1)
4.9
(66.2)
29.9
($0.36)
($0.43)
$5.48
(5.9%)
(5.9%)
78.4%
27.0%
19.5%
124.9%
94.2%
2.5%
2016
$m
633.9
458.7
488.1
142.5
213.5
29.8
(2.4)
144.0
153.8
4.1
157.9
178.9
$0.76
$0.71
$5.98
13.5%
13.5%
29.2%
27.1%
20.2%
76.5%
46.2%
2.1%
2015
$m
641.1
481.7
567.1
155.7
265.2
29.8
(2.8)
173.4
181.1
(11.3)
169.8
317.5
$0.91
$0.87
$6.07
10.9%
13.5%
27.5%
25.8%
18.8%
72.1%
46.0%
0.7%
2014
$m
907.6
742.8
715.6
226.5
335.7
28.6
(5.9)
231.9
229.3
(2.1)
227.2
321.0
$1.16
$1.17
$6.96
13.9%
14.7%
31.7%
21.4%
15.6%
68.7%
35.9%
1.0%
2013
$m
679.7
557.6
568.1
188.1
254.2
25.4
12.6
184.2
222.5
(32.5)
190.0
325.6
$1.17
$0.97
$7.50
18.9%
18.9%
33.1%
22.1%
15.0%
70.2%
36.1%
0.3%
www.lancashiregroup.com
17
OverviewStrategyPerformanceGovernanceFinancial statements
Key performance indicators
Return on equity
Combined ratio
Total investment return
The return on equity is measured by
management as the internal rate of return
of the change in fully converted book
value per share in the period, adjusted
for dividends.
The Group’s aim is to provide
shareholders with a risk-adjusted return
on equity of 13 per cent in excess of the
risk-free rate over the longer term.
The combined ratio is the ratio of costs
to net premiums earned and is a measure
of an insurance company’s operating
performance. It is calculated as the sum
of the loss ratio, the acquisition cost ratio
and the expense ratio. These ratios are
defined in our glossary.
The Group aims to price its business to
ensure that the combined ratio across the
cycle is significantly less than 100 per cent.
Total investment return measures
investment income and net realised and
unrealised gains and losses produced by
the Group’s managed investment portfolio.
The Group’s primary investment
objectives are to preserve capital and
provide adequate liquidity to support
the Group’s payment of claims and other
obligations. Within this framework we aim
for a degree of investment portfolio return.
-5.9%
18.9*
124.9%
2.5%
14.7*
13.5*
13.5
124.9
70.2
68.7
72.1
76.5
-5.9
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
A significant level of loss activity in 2017
has resulted in a negative RoE for the
year for the first time since we began
underwriting in 2006.
The stated aim is a long-term goal,
acknowledging that management expects
both higher and lower results in the
shorter term. The cyclicality and volatility
of the insurance market is expected to be
the largest driver of this pattern. We seek
to align our variable remuneration to
shareholders’ interests by having a RoE
component in this.
Please refer to the Directors’
Remuneration Report on page 60
for further details.
In 2017, we witnessed the occurrence
of three major hurricanes (Harvey, Irma
and Maria), two earthquakes in Mexico
as well as wildfires in California. The high
combined ratio in 2017 reflects the impact
of these losses. Whilst there was a higher
than usual sequence of catastrophe loss
events in 2017 the impact of these was not
outsize or unexpected for the Group or
its stakeholders.
The Group’s underwriters assess likely
losses, using models, their experience
and knowledge of past loss experience,
industry trends and current circumstances.
This allows them to estimate the premiums
sufficient to meet likely losses and
expenses. Peer reviews of risks are
conducted through the daily underwriting
call or peer review, depending on
risk impact, enabling the Group to
ensure careful risk selection, limits on
concentration and appropriate portfolio
diversification. The RRC then monitors
performance at a portfolio level.
e
g
a
r
e
v
a
r
a
e
y
-
5
2.5
2.1
1.0
0.7
0.3
2013
2014
2015
2016
2017
In 2017, Lancashire continued to monitor
risk-on/risk-off volatility and maintained
the allocation to risk assets in the surplus
portfolio as a hedge against the interest
rate risk inherent in the significant fixed
maturity allocation of the portfolio.
The investment strategy places an
emphasis on the preservation of invested
assets and provision of sufficient liquidity
for the prompt payment of claims, in
conjunction with providing a reasonably
stable income stream. These objectives
are reflected in the Group’s investment
guidelines and its conservative asset
allocation. Management reviews the
composition, duration and asset allocation
of the investment portfolio on a regular
basis in order to respond to changes in
interest rates and other market conditions.
* RoE including the impact of warrants was 10.9% in 2015, 13.9% in 2014 and 18.9% in 2013. The five-year average was 10.3%.
18
Lancashire Holdings Limited | Annual Report & Accounts 2017
AimMeasurementPerformanceRisk management
Total shareholder return
Total shareholder return is measured in
terms of the internal rate of return of the
increase/decrease in share price in the
period, measured in U.S. dollars and
adjusted for dividends.
Percentage of comprehensive
income returned to shareholders
The percentage of comprehensive income
returned to shareholders equals the total
capital returned to shareholders through
dividends and share repurchases paid in
a given year, divided by the Group’s
comprehensive income.
Dividend yield
Dividend yield is measured by dividing the
annual dividends per share by the share
price on the last day of the given year.
The Group’s aim is to maximise RoE
over the longer term and we would
expect that to be reflected in our share
price and multiple. This is a long-term
goal, recognising that the cyclicality and
volatility of both the insurance market
and the financial markets in general will
impact management’s ability to maximise
the share multiple in the immediate term.
The Group aims to carry the right level
of capital to match attractive underwriting
opportunities, utilising an optimal mix of
capital tools. Over time, through proactive
and flexible capital management across
the cycle, we aim to generate optimum
returns for shareholders.
The Group aims to maintain a strong
balance sheet whilst generating an attractive
risk-adjusted return for shareholders.
Lancashire’s dividend yield demonstrates
our ability to operate nimbly through the
cycle through the active capital management
that underpins our business model. We
aim to pay annual ordinary dividends, and
when we decide not to retain our profits
as additional underwriting capital we
return them to shareholders by way
of special dividends.
9.4%
21.3
25.9
2.4
9.4
n/a*
171.4
152.3
187.0
1.6%
17.8
17.3
113.3
12.3
e
g
a
r
e
v
a
r
a
e
y
-
5
-24.2
2014
2013
2015
2016
2017
2013
2014
2015
2016
n/a*
2017
The share price benefited from an uptick
towards the end of the year due to positive
expectations for the (re)insurance market
following the run of catastrophe losses.
The Lancashire remuneration structure
and RSS ensure that staff are highly
motivated and closely aligned to the
Group’s goals, and therefore with
shareholders. Permanent staff are all
eligible to receive RSS awards. The
participation of employees in the RSS
ensures that there is a strong focus on
sustainable long-term shareholder value.
Following the costly catastrophe events in
2017, Lancashire took the decision not to
pay a special dividend in order to retain
capital to support potential business
opportunities in the post-loss market.
* The Group made a comprehensive loss of
$66.2 million during 2017. We paid annual
ordinary dividends of $0.15 per share. Due
to 2017 being n/a, the average is calculated
over 4 years.
Risk tolerances are set at a level that aims
to prevent the Group incurring losses that
would impair its ability to operate. The
Group’s key capital measure is its A.M.
Best rating, and a minimum rating of A–
is considered necessary to attract business.
In 2017, Lancashire maintained its A rating.
10.5
1.6
2013
2014
2015
2016
2017
During 2017, we paid annual ordinary
dividends of $0.15 per share.
As capital continues to accumulate in
the (re)insurance market, the need to
be nimble is more important than ever.
This means being ready to deploy capital
quickly when it is needed and having the
discipline to return it when it is not. The
Group has to ensure that all shareholders
understand that in harder markets the
Group will want to retain, and potentially
even raise, capital to take full advantage
of underwriting opportunities.
KPI linked to Executive Directors’ remuneration. For more information see pages 60 to 79.
www.lancashiregroup.com
19
AimMeasurementPerformanceRisk managementOverviewStrategyPerformanceGovernanceFinancial statements
Underwriting review
Adapting to the cycle
In recent years we have been able to ignore
the pressure for top-line premium growth,
focusing on maintaining a core portfolio
of risks and protecting this portfolio
with tailored, and increasingly more
comprehensive, reinsurance products. When
the price you receive for the risk reduces, the
amount of risk you take should also reduce.
Rates in almost all of our product lines have
been declining year-on-year making it more
and more difficult to produce acceptable
underwriting margins. We, like all of our
peers, have clearly benefited from what
has been a benign period over a number
of years for natural catastrophe insured loss
events. However, in non-natural catastrophe
exposed lines we have also been able to
continue to deliver underwriting margins,
which the broader market has struggled to
achieve, through disciplined underwriting
and superior risk selection. The benign
loss environment in natural catastrophe
exposed lines has certainly masked rating
deficiency elsewhere. So despite soft market
conditions we were still able to achieve
sector-leading underwriting results across
our underwriting platforms by maintaining
underwriting discipline.
The benign natural catastrophe environment
was never going to continue forever, and the
broader market was able to hide behind the
profits generated by catastrophe business
throughout this benign period. At some
point this was going to end, and in the third
quarter of 2017 this benign loss environment
came to an abrupt halt with the three land-
falling hurricanes, namely Harvey, Irma
and Maria, as well as Mexico experiencing
two major earthquakes. These losses were
promptly followed by a fourth, if rather
less significant, hurricane (Nate) and
some of the costliest wildfires ever seen in
California. In addition to these there were
also major flood events in South East Asia
and devastating mudslides in Columbia.
Mother Nature has certainly reminded
our industry of the devastation and cost she
can deliver. Every time there are catastrophe
losses there seems to be something ‘unique’
about the loss or losses. By now we should
realise the next loss or run of losses will
always be different from the last.
First, these losses are devastating from
a human perspective with millions of
people’s lives impacted by these cruel events.
Second, the broader economic impact of
these events, particularly in areas such as
the Caribbean, are also incredibly damaging
with lasting implications for these local
economies. Third, the impact to our industry
has been significant. It is likely that when the
final bill is added up 2017 will be only the
third year on record with natural catastrophe
insured losses in excess of $100 billion and
quite possibly the costliest in history, and in
any year this is a true test for the industry.
As a Group we have always had significant
exposure to natural catastrophe risk across
all of our platforms via a number of our
reinsurance and insurance product lines.
These events are a real test of our risk
management capabilities as they are at the
heart of our major product lines. When there
are losses of this frequency and magnitude
we obviously expect to incur losses across
all of our platforms. At our inception one
of our strategic objectives was to make an
underwriting profit four years in every five,
therefore acknowledging that there will be
years where we will make an underwriting
loss. We have been able to achieve an
underwriting profit every year for the
past 11 years, so whilst this year will be
the first exception to this, in the context
of our original target we have performed
remarkably well.
20
Lancashire Holdings Limited | Annual Report & Accounts 2017
We have always been very candid about our underwriting approach. Our aim as underwriters has always been to find the appropriate balance between risk and return. This underwriting philosophy has never changed since our formation, however it does mean that at each stage of the market cycle our underwriting tactics change. Paul Gregory
Group Chief Underwriting Officer
“Mother Nature has
certainly reminded
our industry of the
devastation and cost she
can deliver. Every time
there are catastrophe
losses there seems to be
something ‘unique’ about
the loss or losses. By now
we should realise the
next loss or run of losses
will always be different
from the last.”
Part of our disciplined underwriting strategy
over the past few years has been to ensure
that when we experience loss events such
as those in 2017, we perform in line with
our various stakeholders’ expectations and
remain in a position to be responsive to
our clients’ and brokers’ needs. First, we
need to be able to pay our clients’ claims
expeditiously. Second, we need to be in a
position to continue to provide these clients
with ongoing support. Third, we want the
underwriting platforms to be in a robust
position to broaden our underwriting
appetite and client base should the
market conditions dictate.
I am very pleased that after experiencing
these events we have achieved these aims
and remain in a position to respond
appropriately to our clients’ current and
future needs. As much as we have been
prepared to narrow our portfolio in soft
market conditions, we are equally prepared
to broaden our portfolio in improving
market conditions.
So as we look forward into 2018 we are very
well positioned as a Group to service and
support our existing clients and portfolio.
We have the platforms and the people to
ensure we maximise whatever underwriting
opportunities manifest themselves.
Property Reinsurance
2017 certainly bucked the recent trend of
benign loss years. The market received a
stark reminder of the havoc and cost that
Mother Nature can deliver. All of the various
hurricane, flood, fire and earthquake events
of 2017 tested the global reinsurance and
retrocession markets. It was not just the
quantum of these losses but the frequency.
After a number of years of rate reductions
and broadening terms and conditions these
losses come at a time that really tests the
robustness of the market. Thus far it looks
like the market will be able to respond
to these losses as our customers would
expect with claims being paid, however
the dynamics of the market are now likely
to change, albeit not to the extent we
would like to see.
The structure of the reinsurance
market in recent years has subtly changed,
with the growth of ILS funds in the sector,
predominantly into the retrocession space.
It is fair to say that the 2017 losses are the
first true test for a lot of this ‘new’ capacity
and much like traditional rated paper
there will be some that respond better than
others. There is no doubt that retrocession
pricing is going up, whether that be
rated paper or ILS paper. This will flow
through to the property reinsurance
market as retrocessional costs increase.
www.lancashiregroup.com
21
OverviewStrategyPerformanceGovernanceFinancial statements Underwriting review continued
There will of course be differentiation, with
loss-impacted territories and clients sharing
more of the cost burden than those territories
and clients that were not loss impacted.
No one can predict exactly how much
better the market will be in 2018 for these
classes of business but what we do know is
the softening has currently stopped and
pricing is improving. The extent to which
it does is very much dependent upon both
the development pattern of the losses,
and as always the dynamic between
demand and supply.
As a Group we are very well placed to access
all sectors of the reinsurance market so will
be able to maximise whatever opportunity
there is. We have the option of both rated
paper, either company market or Lloyd’s,
and collateralised products via Kinesis,
providing our clients with the full suite of
reinsurance options. We have an established
position and reputation in the property
reinsurance market with deep broker and
client relationships to benefit from any
improved market conditions. As always
the Group will look to take risk that is
appropriate to the opportunity.
Property Direct & Facultative
Much like the property reinsurance
market the story for the direct property
market in 2017 was dominated by the
significant natural catastrophe events. Years
of relatively benign conditions had led to
increased competition in this sector, which
inevitably had led to rating pressure across
all elements of the portfolio, albeit more so
for the open market business than the more
stable binder business. As in other sectors of
the market this pricing pressure had taken
the margin from the portfolio. As a result,
when events with the frequency and severity
of those experienced in 2017 occur, the
underwriting results will be in the red.
The D&F portfolio within the Group is
primarily written from our Lloyd’s platform
and much like other lines of business this has
shrunk as market conditions softened. The
portfolio has de-risked in certain territories
as rates and conditions became unsustainable.
Given the 2017 industry loss events this has
justified the decision as the losses incurred
to the Group would have undoubtedly been
larger if risk levels had not been reduced.
Following the losses there is likely to be
positive rating movement during 2018 on
our existing Direct & Facultative portfolio
and also the opportunity to grow in areas
where in recent years we have shrunk, for
example Mexico and the Caribbean. We
expect this to be predominantly within
the open market D&F sphere as the binder
book is traditionally a more stable portfolio
although this will also benefit from better
rating conditions. The extent of any growth
will obviously be dictated by the extent of the
opportunity as we look to balance risk and
return appropriately.
Energy
The ‘perfect storm’ of a low oil price and
historically high levels of upstream energy
market capacity witnessed during 2015 and
2016 continued in 2017, albeit with an oil
price that was far more stable and a client
base whose necessary cost cutting had largely
been achieved. The stabilisation of the oil
price meant that the demand side of the
equation held up during 2017. Whilst the
upstream energy market did not see a huge
uptick in demand there were not any further
reductions and there are a few early signs of
some demand coming back into the system
with a small number of construction projects
coming to market and a number of our
clients gradually increasing activity.
With the supply dynamic unchanged,
i.e. historically high levels of market
capacity, there was still pressure on rates
as competition for a much reduced pot of
premium continued amongst markets. The
Group’s strategy has been to maintain our
core portfolio of profitable business as rates
are now approaching levels last seen in the
late 1990s and, considering that in 2012 rates
were not far from historical highs, this shows
how steep the fall in energy rates has been
in the space of only a few years.
2017, however, was relatively benign for
the upstream energy market in terms of
significant claims although some prior
year major losses did develop negatively,
highlighting the volatility of the class.
This benign loss year has helped mask the
underlying weakness of energy rates and
any return to a ‘normalised’ loss year would
likely render the current rating environment
unsustainable from a macro-market
perspective. Whilst the natural catastrophe
22
Lancashire Holdings Limited | Annual Report & Accounts 2017
events of 2017 have not directly impacted
the upstream energy market they are large
enough to alter the direction of the energy
reinsurance market, which will filter through
to the direct market as reinsurance costs
increase. With this dynamic in place we
fully expect market conditions to improve
during 2018. The Group has access to
energy business from both the Lancashire
Companies and Lloyd’s platforms, which
primarily will focus on servicing existing
clients’ needs. However, should market
conditions dictate, we have the people
and the platforms to grow our energy
portfolio further.
“Following the
losses there is likely
to be positive rating
movement during 2018
on our existing Direct &
Facultative portfolio
and also the opportunity
to grow in areas where
in recent years we have
shrunk, for example
Mexico and the
Caribbean.”
“The Group is able
to offer significant
capacity across multiple
platforms to ensure
we are providing both
clients and brokers with
fully rounded products
and services, which
allows us to maintain
our underwriting
principles despite
the many challenges
the market contains.”
Marine
The marine market was relatively stable
during 2017 with rates across areas of
our marine portfolios remaining
reasonably static.
Within the cargo market a number of
London market participants exited the
class during 2017, which aided this stability.
The natural catastrophe events later in the
year also impacted the cargo market given
the exposure that this portfolio has to these
kinds of events. Fortunately for us our
portfolio performed admirably given
the make-up of the book which has been
deliberately designed to try to mitigate
natural catastrophe exposures where
possible. We expect these loss events
to improve the cargo market during
2018 with rates reacting positively.
Outside of cargo, our hull, builders’ risk
and ancillary marine products portfolio
performed steadily and we maintained
our position on all our key accounts. This
portfolio has been our most stable since
our inception with our risk appetite clearly
defined, which has allowed us to deliver
sector-leading results for what is a notoriously
difficult area to generate underwriting
returns. Whilst the natural catastrophe
events of 2017 have no direct impact on
the insurance lines we write it will impact
the broader reinsurance market so we
expect stability in this market to continue
through 2018.
Aviation
The aviation market, much like the marine
market, has historically been a difficult place
to deliver respectable underwriting returns.
Fortunately as a Group we have consistently
been able to do this across all of our platforms.
In a soft but more stable market in 2017 we
continued to deliver underwriting profits.
We access both the direct and reinsurance
market across the Group’s platforms so have
excellent visibility of the entire sector.
Throughout the year there were a few green
shoots of hope that the market had found a
more viable level, particularly in the direct
lines such as war. Market capacity has yet
to retract, however, so as always until the
demand/supply dynamic alters there is
unlikely to be any material improvement
in market conditions. That said there
has been a general recognition within
the market, most notably post the natural
catastrophe events of the third quarter of
2017, that the softening needs to stop. The
rating environment for the broader market
has now stabilised, much like other non-
catastrophe lines, although it is still not at a
level to sustain any quantum of normalised
loss levels. We are confident that, at the very
least, this stability of market conditions will
continue through 2018.
Terrorism, Political Violence
& Political Risks
As in recent years the world continued to
be a volatile place during 2017. There were
numerous terrorist attacks across the globe
in cities including London, Manchester,
Barcelona, Paris and Stockholm as well as
ongoing wars and civil disruption in many
countries including Syria, Libya, Afghanistan,
Iraq and Yemen. In addition, we have seen
political tensions escalate between North
Korea and the U.S. with the sabre-rattling
intensifying. Despite these terrorism events
and wars being horrific from a loss of life
perspective, the impact on the insurance
market has been minimal as they have
created very few actual insured losses.
This global political and socio-economic
climate certainly creates challenges for
underwriting these classes of business, and
risk selection remains absolutely crucial as
years of softening rates means that there
is little margin to cater for any type of
attritional losses. Given this, and as with
other classes of business, we have built up a
profitable core portfolio of business, which
in the softer market we have successfully
retained. If the significant loss events of 2017
lead to a broader hard market then our
leadership capabilities in these classes would
allow us to develop our portfolio quickly
and we have the appetite to do so.
The Group is able to offer significant
capacity across multiple platforms to ensure
we are providing both clients and brokers
with fully rounded products and service
which allows us to maintain our underwriting
principles despite the many challenges the
market contains.
www.lancashiregroup.com
23
OverviewStrategyPerformanceGovernanceFinancial statements Business review
Ready to deliver, in all conditions
Hayley Johnson
Chief Underwriting Officer, LUK
Sylvain Perrier
Chief Underwriting Officer, LICL
Jon Barnes
Active Underwriter, Syndicate 2010
John Spence
Active Underwriter, Syndicate 3010
Business environment and outlook
2017 was characterised by a significant
level of loss activity. With the occurrence
of hurricanes Harvey, Irma and Maria, the
Mexican earthquakes and the California
wildfires, the industry has incurred
substantial losses.
At Lancashire we pride ourselves on
understanding the insurance cycle. These
events have shown the value of our priorities.
Our discipline means that we prioritise the
appropriate risk selection for all stages of
the cycle.
Our outlook for 2018 is more positive than
it has been for some time. We expect to
put our capital to work to take advantage
of improving market conditions and will
be paying our standard ordinary dividend,
in line with our stated dividend policy.
Renewal price index (RPI)
Lancashire’s RPI is an internal methodology
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 on
like-for-like renewals only, and is weighted by
premium volume. The RPI does not include
new business and only covers business written
by LICL and LUK, to offer a consistent basis
for analysis. The calculation involves a degree
of judgement in relation to the comparability
of contracts and the assessment noted above.
To enhance the RPI tool, Lancashire may
revise the methodology and assumptions
underlying the RPI, so the trends in
premium rates reflected in the RPI may
not be comparable over time. Consideration
is only given to renewals of a comparable
nature so the RPI does not reflect every
contract in LICL and LUK’s portfolio. The
future profitability of the portfolio of contracts
within the RPI is dependent upon many
factors besides the trends in premium rates.
24
Lancashire Holdings Limited | Annual Report & Accounts 2017
The following table summarises the RPI figures for the main business classes, excluding the Lloyd’s segment, using 2006 as the base year:
RPI
Class
Aviation (AV52)
Gulf of Mexico offshore energy
Worldwide offshore energy
Marine
Property retrocession and reinsurance
Terrorism
Combined
Underwriting results
2017
34
103
68
65
98
36
57
2016
37
111
70
72
103
38
61
2015
41
118
81
82
117
43
68
2014
44
125
91
91
132
48
76
2013
49
136
97
89
152
52
81
2012
55
140
100
86
157
55
84
2011
59
140
97
79
131
57
83
2010
62
139
88
80
121
60
81
2009
68
137
84
82
127
66
83
2008
69
64
68
80
86
71
76
2007
80
80
80
88
97
86
86
2006
100
100
100
100
100
100
100
2017
2016
Gross premiums written
Net premiums earned
Net loss ratio
Net acquisition cost ratio
Expense ratio
Combined ratio
Marine
$m
67.6
50.7
Aviation
$m
16.9
11.6
Energy
$m
101.8
70.4
Property
$m
198.0
146.5
Total
$m
591.6
427.9
114.4% 15.8% 32.9% (19.0)% 95.6% 78.4%
Total
Property
$m
$m
633.9
219.5
148.5
488.1
9.2% 39.3% 41.8% (4.7)% 42.6% 29.2%
18.8% 44.0% 36.3% 27.6% 23.8% 27.0% 18.9% 45.1% 27.4% 30.6% 22.5% 27.1%
— 20.2%
8.6% 119.4% 124.9% 28.1% 84.4% 69.2% 25.9% 65.1% 76.5%
—
133.2% 59.8% 69.2%
Lloyd’s
$m
207.3
148.7
Lloyd’s
$m
215.0
173.2
Energy
$m
126.0
105.5
Aviation
$m
36.2
25.5
Marine
$m
37.2
35.4
— 19.5%
—
—
—
—
—
—
—
Premiums
Gross premiums written decreased by
6.7 per cent in 2017 compared to 2016.
Gross premiums earned decreased by 6.9 per
cent in 2017 compared to 2016. The Group’s
five principal segments, and the key market
factors impacting them, are discussed below.
Property
Property gross premiums written
decreased by 9.8 per cent for the year
ended 31 December 2017 compared to the
year ended 31 December 2016. The decrease
was primarily due to multi-year contracts in
the property catastrophe, political risk and
terrorism classes which were written in 2016
that are not yet due to renew. This reduction
was partly offset by new business written in
the political risk book. Business flow in the
political risk class is generally less predictable
than other classes due to the specific nature
of each deal. We also saw some new business
written in the property catastrophe book and
$7.0 million of reinstatement premiums in
connection with hurricanes Harvey, Irma
and Maria.
Energy
Energy gross premiums written decreased
by 19.2 per cent for the year ended
31 December 2017 compared to the year
ended 31 December 2016. The decrease
for the year was mainly due to exposure
reductions on prior underwriting year
risk-attaching business in the worldwide
offshore book, which can include exposure
such as construction projects that have
been delayed or cancelled, plus the
timing of renewal of non-annual deals
in the worldwide offshore book.
Marine
Marine gross premiums written
increased by 81.7 per cent for the year
ended 31 December 2017 compared to
the year ended 31 December 2016. The
majority of the increase was due to new
pro-rata business plus the timing of non-
annual renewals and an increase in prior
underwriting year risk-attaching business
due to changes in the underlying exposure.
in the AV52 book. In addition, there were
premium reductions year on year in the
satellite book following the de-risking of
this book during 2017.
Lloyd’s
In the Lloyd’s segment gross premiums
written decreased by 3.6 per cent for the
year ended 31 December 2017 compared
to the year ended 31 December 2016. The
decrease was driven primarily by continued
rating pressure on the energy book. This
decrease was partly offset by an increase
in reinstatement premiums in connection
with hurricanes Harvey, Irma, and Maria.
Ceded
Ceded reinsurance premiums increased by
$18.4 million, or 10.5 per cent, for the year
ended 31 December 2017 compared to the
year ended 31 December 2016. The increase
was due to additional limit purchased plus
reinstatement premiums in connection
with hurricanes Harvey, Irma, and Maria.
Aviation
Aviation gross premiums written
decreased by 53.3 per cent for the year
ended 31 December 2017 compared to
the year ended 31 December 2016. This
was due to exposure reductions on prior
underwriting year risk-attaching business
Earned
Net premiums earned as a proportion of net
premiums written were 107.5 per cent for the
year ended 31 December 2017, compared
to 106.4 per cent for the year ended
31 December 2016. The earnings ratios
were relatively stable on an annual basis.
www.lancashiregroup.com
25
OverviewStrategyPerformanceGovernanceFinancial statements Business review continued
Losses
2017 was characterised by significant
catastrophe activity, in the form of hurricanes
Harvey, Irma and Maria, the two earthquakes
in Mexico and the California wildfires. As a
result, the Group’s net loss ratio was 78.4
per cent for the year ended 31 December
2017 compared to 29.2 per cent for the
year ended 31 December 2016. The 2017
accident year loss ratio, including the
impact of foreign exchange revaluations,
was 94.2 per cent compared to 46.2 per
cent for the year ended 31 December 2016.
Our net losses recorded for the year
ended 31 December 2017 in relation to the
catastrophe events noted above was $181.8
million, excluding the impact of inwards and
outwards reinstatement premiums and our
share of losses from Kinesis. While reserves
have been recorded, significant uncertainty
exists on the eventual ultimate losses in
relation to the hurricanes, earthquakes
and wildfires as loss information after these
types of events can take some time to obtain.
The Group’s reserve estimates were derived
from a combination of market data and
assumptions, a limited number of provisional
loss advices, limited client loss data and
modeled loss projections. As additional
information emerges, the Group’s actual
ultimate loss may vary, perhaps materially,
from the current reported reserves. The
final settlement of all claims is likely to take
place over a considerable period of time.
While there were no other significant
net losses in either of 2017 and 2016, both
years experienced a few small to mid-sized
losses, primarily across the property and
energy classes.
Prior year favourable development was
$65.1 million for the year ended 31 December
2017 compared to $85.8 million for the year
ended 31 December 2016. Despite some
adverse development on a prior accident
year property and energy claims, we saw
overall favourable development primarily
due to general IBNR releases across most
lines of business due to a lack of reported
claims. Experience in 2016 was similar in
terms of releases, offset partially by some
adverse development on prior accident
year energy and marine claims.
Excluding the impact of foreign exchange evaluations, the table below shows the impact
of current accident year catastrophe events on the Group’s loss ratio for the year ended
31 December 2017:
Reported loss ratio at 31 December 2017
Absent hurricane Harvey
Absent hurricane Irma
Absent hurricane Maria
Absent Mexico earthquakes
Absent California wildfires
Absent all catastrophe events
Losses
$m
335.4
287.6
281.6
300.0
325.1
300.9
153.6
Loss ratio
%
78.4
67.7
66.1
70.5
76.0
70.4
36.6
Note: The table does not sum to a total due to the impact of reinstatement premiums.
Excluding the impact of foreign exchange revaluations, previous accident years’ ultimate
losses developed as follows during 2017 and 2016:
Ultimate loss development by accident year
2007 accident year and prior
2008 accident year
2009 accident year
2010 accident year
2011 accident year
2012 accident year
2013 accident year
2014 accident year
2015 accident year
2016 accident year
Total
2017
$m
0.6
(0.5)
0.1
1.8
8.8
5.0
3.5
9.2
20.3
16.3
65.1
Note: Positive numbers denote favourable development.
The ratio of IBNR to total net loss reserves was 44.8 per cent as at 31 December 2017
compared to 34.6 per cent as at 31 December 2016.
The table below provides further detail of the prior years’ loss development by class,
excluding the impact of foreign exchange revaluations:
Loss development by class
Property
Energy
Marine
Aviation
Lloyd’s
Total
2017
$m
14.4
21.1
15.2
3.0
11.4
65.1
Note: Positive numbers denote favourable development.
Accident year loss ratios
Accident year loss ratio
Initial accident year loss ratio
Change in loss ratio post
accident year
2017
%
94.2
n/a
n/a
2016
$m
36.6
17.3
1.9
3.9
26.1
85.8
2016
%
43.5
46.2
2015
$m
26.4
35.2
13.8
2.9
29.4
107.7
2015
%
32.4
46.0
2014
$m
19.8
5.4
(9.7)
0.9
18.0
34.4
2014
%
25.9
35.9
2016
$m
(0.4)
1.6
(18.0)
3.2
9.9
13.5
(1.6)
19.9
57.7
—
85.8
2013
$m
13.2
18.4
(23.4)
(1.4)
9.1
15.9
2013
%
28.1
36.1
2.7
13.6
10.0
8.0
Note: Adjusted for revaluation of foreign currencies at the exchange rate as at 31 December 2017.
26
Lancashire Holdings Limited | Annual Report & Accounts 2017
Acquisition costs
The acquisition cost ratio was 27.0 per cent
for the year ended 31 December 2017
compared to 27.1 per cent for the year
ended 31 December 2016. The acquisition
cost ratio is relatively stable on an
annual basis.
Investments, liquidity and cash flow
Since inception, the primary objectives for
our investment portfolio have been capital
preservation and liquidity. Those objectives
remain unchanged, and are more important
than ever in today’s volatile and reactive
markets. As market volatility continues, we
position our portfolio to limit downside risk
in the event of market shocks. In 2017, our
focus has been on managing our interest rate
risk, the largest risk to our predominantly
fixed maturity portfolio. We continue to
maintain a short-duration fixed maturity
portfolio and have been using our risk
budget to add products to our portfolio
to help mitigate a rise in rates.
Managed investment portfolio allocations
Cash
Short-term investments
Fixed maturity funds
Government debt
Agency debt
Agency MBS, CMBS
Non-agency RMBS, ABS, CMBS
Corporate bonds
Bank loans
Fixed maturity – at FVTPL
Equity securities
Hedge funds – at FVTPL
Other investments
Total
Our portfolio mix illustrates our conservative
philosophy, as shown in the table below.
With the composition regulated by the
Group’s investment guidelines, we have
three investment portfolio categories: ‘core’,
‘core plus’ and ‘surplus’. The core portfolio
contains at least enough funds required to
meet near-term obligations and cash flow
needs following an extreme event. Assets
in excess of those required to be held in
the core portfolio may be held in any of
the three categories, which are discussed
further on page 110.
As at 31 December 2017 and 2016
the managed portfolio was as follows:
Fixed maturity securities
Cash and cash
equivalents
Hedge funds
Equity securities
Total
2017
%
80.1
2016
%
81.4
10.2
8.4
1.3
100.0
10.4
7.0
1.2
100.0
2017
%
10.2
6.0
1.7
17.0
3.8
7.7
8.5
28.2
5.8
1.4
1.3
8.4
—
100.0
2016
%
10.4
0.3
0.8
20.3
4.4
6.4
7.3
32.5
6.6
2.8
1.2
7.0
—
100.0
2015
%
9.6
1.1
0.6
23.6
0.2
7.3
8.4
33.2
5.9
1.3
0.8
8.0
—
100.0
2014
%
10.6
1.4
0.7
21.4
0.8
7.7
11.0
31.7
5.8
1.4
0.7
6.8
—
100.0
2013
%
14.7
9.8
1.1
14.6
4.1
10.9
8.4
29.7
4.5
1.3
0.7
—
0.2
100.0
www.lancashiregroup.com
27
OverviewStrategyPerformanceGovernanceFinancial statements
Business review continued
The composition, duration and asset
allocation of the investment portfolio
are reviewed on a regular basis in order
to respond to changes in interest rates and
other market conditions. If certain asset
classes are anticipated to produce a higher
return within management’s risk tolerance
an adjustment in asset allocation may be
made. Conversely, if the risk profile is
expected to move outside of tolerance levels,
adjustments may be made to reduce the
risk in the portfolio. We try to be nimble
in our investment strategy while putting
our objective of capital preservation first
and foremost.
We believe in the application of common
sense, and do not place much reliance
on ‘black box’ approaches to
investment selection.
Investments are, however, inherently
unpredictable and there are risks associated
with any investment strategy decisions.
Recent market history has been tumultuous
and we remain ever watchful. We will
continue to monitor the economic
environment closely.
Investment performance
Net investment income excluding realised and
unrealised gains and losses, was $30.5 million
for the year ended 31 December 2017, an
increase of 2.3 per cent compared to 2016.
Total investment return, including net
investment income, net realised gains
and losses, impairments and net change
Key investment portfolio statistics
Duration
Credit quality
Market yield
Book yield
Liquid securities will be maintained at an
adequate level to more than meet expenses,
including unanticipated claims payments.
Only once safety, liquidity and investment
income requirements are satisfied, may
additional growth in the investment
portfolio be pursued.
Cash flow
The Group’s cash inflows are primarily
derived from net premiums received, from
losses recovered from reinsurers, from net
investment income, including dividends
and net income from managed third party
capital, and any capital raising activities
performed in a given year including the
issuance of debt. Excess funds are invested
in the investment portfolio, which primarily
consists of high-quality, highly liquid fixed
maturity securities of short duration. Other
cash inflows result from the sale and
redemption of investments.
The principal outflows for the Group are
the settlement of claims, the payment of
premiums for reinsurance cover, payment
of general and administrative expenses, the
servicing of debt, the purchase of investment
products and the distribution of dividends.
in unrealised gains and losses, was a
gain of $45.7 million for the year ended
31 December 2017 compared to a gain
of $38.4 million for 2016.
Despite the increase in treasury yields in
2017, the investment portfolio produced a
return of 2.5 per cent due to the narrowing
of credit spreads, coupon income and strong
returns in the Group’s risk-asset portfolios.
In 2016, the investment portfolio returned
2.1 per cent. The fixed maturity portfolios
performed reasonably well in 2016, primarily
due to the narrowing of credit spreads,
which more than offset the slight increase
in treasury yields during the year. The 2016
returns were also supported by strong
performance from the Group’s bank
loans, equities and equity-linked notes.
Our average annual total investment return
since inception is 2.9 per cent, and we have
made a positive investment return in every
year since inception, including 2008.
Liquidity
The Group is a short-tail insurance and
reinsurance group. As such, the investment
portfolio must be liquid, short duration
and highly creditworthy. As noted earlier,
the Group’s investment strategy places an
emphasis on the preservation of invested
assets and provision of sufficient liquidity
for the prompt payment of claims in
conjunction with providing a reasonably
stable income stream.
2017
1.7 years
AA-
2.1%
2.0%
2016
1.8 years
A+
1.9%
1.8%
2015
1.5 years
AA-
1.9%
1.6%
2014
1.5 years
AA-
1.5%
1.5%
2013
1.0 year
AA-
1.2%
1.4%
28
Lancashire Holdings Limited | Annual Report & Accounts 2017
Lancashire third party capital
management
The total contribution from third
party capital activities consists of the
following items:
Kinesis underwriting fees
Kinesis profit
commission
Lloyd’s managing agency
fees & profit commission
Total other income
Share of (loss) profit
of associate
Total net third party
capital managed income
2017
$m
5.8
2016
$m
4.4
5.9
6.2
5.5
17.2
9.9
20.5
(9.4)
5.1
7.8
25.6
The increase in Kinesis underwriting fees
during 2017 was due to more limit being
placed compared to 2016. The Kinesis
profit commission was driven by the timing
of loss experience and collateral release
and therefore varies from year to year. The
share of (loss) profit of associate reflects
Lancashire’s 10 per cent equity interest in
KHL. The overall loss for 2017 was entirely
driven by the significant catastrophe
activity during the second half of 2017.
The reduction in Lloyd’s fees and profit
commission was driven by the relative
profitability of the underwriting years
impacting each period.
Other operating expenses
Employee remuneration
costs
Other operating
expenses
Total
2017
$m
2016
$m
40.2
61.4
43.4
83.6
37.1
98.5
Employee remuneration costs for the year
ended 31 December 2017 were $21.2 million
lower than the same period in 2016, primarily
driven by lower variable compensation due
to the catastrophe activity in the year.
Other operating expenses were $6.3 million
higher for the year ended 31 December 2017
compared to the same period in 2016,
primarily due to increased software costs,
placement fees for the Kinesis vehicle plus
higher consulting costs.
The equity-based compensation credit of
$0.4 million for the year ended 31 December
2017, compared to an expense of $10.7
million for the year ended 31 December
2016, was due to incorporating losses
incurred during the second half of 2017
into performance estimates, combined with
the lapsing of awards of former Cathedral
employees on their departure from the
Group. The equity-based compensation
charge was driven by the anticipated vesting
level of the active awards based on current
performance expectations.
Capital management
Lancashire has built a reputation for
being one of the best known and most active
proponents of capital management in the
industry. Capital management is our most
important area of focus after underwriting
and it is our firm belief that proactive and
flexible capital management is crucial in
helping to maximise risk-adjusted return
over time. With that focus we will return
capital where this offers the best returns
for our shareholders. We have returned
108.1 per cent of comprehensive income
generated via dividends or share
repurchases since inception.
The Group actively reviews the level and
composition of capital on an ongoing basis.
Internal methods have been developed to
review the profitability of classes of business
and their estimated capital requirements
plus the capital requirements of the
combination of a wide range of other
risk categories. The key aim of the capital
management process is to maintain a
strong balance sheet, whilst:
• maintaining sufficient capital for
underwriting opportunities and to
meet obligations to policyholders;
• maximising the risk-adjusted return
to shareholders within predetermined
risk tolerances;
• maintaining adequate financial strength
ratings; and
• meeting internal, regulatory and rating
agency requirements.
www.lancashiregroup.com
29
OverviewStrategyPerformanceGovernanceFinancial statements
Business review continued
The subsidiary operating entities also
conduct capital requirement assessments
under internal measures and in compliance
with local regulatory and Lloyd’s
requirements.
Capital raising can include debt or equity,
and returns of capital may be made through
dividends, share repurchases, a redemption
of debt or any combination thereof. All
capital actions require approval by the
Board of Directors. The retention of earnings
generated also leads to an increase in capital.
The composition of capital is driven
by management’s appetite for leverage,
amongst other factors, including the cost
and availability of different types of capital.
Maintaining a strong balance sheet will
be the overriding factor in all capital
management decisions.
Capital
As at 31 December 2017, total capital
available to the Group was $1.433 billion,
comprising shareholders’ equity of $1.107
billion and $326.3 million of long-term debt.
Tangible capital was $1.279 billion. Leverage
was 22.8 per cent on total capital and 25.5
per cent on total tangible capital. Total
capital and total tangible capital as at
31 December 2016 were $1.528 billion
and $1.374 billion respectively.
Dividends
During 2017, the Lancashire Board
declared a final dividend of $0.10 per
common share in respect of the 2016
financial year and an interim dividend of
$0.05 per common share in respect of 2017.
With the final dividend in respect of 2017
of $0.10 per common share, total capital
returns since inception amount to $2.7
billion, or 277.8 per cent of initial capital
raised. The final dividend of $0.10 per
common share will be paid on 21 March
2018 to the shareholders of record on
23 February 2018.
Non pre-emptive issue of shares
As part of the Group’s flexible approach
to capital management the Board has in
recent years requested and received from
shareholders authority to issue up to 15 per
cent of its shares on a non pre-emptive basis.
Lancashire believes that this ability to raise
capital quickly is important in securing
first-mover advantage in the catastrophe
insurance and reinsurance business in which
it underwrites. The Board proposes to put a
similar request for authority to shareholders
in a resolution at the 2018 AGM to be held
on 2 May 2018.
Letters of credit
Lancashire has a standard syndicated LOC
facility which in total amounts to $300.0
million, with a $75.0 million loan sub-limit
available for general corporate purposes.
Syndicate 2010 has an $80.0 million
catastrophe facility in place to assist in paying
claims and gross funding of catastrophes.
Furthermore, a $130.0 million syndicated
uncollateralised facility is available for
utilisation by LICL and guaranteed by
LHL for Funds at Lloyd’s purposes.
There was no outstanding debt under the
above facilities at any reporting date. There
are no off-balance sheet forms of capital.
30
Lancashire Holdings Limited | Annual Report & Accounts 2017
Enterprise risk management
Navigating our environment
Consistent Enterprise Risk Management is the key to being ready
to respond in all environments.
The Group is exposed to risks from
several sources. These include insurance
risk, market risk, liquidity risk, credit risk,
operational risk and strategic risk. The
primary risk to the Group is insurance risk,
which can be subdivided into the core risk of
underwriting and non-core risk of reserving.
The Group has formulated, and keeps
under review, a risk appetite which is set by
the Board of Directors. The Group’s appetite
for risk will vary marginally from time to time
to reflect the potential risks and return that
present themselves. However, protecting the
Group’s capital and maximising risk-adjusted
returns for investors over the long term are
constants. The risk appetite of the Group
is central to how the business is run and
permeates into the risk appetites that
the individual operating entity boards of
directors have adopted. These risk appetites
are expressed through detailed risk tolerances
at both a Group and an operating entity
level. Risk tolerances represent the maximum
amount of capital, generally on a modeled
basis, that the Group and its entities are
prepared to expose to certain risks.
The Board of Directors is responsible
for setting and monitoring the Group’s
risk appetite and tolerances, whereas the
individual entity boards of directors are
responsible for setting and monitoring
entity-level risk tolerances. All risk tolerances
are subject to at least an annual review and
consideration by the respective boards of
directors. The Board and individual entity
boards of directors review actual risk levels
versus tolerances, emerging risks and any risk
learning events at least quarterly. In addition,
on at least a monthly basis, management
reviews the output from SHARP in order to
assess modeled potential losses against risk
tolerances and to ensure that risk levels
are managed in accordance with them.
ERM framework
The Group subscribes to a ‘three lines
of defence’ model, the front line being
risk ownership by business managers.
Responsibility for the management of
individual risks has been assigned to, and
may form part of the performance objectives
of, the risk owners within the business. Risk
owners ensure that these risks and controls
are consistent with their day-to-day processes
and the entries made in the Group risk
registers, which are a direct input into the
subsidiary capital models. The second line
comprises the risk management team, which
is responsible for risk oversight. Within this,
the Group CRO provides regular reports
to the business outlining the status of the
Group’s ERM activities and strategy, as well
as formal reports to the Board and the
boards of the individual operating entities.
The Group CRO ultimately has the right
to report directly to the Group and entity
regulators if she feels that management
is not appropriately addressing areas of
concern. Cathedral’s CRO provides formal
reports to the CUL Board and its Risk,
Capital and Compliance Committee. The
third line of defence is the internal audit
function, which works very closely with the
business and the risk management team
in providing risk assurance.
We continue to perform a quarterly risk
and controls affirmation process whereby
the operation of all key controls is affirmed
by the control operators and then reviewed
and signed off by the risk owners. In addition,
the risk owners are required to affirm their
risks remain appropriately documented
and scored. During 2017 this process was
expanded to include all individual operating
entities including the syndicates. The output
from this process is reported to the RRC
and the Group and operating subsidiary
audit committees or boards of directors
as appropriate.
www.lancashiregroup.com
31
Louise Wells
Group Chief Risk Officer
Maintaining the balance
The first eight months of 2017 were all about
maintaining the balance of the risk we were
taking on with the return we were receiving
for that risk. It was pleasing therefore, that
post hurricanes Harvey, Irma and Maria, the
Mexican earthquakes and California wildfires
we remained inside our Board-approved risk
appetite and tolerances. Following these
events our risk management processes did
not change; our risk appetite was reviewed
with the changing environment in mind,
however no adjustments to tolerances
were required.
Risk strategy
Our risk strategy is the starting point for
the development and evolution of our risk
management framework and is therefore
refreshed on an annual basis in line with
the continuous development of our
framework and the annual review of the
business and capital strategy. Our risk
strategy must be aligned with our business
and capital strategy to ensure the capital
resources held are matched to the risk
profile of the Group and that the balance
between risk and return is considered as
part of all key business decisions.
OverviewStrategyPerformanceGovernanceFinancial statements Enterprise risk management continued
ERM & ORSA
Key Activities
• Review of business strategy with challenge from the Board
• Annual approval of a business strategy paper by the Board
• Group CRO report
to Board and Executive
Management Committee
• Production of ORSA report
and review and approval
by the Board
• Capital and liquidity
management frameworks
• Review of BLAST
policies, capital and
solvency appetites
• Full/proxy
capital assessments
• Rating agency
capital assessments
• Stress and scenario testing
STRATEGY REVIEW
& CHALLENGE
RISK SOLVENCY &
ASSESSMENT
CAPITAL
MANAGEMENT
C U LTURE &
BOARD
RRCRRC
RRC
OVERN A N C E
G
RISK ID &
ASSESSMENT
RISK APPETITE &
TOLERANCES
RISK & BUSINESS
MANAGEMENT
BUSINESS
PLANNING
• Risk identification and assessment
• Quarterly risk and control
affirmations
• Quarterly internal audit reports to
the Audit Committee per a three-
and four-year rolling programme
• External audit reports to the
Audit Committee
• Audit Committee annual
review of the effectiveness
of financial controls
• Review of risk strategy
and ‘attitude to risk’
• Review of risk appetite
and limits
• Review of Group
risk tolerances
• Management, Board and
subsidiary board approval
of risk tolerances
• Review of risk management
• Review and approval
policies
of business plan by the Board
• Assessment of risk management
• Stress and scenario testing
framework maturity
(business plan)
• Integrated assurance assessment
• Emerging risk assessment
• Assessment of management
actions
Key Elements of ORSA
Board sign-off and embedding
Business Strategy
Risks
Capital and Solvency
Stress and Scenario testing
As at 31 December 2017, all Group entities
were operating within their board-approved
risk tolerances. No significant new risks have
been identified and there have not been any
material changes in our existing risks.
Our quarterly ORSA reports prepared by
the Group CRO to the main Board provide a
timely analysis of current and potential risks,
compared against risk tolerances, along with
their associated capital requirements. The
2018 annual ORSA report will be presented
to the Board for review, challenge and
approval during Q1 2018 and then
submitted to the PRA in line with
supervisory requirements.
As a Lloyd’s managing agent, CUL falls
within the Society of Lloyd’s for Solvency II
reporting, preparing ORSA reports for
each syndicate. Cathedral has its own
ERM framework to ensure adherence
to Lloyd’s minimum standards.
In November 2017, the Group CRO
reported to the Remuneration Committee
regarding risk and remuneration,
recognising the importance of the design
of the remuneration structure in driving
desired behaviours over both the short-term
and the longer-term business planning
periods. In addition, a Group Solvency II
Staff policy was reviewed, challenged and
approved by the Remuneration Committee.
The diagram above illustrates how we
balance our ERM and ORSA activities.
Our risk culture is driven from the top down
via the Board and executive management to
the business, with the RRC central to these
processes. The primary role of the Group
CRO is to facilitate the effective operation of
ERM and the ORSA process throughout the
Group at all levels. The role includes, but is
not limited to, the following responsibilities:
• overall management of the risk
management system;
• to drive ERM culture, ownership
and execution on three levels: Board,
executive management and operational
within the business;
• to facilitate the identification, assessment,
evaluation and management of existing
and emerging risks by management and
the Board including the articulation of risk
preferences and the adoption of formal
risk tolerances;
• to ensure that these risks are given due
consideration and are embedded within
management’s and the Board’s oversight
and decision-making process;
• to be consulted, and opine, on policy
in areas such as, but not limited to,
underwriting, claims, investments,
operations and capital management; and
32
Lancashire Holdings Limited | Annual Report & Accounts 2017
O
v
e
r
v
e
w
i
• to provide timely, accurate, reliable,
factual, objective and accessible
information and analysis to guide,
coach and support decision making.
RRC
The RRC, under the chairmanship of the
Group CEO, is the key management tool for
monitoring and challenging the assessment
of risk on a continual basis. It seeks to
optimise risk-adjusted return and facilitate
the appropriate use of BLAST, including
considering its effectiveness. It ensures that
all key areas of risk are discussed according
to a schedule that covers fortnightly, monthly,
quarterly, semi-annual and annual reviews.
The RRC meets fortnightly and is responsible
for co-ordinating and overseeing ERM
activities within the risk profile, appetites and
tolerances set by the Group and individual
entity boards of directors. The RRC includes
the Group CEO, members from the finance,
actuarial, modeling, operations, treasury and
underwriting functions and both the Group
CRO and Cathedral CRO. The Group CRO
reports on the RRC’s activities to the Group
and individual entity boards of directors
and, via the Cathedral CRO, the Risk, Capital
and Compliance Committee of Cathedral.
Through the Group CRO the RRC considers
recommendations to the Board and its
Committees with regard to the adoption
of formal risk tolerances.
Capital models
We continue to challenge the assumptions
used in the individual capital models and
make changes where appropriate.
Emerging risk
The identification and assessment of
emerging risk occurs throughout the Group
from individual departments to management
and executive committees to the boards of
directors and sub-committees of the boards.
The risk department maintains an emerging
risk register, which is provided to the Board
and entity boards of directors each quarter,
and is therefore subject to an iterative
process of review and oversight. Emerging
risks, by their nature, are difficult to quantify,
however during 2017 the Group strove to
foresee potential areas of new risk, or
developments in existing risks and to assess
how those risks could impact the Group.
Risk universe
We continue to classify risks in three
broad classes: (a) Intrinsic Risk: ‘Risk
that stems from the inherent randomness
and uncertainty that exists in the universe
in which we operate and that is therefore
fundamental to how we manage our
business’. This can be core or non-core;
(b) Operational Risk: which can be
independent or correlated; and (c) Other
Risk: the non-financial category of risks
which cannot necessarily be mitigated by
holding capital since such risks may not
have direct balance sheet implications.
The Board evaluated the risks disclosed,
alongside other factors, in the assessment of
the Group’s viability and prospects as set out
in the going concern and viability statement
in the Directors’ Report at page 83.
Risk universe
Type
Category
Description
e
r
o
C
c
i
s
n
i
r
t
n
I
c
i
s
n
i
r
t
n
I
l
a
n
o
i
t
a
r
e
p
O
Underwriting
Investment
e Reserving
r
o
c
-
n
o
N
(Re)Insurance
counterparty
Liquidity
Intrinsic risks representing the potential to generate a return as well as a loss.
In these areas, the Group promotes informed risk-taking that considers the risk and return equation in all major
decisions, with the intention of maximising risk-adjusted return on equity.
We recognise that by insuring fortuitous events we can suffer losses, and that within our investment portfolio we
can see the value of investments fall. We cannot avoid these risks so we focus on the correlated operational risks and
seek to mitigate them. For example, we know that by insuring the risk of earthquake we are exposed to the risk that
losses exceed our plan. We model our portfolio using stochastic modeling to review actual and planned exposures
to ensure they remain within tolerances. The correlated risks are that we might fail to design or maintain effective
tolerances and limits, and fail to maintain exposures within such limits; or that we fail to keep accurate and timely
records of our exposures. We then devise systems and processes to mitigate these risks, such as PML reconciliations,
and RDS sign-offs, with review by the RRC and regular ORSA reports to the Board, which also considers and
approves formal risk tolerances.
Intrinsic risks to which we are inevitably exposed as a result of conducting our day-to-day business operations yet offer
no direct potential for return.
They are quantified insofar as practicable for the purposes of capital and risk management and avoided or
minimised insofar as is economically justifiable.
Operational
These are risks arising as a result of inadequate or failed internal processes, personnel, systems or (non-insurance)
external events.
r Strategic
e
h
t
O
Group
Emerging
They have the potential either to magnify the adverse impacts of intrinsic risks, for example increased reinsurer
default losses arising through the use of non-approved counterparties; or to crystallise separately in their own
right, for example losses arising through the imposition of fines as a result of a regulatory breach, so unrelated
to our core functions.
These are risks for which quantitative assessment is difficult but for which a structured approach is still required to
ensure that their potential impact is considered and mitigated insofar as is practicable. These are included within
the risk register and are assessed and mitigated through scenario and stress testing.
www.lancashiregroup.com
33
StrategyPerformanceGovernanceFinancial statements
Principal risks
Balancing our risks and opportunities
As described under our review of the Risk Universe, our classification of risks as Intrinsic Core and Intrinsic Non-core, Operational and Other
helps us to focus on our management and mitigation of those risks. Further details concerning these risks can be found on pages 100 to 125.
Within the capital models, insurance risk accounts for over 80 per cent of the allocated risk capital, so this is clearly the principal area where
we stringently apply controls and reviews. For example, we place a large number of controls around monitoring risk levels across the business.
However, we understand that even risks that do not generate a capital charge under an economic capital model can pose serious threats to
the execution of the business plan and strategy, and therefore need to be monitored and tested. For example, we spend a lot of time looking
at the implications of emerging capital and the evolution of the market cycle.
INTRINSIC RISK: CORE
TYPE
Underwriting: Losses in our classes are hard to predict in particular
as to the specifics of timing and quantum of catastrophe loss events.
Additionally, we write lines of business that are subject to accumulations,
including accumulations of individual risk losses arising from a single
event such as several property catastrophe excess of loss programmes
being affected by a windstorm or earthquake, and accumulations
between business lines such as a 9/11 type event impacting both the
terrorism and AV52 portfolios. Losses can also exceed expectations in
terms of both frequency and severity. So, although we model losses,
for example using the RMS and AIR stochastic models, we know
that these projections can and will be wrong in many instances.
Movement since 2016: Decreased due to reduced retentions and
further contraction to core book reducing aggregate exposure.
Investment: We need to hold sufficient assets in readiness to pay claims,
but the markets and products in which we invest can suffer volatility and
losses. As a short-tail insurer, we are able to hold the majority of assets in
low-duration securities such as fixed maturities. However, this creates an
additional source of risk in the current environment, where there is a
considerable risk from changes to interest rates as quantitative easing
programmes may begin to taper or be increased. We model our
investment portfolios and use various stress scenarios to see what
kinds of losses we could expect under a range of outcomes.
Movement since 2016: No material change.
INTRINSIC RISK: NON-CORE
TYPE
Reserving: Because we do not know the amount of losses we are going
to incur at the outset of a contract, we have to make estimates of the
reserves we need to hold to pay claims. If these reserves are inadequate
and claims exceed them, this may have an impact on earnings, or indeed
capital. Independent external reviews of our reserves look at the overall
levels of expected losses, as well as individual large events, including
benchmarking analyses to provide assurance over the level of
reserves booked.
Movement since 2016: No material change. Our processes and controls
remain the same as in previous periods.
34
Lancashire Holdings Limited | Annual Report & Accounts 2017
MITIGATION
Modeling: We apply loads to, and stress test, stochastic
models and develop alternative views of losses using
exposure damage ratios.
RRC: The RRC considers accumulations, clashes and
parameterisation of losses and models.
Capital: We set our internal capital requirements at a level that
allows for buffers above accumulations of extreme events and the
Board approves risk tolerances at least annually and considers
capital requirements on at least a quarterly basis.
Investment strategy: Our strategy is that investment income
is not expected to be a significant driver of our returns. Our
primary focus remains on underwriting as the engine of profits.
Investment strategy, including investment risk tolerances, is
approved annually and monitored on a quarterly basis by
the Investment Committee and Board.
IRRC: The IRRC forms an integral part of our risk management
framework, meeting at least quarterly and reporting to the RRC.
External advisers: Lancashire’s Board and management
recognise that the Group’s principal expertise lies in
underwriting so we use the services of internationally recognised
investment managers who are experts in their fields.
MITIGATION
Short-tail business: Lancashire’s focus is on short-tail lines of
business where losses are usually known within, or shortly after,
the policy period with a reasonable degree of certainty.
Experience data: We have access to a lot of data, both our own and
from the industry as a whole, about losses and loss trends. Actuarial
and statistical data are used to set estimates of future losses, and
these are reviewed by underwriters, claims staff and actuaries to
ensure that they reflect the actual experience of the business.
External review: Insurers typically facilitate an independent,
external review of their loss reserves. Lancashire retains the
services of one of the leading industry experts, and our appetite is
defined so as to set reserves within a range of reasonable estimates
based on both internal and external review. The Audit Committee
of the Board reviews reserve adequacy at its quarterly meetings.
INTRINSIC RISK: NON-CORE
TYPE
(Re)Insurance and intermediary counterparty: Almost all the insurance
policies which we write are brought to us by brokers, who act as
intermediaries between us and the client, and handle the transaction
of payments of claims and premiums on our behalf. This exposes us
to the risk of mishandling by, or failure of, the broker concerned. In
order to make our portfolio as efficient as possible, we buy reinsurance
to protect against severity, frequency and accumulation of losses. Again,
this exposes us to the risk that our counterparties may have the inability
or unwillingness to pay us in the event of a loss.
Movement since 2016: No material change.
Liquidity: In order to satisfy claims payments we need to ensure
that sufficient assets are held in a readily realisable form. This includes
holding cash accounts for the expected level of attritional losses, as
well as ensuring that we can meet claims payment requirements in
extreme events.
Movement since 2016: No material change.
OPERATIONAL
MITIGATION
Counterparty credit limits: The Broker Vetting Committee
is responsible for the broker vetting approval process and
monitoring credit risk in relation to brokers. In addition, the
Group conducts broker business using non-risk transfer TOBAs.
This mitigates the risk due to non-payment by brokers and
intermediaries as monies are held in separated client accounts.
We use counterparty credit limits, seek to deal with reputable
reinsurers that meet our minimum rating standards, and use
collateral agreements where appropriate. The operating entities
of the Group that contract for reinsurance separately maintain
and report their own counterparty credit limits at the entity level.
The RSC is responsible for approving counterparties and
monitoring aggregate limits.
Portfolio management: The Group maintains liquidity in
excess of the Board-agreed tolerances. This is achieved through
the maintenance of a highly liquid portfolio with short duration
and high creditworthiness. We monitor this through the use
of stress tests and mitigate risks through the quality of the
investments themselves.
TYPE
These are risks arising as a result of inadequate or failed internal
processes, personnel, systems or (non-insurance) external events.
They have the potential either to magnify the adverse impacts of intrinsic
risks or crystallise separately in their own right. This can encompass IT
availability, where the failure of an IT system, such as our underwriting
system, could impact our ability to maintain accurate and up-to-date
records of our exposures. If correlated with an insurance loss this could
cause us to breach insurance risk tolerances. It could also encompass
IT integrity, where an unauthorised intruder could alter data in our
systems, or introduce a bug that would corrupt the system.
Movement since 2016: Increasing as we commence our project to
develop our systems to enable us to further improve the functionality
of Group IT Finance systems, to enhance management of financial
reporting risk and to ensure compliance with IFRS 17 which comes
into effect in 2021.
MITIGATION
Capacity: We mitigate IT availability risk by adding redundancy to
the capacity we need and using backups of data including off-site
storage that we test regularly.
Testing and access: We mitigate the integrity risk by using
independent external penetration tests, and by restricting access
to key systems to only those people who are qualified and need
to use them.
Personnel: We mitigate the risks associated with staff retention
and key-man risk through a combination of resource planning
processes and controls. Examples include targeted retention
packages, documented position descriptions and employment
contracts, resource monitoring and the provision of appropriate
compensation and training schemes. The Board regularly reviews
succession planning arrangements and remuneration structures.
OTHER
TYPE
These are risks for which quantitative assessment is difficult but for
which a structured approach is still required to ensure that their
potential impact is considered and mitigated insofar as practicable.
They include categories such as Strategic, Group and Emerging Risks.
Movement since 2016: On balance no material change. The impact
of Brexit is not considered to be a significant risk to the Group given
the Group’s current operations and trading profile. We will keep U.S.
tax reform under review but do not at present consider that it will
materially adversely impact the Group’s operations.
MITIGATION
Qualitative approach: These risks require a qualitative
approach, engaging staff in appropriate discussions about
sources of risk, and then thinking about possible outcomes.
The Group Executive Management Committee and the RRC
consider these issues, and the ORSA reports made by the Group
CRO to the Board include standing items on Emerging Risk.
www.lancashiregroup.com
35
OverviewStrategyPerformanceGovernanceFinancial statements
Corporate responsibility
Our responsibility to others
and the environment
Why corporate responsibility is important to Lancashire
Corporate responsibility is an integral part of Lancashire’s approach to its business.
We recognise the need to balance our commitment to our shareholders, employees
and more immediate stakeholders with a responsibility to support the wider
community and the environment, whether within our neighbouring areas or
further afield. The work of The Lancashire Foundation is fundamental to the
Group’s corporate responsibility programme.
Our approach
Lancashire tries to improve society and our
environment using such tools as donations
by the Foundation and the allocation of staff
charity days to work on local improvement
projects. We limit the negative impact of
our carbon footprint through mitigation
strategies and off setting. As well as the direct
benefits, we believe that Lancashire reaps
indirect benefits in terms of its attraction as
an ethical and compassionate employer, and
the positive and long-lasting team-building
benefits of the activities undertaken. In terms
of governance, the Board sets the policy for
corporate donations to the Foundation and
reviews reports on its activities. For more
information about the day-to-day management
of the Foundation and how it operates see
pages 37 and 38. The Board also sets the
policy for the operation of the HR function,
and oversees the management of the
environmental impact of the business.
Lancashire has a relatively low headcount
(204 employees globally), all of whom are
remunerated on a basis which comfortably
exceeds UK minimum wage requirements.
In particular, the Group’s UK operation is
an accredited Living Wage employer by the
Living Wage Foundation. In the ancillary
services and limited supply chains used by
the Group, Lancashire seeks to receive
assurance that its service providers pay a
living wage. Concerns over human rights
issues with insureds and potential clients
are addressed as part of the underwriting
process. The Board has recently reviewed
and modified the statement on slavery and
human trafficking made on behalf of all
companies within the Group and considers
that it remains fit for purpose. This statement
is published on the Company’s website. The
Chairman’s statement on the Group’s
diversity policy has also been debated by
the Board during the year and is posted
on the Company’s website.
We focus on the following four areas:
Community
$18.5m
donated by the Lancashire
Foundation since inception
Environment
100%
of our 2017
CO2 emissions offset
Marketplace
100%
of our permanent employees
are eligible for RSS awards
Workplace
12
different nations represented
by our employees
See page
37
See page
39
See page
39
See page
40
36
Lancashire Holdings Limited | Annual Report & Accounts 2017
The Lancashire Foundation
Committed to
supporting communities
In 2017, 131 of our staff across the Group
participated in charity volunteer days,
mentoring opportunities or fundraising
events. The Foundation also operates a
charity matching scheme to support
individual staff members’ charitable
initiatives. During 2017 matched funds
from the Foundation amounted to
£16,785 and supported 12 charities.
This sounds simple, but how does
it work in practice?
Let’s take grant-making first. As a charity
closely linked to the Lancashire Group, we
strive to ensure that the charities we support
reflect the issues and concerns of our staff,
whether from personal experience or
through the demonstrably positive impact
that they have on those in need. We
underpin this with a set of objectives to
inform our giving with a focus on charities
operating in the fields of poverty relief,
removing barriers to social exclusion,
supporting medical research and
humanitarian relief.
The majority of charities we supported in
2017 were as a result of staff suggestions and
support. In addition, the Foundation also
supported charities suggested by clients and
brokers which, for 2017, included Batten
Disease Family Association, Skiing with
Heroes, Edinburgh Global Partnerships,
Starlight Foundation, The Brain Tumour
Charity, World Vision – Hurricane Relief
and Richard House Children’s Hospice.
Taking the second aspect of staff giving, we
actively encourage support by staff. This takes
a number of forms, for example: carrying out
volunteering work that directly benefits the
charity, like our annual volunteering trip to
the Philippines to support the work of ICM
with the ultra-poor; providing mentoring
support to staff at St Giles Trust, many of
whom are ex-offenders; or participating in
fundraising events like marathons. During
the year the Foundation carried out a
number of presentations to remind staff
what the Foundation aims to do and how
they can support it.
How is the Foundation staffed to
support this work?
We don’t employ staff; all the work is carried
out on a voluntary basis by the existing staff
of the Lancashire Group. As I mentioned
earlier, a key aspect is ensuring that the
Foundation reflects what engages our staff,
so funding applications received from
charities are analysed and challenged by the
Foundation’s Donations Committee, which
is comprised of staff from across the UK
and Bermuda platforms.
The Trustees of the Foundation review the
recommendations for funding received from
the Donations Committee and release funds
as appropriate. As Trustees we also set the
strategic direction of the Foundation and
ensure it is meeting all of its governance
and compliance requirements.
We are lucky with the quality and
commitment of the people involved in
the Foundation. It does not seem right to
highlight certain individuals involved in
the Foundation’s work as all of them are
www.lancashiregroup.com
37
Michael Connor
Chairman of the Trustees of
The Lancashire Foundation
Can you explain what The Lancashire
Foundation is and define its purpose?
The Foundation is a registered charity in
England and Wales (number 1149184) and
its purpose is to act as the focal point for
the Lancashire Group’s corporate social
responsibility activities.
These activities can be divided into two
main streams: giving money in the form of
grants to selected charities and, equally as
important, encouraging our staff to give of
themselves by supporting the Foundation’s
work through volunteering. We do this by
providing day release programmes for staff
to give back to the communities in which
they live and around the world. In addition,
staff are entitled to up to a week’s annual
charity leave on completion of three years’
permanent employment with the Group.
The Lancashire Foundation, our charitable grant-making body, is the cornerstone of our support. The channelling of the talents and energy of our staff in helping others in this way helps benefit and build Lancashire’s business and a positive culture.OverviewStrategyPerformanceGovernanceFinancial statements Corporate responsibility continued
The Lancashire Foundation
Clockwise from left: Louise Wells, Chris
Wilkinson, Louise Byrne, Derek Stapley
and Robert Kennedy
committed and talented, however I am
very grateful for the insight and support
of my fellow trustees, Derek Stapley and
Louise Wells, the Chair of our Donations
Committee, Chris Wilkinson, Robert
Kennedy, who lends his considerable
financial skills to the Foundation’s budgeting
and forecasting and Louise Byrne, whose
organisational skills keep the whole show
on the road!
However, it does not stop there. We have
a wider pool of advocates to draw upon,
namely staff members who act as the
Foundation’s ‘eyes and ears’ in relation
to specific charities. This really allows both
the Donations Committee and the Trustees
to obtain comfort that we have close liaison
with our charity partners and that questions
and issues can typically be resolved quickly.
“It was very pleasing
that the Foundation
was shortlisted for
an award at the 2017
Charity Times Awards
in the Corporate
Community Local
Involvement category.”
We’ve not really talked about
charities. Can you give me a
flavour of who you support?
Of course. The Foundation looks to
support charities around the world but
with an emphasis on charities where we can
see a demonstrable positive impact on the
communities they serve and which operate
in effective, transparent and sustainable ways
to deliver the programmes they provide.
Through our flagship or cornerstone
relationships we can see this: for example,
the work of MSF really needs little introduction
but they have an ability to react nimbly to
multiple international humanitarian crises
and to continue to shine a light on issues
once the news cycle has moved on. More
locally, the Family Centre in Bermuda
provides early intervention services for
children on the island suffering from
family-based problems such as abuse and
neglect, and St Giles Trust in the UK looks to
break the bleak cycle of re-offending through
a variety of means, one of which is its model
of using ex-offenders trained to act as peer
advisers to support those released from prison.
It was very pleasing that the Foundation was
shortlisted for an award at the 2017 Charity
Times Awards in the Corporate Community
Local Involvement category, which is a
tribute to our advocate for St Giles, John
Cadman (the Group’s General Counsel),
and a number of our staff who act as mentors
and give up their spare time to support
selected St Giles’ staff as they develop
their careers.
What kind of relationships do you
look to cultivate with the charities
you support?
Put simply – open and transparent. The
advocate system allows us to get close to
our charities and foster the deep, multi-year
relationships we hope to develop with most
of the charities we support.
Annually, where we have multi-year
relationships, the advocates are expected
to review and reflect on the performance of
the charity they advocate with the Donations
Committee to ensure that the Committee
is happy to recommend a renewal of the
grant for the next year to the Trustees.
Both quantitative and qualitative data
will be reviewed as part of this process.
What is the relationship like between
the Foundation and Lancashire
Holdings Limited?
A very supportive one. The Foundation
has been very lucky to receive an annual
donation from LHL to support its activities
and at the Foundation’s inception it was
granted warrants which have been converted
into shares. We currently hold 330,713 shares
in LHL. In this way we have aligned the
Foundation to the Group and can share in
its success, and leverage that success to causes
and communities that do not often receive
such material rewards. Ideally through our
work we can develop something approaching
a virtuous circle as a grant maker, but this
remains a work in progress.
38
Lancashire Holdings Limited | Annual Report & Accounts 2017
Our focus areas
Using an operational control approach,
Lancashire assessed its boundaries to identify
all the activities and facilities for which it is
responsible and reported on all material
Greenhouse Gas (GHG) emissions including
Scope 1, 2 and 3. Calculations performed
follow the ISO-14064-1:2006 standard and
give absolute and intensity factors for the
Group’s emissions.
Emissions from water (Scope 3) have also
decreased by 72.2 per cent compared with
2016. This was due to a water leakage at the
Bermuda office during 2016, which was
subsequently rectified in 2017.
Lancashire has purchased carbon credits to
reduce its gross GHG emissions by 2,453.3
tonnes, offsetting its total carbon emissions
and remaining carbon neutral.
Environment
Despite a small increase in reporting scope,
total emissions for 2017 have decreased
by 4.3 per cent compared to 2016, with
emissions per full-time employee (FTE)
falling by 7.0 per cent.
With operations in London and Bermuda,
and with clients and brokers around the
globe, the Lancashire Group incurs the bulk
of its carbon footprint as a result of airline
travel, which is offset through an organised
programme. The Group operates out of two
offices; in London and Bermuda. The Group
is also responsible for an apartment in
Bermuda which is used for temporary
visitor accommodation.
Our approach
The figures in this report are calculated over
a 12-month period from 1 January 2017 to 31
December 2017. Emissions are calculated by
converting consumption data into tonnes of
carbon equivalent (tCO2e) using the DEFRA
2017 greenhouse gas reporting: conversion
factors. Lancashire uses the number of FTE
as its intensity metric, which this year shows a
decrease of 7.0 per cent to 12.0 tCO2e per FTE,
compared to 12.9 tCO2e per FTE in 2016.
Where data was not available for 2017, values
have been extrapolated by using available
data or calculated using industry benchmarks.
In 2017, the Group’s UK operations
achieved BREEAM excellence for its London
offices at 20 Fenchurch Street, which has
supported an overall improvement in
environmental performance.
Therefore, results show that GHG emissions
in the year were 2,453.3 tCO2e, comprised
of direct emissions (Scope 1) amounting
to 70.9 tCO2e, and indirect emissions
(Scope 2) amounting to 418.0 tCO2e. The
source of other indirect emissions (Scope 3)
comprised 1,964.4 tCO2e. Scope 1 emissions
have decreased by 21.7 per cent. Scope 2
emissions have decreased by 14.4 per cent
compared with 2016 due to the decarbonisation
of the UK power grid. Scope 3 emissions
have also decreased compared with 2016
due, in part, to a reduction in airline
travel, most notably short haul flights.
Types of Emissions
Direct (Scope 1)
Indirect Energy (Scope 2)
Indirect Other (Scope 3)
Gross Emissions (tCO2e)
Gross Emissions per FTE (tCO2e/FTE)
Carbon Credits
Total Net Emissions after offset (tCO2e)
Activity
Gas (measured in kWh)
Refrigerant (measured in kg)
Electricity (measured in kWh)
Business Travel
(measured in miles and GBP)
Additional Upstream Activities1
(measured in kWh, litres, miles
and spend)
Water (measured in m3)
Waste (measured in kg)
Paper (measured in reams)
Hotels (measured in hotel nights)
2017
tCO2e
70.9
0.0
418.0
2016
tCO2e
90.5
0.0
488.5
1,619.5 1,624.3
299.7
7.2
4.4
6.9
26.7
308.7
25.9
1.7
5.5
17.2
2,453.3 2,562.3
12.9
2,563
0.0
12.0
2,454
0.0
(1) Additional Upstream Activities include Well-to-Tank and Transmission & Distribution emissions. These
are emissions associated with the upstream processes of extracting, refining, and transporting raw fuel to
our business.
The Group has chosen to offset its carbon
emissions with Carbon Clear by buying
credits in the Wind Power Generation
Project in India. These offsetting
proposals were discussed and agreed
with the Group CEO.
Marketplace
We continue to help the development of our
marketplace by making employees available to
sit on market committees, boards and working
groups. During 2017, our employees gave talks
at industry conferences, investor days and
symposia, and market education programmes.
As noted on page 37, we also donate to many
of the causes supported by our industry
partners through the Foundation.
Our approach
We believe it is important to make our people
available to the markets in which we operate,
and we do this happily. We also engage actively
with our regulators in Bermuda and London,
and the Cathedral team is active within the
Lloyd’s market. With our clients and their
brokers, we are happy to welcome them to
our offices, but we also travel to see them
and their businesses all around the world.
Our focus areas
Clients: we strive to offer clear, fairly priced
and useful products that meet their needs
across our range of underwriting operations.
Brokers: we are fully committed to
supporting a ‘broker market’ and prize
our broker relationships very highly, right
across the Group.
Investors: we continue to work hard at investor
relations and have an active programme of
engagement with investors around the globe.
Regulators: we recognise the need to engage
closely with our regulators at the PRA, FCA,
BMA and at Lloyd’s and seek to be transparent
in all our dealings with them.
www.lancashiregroup.com
39
OverviewStrategyPerformanceGovernanceFinancial statements
Corporate responsibility continued
Corporate responsibility in action
Relay for Life
For the past four years the Bermuda
office has participated in the Relay for
Life event put on by Bermuda Cancer
and Health Centre. This event is part
of the Global Relay for Life which
is a 24-hour fundraiser that brings
communities together in the fight against
cancer. We walk to remember those
we have lost, celebrate those who have
survived, encourage those who are still
fighting and give thanks to all caregivers.
In 2017, Lancashire’s ‘Team Tango’ was
made up of over 100 staff, family and
friends. In 2017 our team raised over
$25,000 and over the four years we have
raised over $75,000. These funds have
been used to bring radiation therapy to
Bermuda so patients can be treated locally
rather than having to travel overseas.
Workplace
We strive to attract and retain excellent
employees who drive our appetite to
outperform so as to ensure that the talents of
our people and our unique culture continue
to set us apart from our competitors.
Matching the skills, aspirations and values
of new recruits to both the role and the
values of Lancashire remains a high
priority for our business.
Our approach – promoting a positive
and diverse culture
The Group promotes an inclusive
environment that recognises and values
diversity as key to enhancing individual
development and maximising business
effectiveness. As an equal opportunities
employer, we will not tolerate discrimination
of any kind in any aspect of employment,
including in job advertisements, recruitment,
training, promotion, compensation, benefits,
advancement and career development.
The Group is also committed to a working
environment that is free from any form
of bullying or harassment.
Our proactive measures to achieve a diverse,
vibrant and positive business culture include
our ‘Respect in the Workplace/
Communications Etiquette’ training
sessions which are given to all new employees
during their induction. The training sessions
aim to highlight their responsibilities in
preventing discrimination in the workplace
and in fostering a positive and productive
working environment.
Staff training and
professional development
The Group encourages continuous
personal and professional development
for all of its employees, whether through
individual external training, professional
qualifications, performance coaching or
‘lunch and learn’ sessions.
The Group values having a diverse workforce
and bases all recruitment decisions on the
ability of prospective employees to do the
job, without consideration to race, age,
gender, sexual orientation, disability,
beliefs, background (except as may be
pertinent to the requirements of a role,
such as educational qualifications or prior
employment experience) or nationality.
Individual training and personal
development needs are discussed on a
regular and ongoing basis by managers
and their team members, including as part
of the formal performance appraisal process.
Compulsory training is provided to new
permanent staff and fixed-term contract staff
in relation to a number of topics as follows:
The Group is currently represented by
employees from 12 different nations.
The gender split of males to females
(see page 56) within the Group is
60/40 per cent respectively.
Lancashire respects, supports and complies
with all relevant local Bermudian and UK
legal requirements, in particular with respect
to rights of freedom of association, collective
bargaining and working time regulations.
• Tax/Regulatory Operating Guidelines;
• Disclosure (including share dealing);
• Inspections;
• Financial Crime;
• ERM; and
• Respect in the Workplace/
Communications Etiquette.
Other training may be held on an ad hoc,
one-off or refresher basis. The training is
designed to ensure that all personnel who
40
Lancashire Holdings Limited | Annual Report & Accounts 2017
Corporate responsibility in action
Project
Transform
Every year since 2010, six to eight employees
from across the Group volunteer to travel
to the Philippines and work alongside ICM
for a week providing aid and support to
those living in ultra-poverty. The 2017
Project Transform volunteers have
reflected on their experience and
summarised their thoughts:
“The members of the 2017 Project Transform
team were very grateful to have been selected
to travel to the Philippines and work with ICM.
We each applied to be part of the team due to
the positive feedback shared by previous team
members. The team were keen to help people
less fortunate than ourselves, as well as better
understand some of the challenges ICM is trying
to overcome locally.
During the project week we had the opportunity
to see how ICM are trying to reach and educate
as many people as possible. Our work included
building projects and delivering educational
talks within various communities.
“Ultimately ICM
gives people hope
for the future.”
We loved spending time and interacting
with the communities we visited and could see
first-hand that lives have clearly been changed
by the work of ICM. The week with ICM was a
humbling experience which made us all see the
world a little differently. Ultimately ICM gives
people hope for the future.”
The Lancashire 2017
Project Transform
team – Steven
Hartley, Shirley
Donovan, Susan
Blasetti, Mathew
Churm, Samantha
Cobb, Sean Pitcher,
Louise Cowin and
Harry London.
56
members of staff
have volunteered to
participate in ICM’s
Project Transform
in the Philippines
since 2010.
are employed by the Group are provided
with the skills, knowledge and expertise
appropriate to their responsibilities.
Quarterly updates regarding attendance
at these compulsory training sessions
are provided to the Board for
information purposes.
Employee turnover and third
party contractors
Among the Group’s employees, the
turnover for 2017 was 16.2 per cent
(a decrease from 20.1 per cent in 2016),
and as at 31 December 2017, 10.1 per cent
of the workforce was composed of third party
contractors, a decrease from 11.6 per cent
in 2016. The rate of staff turnover and third
party contractors was driven principally by
changes in our Lloyd’s platform, where there
continued to be a process of refreshment
and renewal implemented during 2017.
Our focus areas
Our focus in 2017 has been to maintain the
success of our employees through ongoing
training and coaching, provided both
internally and externally. During 2017
approximately 67 per cent of our employees
undertook formal training supported by
the Group. We continue to measure our
employees’ success through attainment
of personal performance metrics as well
as performance within the Group’s values
framework. We can confirm that during
2017 3.4 per cent of our employees were
promoted within the Group, supported
by the training and development
opportunities provided. An area for
continuing development during 2018 will
be greater standardisation of the appraisal
and training frameworks across the Group.
Internship programme –
Corporate responsibility in action
Since 2014, the Group and the Foundation
have jointly sponsored an internship
programme for Bermuda resident college
graduates. These graduates are afforded
the opportunity to spend two years working
and learning about insurance in the Group’s
London office. The first two-year placement
completed during 2016 and one of these
graduates is now a permanent employee
within Lancashire and the other has obtained
a role at another market insurer in Bermuda.
The Group has since welcomed two further
graduates during 2016 and 2017, respectively.
www.lancashiregroup.com
41
OverviewStrategyPerformanceGovernanceFinancial statements Chairman’s introduction
Responsive
governance
Peter Clarke
Non-Executive Chairman
In my opening statement I discussed the way
in which our business and Board responded
to the strategic challenges of 2017 as the year
progressed. The following section focuses
on the work carried out by the Board and its
Committees in exercising effective oversight,
taking decisions and providing responsive
challenge and support to the business.
How does the Board structure and
monitor the governance objectives
for the business?
As a premium-listed company on the
LSE, Lancashire measures its corporate
governance compliance against the
requirements of the UK Corporate
Governance Code published by the UK FRC.
The FCA requires each company with a
premium listing to ‘comply or explain’
against the Code (i.e. to disclose how it has
complied with Code provisions or, if the
Code provisions have not been complied
with, provide an explanation for the
non-compliance). The Group monitors
its compliance with the Code on at least
a quarterly basis.
In this corporate governance section and
throughout the Annual Report and Accounts
for the 2017 financial year, areas of corporate
governance compliance are explained by
reference to the Code. The Company also
monitors its compliance with applicable
corporate governance requirements under
both Bermuda law and regulations and, as
an insurance operation subject to
UK group supervision by the PRA, in
accordance with the requirements of
the UK’s Solvency II regime.
I am pleased to be able to report that
the Board considers that the Company has
complied with the principles and provisions
as set out in the Code throughout the year
ended 31 December 2017. The Board and
business seek to ensure that the formal
consideration of governance and regulatory
requirements does not become a sterile
exercise but is used to best advantage as
a framework to inform the strategic and
commercial matters which are so central
to the nimble and responsive operation
of the Group.
How does the Board have regard to the
interests of Lancashire’s stakeholders in
promoting the success of the business?
Over the last year or so the governance
debate within the UK has concentrated
strongly on the requirement for boards
to focus on a broad group of stakeholders.
Our Board has for many years taken what
might be described as a holistic view to the
operation of its business. Our strategic focus
upon excellence in underwriting encompasses
the importance which we attach to two of
our most important stakeholder groups: our
policyholders and our staff. It is paramount
that the (re)insurance products we offer
meet the needs of our clients and their
42
Lancashire Holdings Limited | Annual Report & Accounts 2017
Responsive governance requires clear communication, constructive challenge and debate and creative strategic thinking. A diverse range of perspectives and experience helps build a responsive culture, which serves and balances the expectations of a broad range of stakeholders. Our governance structure
Group Board
Lancashire Holdings Limited
Board of Directors
Group
Committees
Audit
Committee
p50
Nomination
& Corporate
Governance
Committee
p55
Investment
Committee
Underwriting
& Underwriting
Risk Committee
Remuneration
Committee
p57
p58
p59
Operational Boards
LUK Board
LICL Board
KCML Board
CUL Board
Lancashire Board and the subsidiary boards
continues to operate effectively.
We have also gained useful insights and
identified various areas for enhancements
to the ways we operate and considered
areas for training and learning during the
coming year. I would like to thank all of
our Directors, our management team and
all employees for their hard work during
the year.
Peter Clarke
Non-Executive Chairman
brokers and that Lancashire is viewed as
a trusted partner and provider of solutions.
Similarly, we spend time as a Board carefully
considering the staff resources across the
Group and in particular the succession
planning for Board and senior roles. Given
our relatively small headcount each of our
Directors has regular opportunities to meet
employees at all levels across the business.
In particular, we meet frequently with senior
employees in both London and Bermuda
as part of our quarterly activities.
All of our staff have the opportunity to
meet our Directors both at the AGM and
at semi-formal lunches for employees and
Directors held periodically in both London
and Bermuda.
I am personally involved in the programme
of dialogue which Alex and our management
team conducts with our regulators, in
particular the PRA, Lloyd’s and the BMA,
and those conversations are routinely
reported back to our full Board. The business
also prides itself on its engagement with the
communities in which it operates, both
through staff outreach programmes and
through the operation of the Lancashire
Foundation, which reports to the Board
on its activities. Please see pages 36 to 41
of this Annual Report and Accounts for
further details.
We also pride ourselves on engaging
regularly with our shareholder community,
not only through the regular programme
of meetings organised by our management
team, but also through periodic initiatives to
consult with our shareholders. In particular,
Simon Fraser led a consultation with our
principal shareholders on the remuneration
policy and implementation issues in advance
of the 2017 AGM. As a Board we also meet
regularly with our corporate brokers to seek
their feedback on investor priorities as well as
Lancashire’s performance and perception
amongst investors within the broader
insurance sector.
Are the Board and its Committees
operating effectively?
During 2017 our Board once again carried
out a review of its effectiveness which I led,
facilitated by our Company Secretary (see
page 48 for further details). A summary
report was discussed by the full Board and
we concluded that the Board, its members
and each of its Committees have a balance of
experience and talents that serves the Group
well and have the culture and competencies
necessary to meet the strategic challenges
of the business effectively as we enter 2018.
I have made it my practice to meet regularly
with the chairs of each of our principal
subsidiary boards and our review concluded
that the relationship between the main
www.lancashiregroup.com
43
OverviewStrategyPerformanceGovernanceFinancial statements
Board of Directors
A balanced Board
Alex Maloney
Chief Executive Officer
Alex Maloney joined Lancashire in
December 2005 and was appointed
Group Chief Executive Officer in
April 2014. On joining, Mr Maloney
was responsible for establishing and
building the energy underwriting
team and account and, in May 2009,
was appointed Group Chief
Underwriting Officer. Since
November 2010 Mr Maloney has
served as a member of the Board
and was appointed Chief Executive
Officer of Lancashire Insurance
Company (UK) Limited in 2012.
Mr Maloney also serves as a Director
of Cathedral Underwriting Limited
and has been closely involved in the
development of the Group’s Lloyd’s
strategy. Mr Maloney has over 20
years’ underwriting experience and
has also worked in the New York
and Bermuda markets.
Elaine Whelan
Chief Financial Officer
Elaine Whelan joined Lancashire
in March 2006 and leads both the
Group finance function and the
Bermuda subsidiary, reporting to
the Group Chief Executive Officer.
Ms Whelan was previously Chief
Accounting Officer of Zurich
Insurance Company, Bermuda
Branch. Prior to joining Zurich,
Ms Whelan was an Audit Manager at
PricewaterhouseCoopers, Bermuda,
where she managed a portfolio of
predominantly (re)insurance and
captive insurance clients. Ms Whelan
graduated from the University of
Strathclyde in 1994 with a BA in
Accounting and Economics and
gained her Chartered Accountancy
qualification from the Institute of
Chartered Accountants of Scotland
in 1997.
Michael Dawson
Non-Executive Director
Michael Dawson has more than 35
years’ experience in the insurance
industry, having started his career
at Lloyd’s in 1979. He joined Cox
Insurance in 1986 where he was the
Chief Executive from 1995 to 2002.
In 1991, Mr Dawson formed and
became the underwriter of Cox’s
and subsequently Chaucer’s specialist
nuclear syndicate 1176. Between
2005 and 2008 Mr Dawson was
appointed Chief Executive of
Goshawk Insurance Holdings PLC
and its subsidiary Rosemont Re, a
Bermuda reinsurer. Mr Dawson
served on the Council of Lloyd’s
from 1998 to 2001 and on the Lloyd’s
Market Board from 1998 to 2002. He
is a Non-Executive Director of Pool
Re (Nuclear) Limited and Deputy
Chairman of the management
committee of Nuclear Risk
Insurers Limited.
Peter Clarke
Non-Executive Chairman
Peter Clarke was Group Chief
Executive of Man Group plc between
April 2007 and February 2013. In
1993 Mr Clarke joined Man Group
plc, a leading global provider of
alternative investment products and
solutions as well as one of the world’s
largest futures brokers. He was
appointed to the board in 1997 and
served in a variety of roles, including
Head of Corporate Finance and
Corporate Affairs and Group
Company Secretary, before becoming
the Group Finance Director in 2000.
During this period he was responsible
for investing in and developing one
of the leading providers of third party
capital insurance and reinsurance
products. In November 2005, he was
given the additional title of Group
Deputy CEO. Mr Clarke is currently
the Chairman of City Year and a
Non-Executive Director of AXA
Investment Managers S.A., RWC
Partners Limited and Lombard
Odier Asset Management. He is a
member of the Treasury Committee
of King’s College London. Mr Clarke
previously served as the Chairman of
the National Teaching Awards Trust.
Mr Clarke took a first in Law at
Queens’ College, Cambridge and is
a qualified solicitor, having practised
at Slaughter and May, and has
experience in the investment
banking industry, working at
Morgan Grenfell and Citibank.
44
Lancashire Holdings Limited | Annual Report & Accounts 2017
Simon Fraser
Senior Independent
Non-Executive Director
Simon Fraser was Head of
Corporate Broking at Merrill
Lynch and subsequently
Bank of America Merrill
Lynch until his retirement
in 2011. He began his career
in the City in 1986 with BZW
and joined Merrill Lynch in
1997. He led initial public
offerings, rights issues,
placings, demergers and
mergers and acquisitions
transactions during his
career and advised many UK
companies on stock market
and LSE issues. Mr Fraser
has an MA degree in modern
history from the University
of St Andrews. He is also
a Non-Executive Director
of Legal and General
Investment Management
(Holdings) Limited and
Senior Independent Director
of Derwent London plc,
where he sits on the
Remuneration, Audit and
Nominations Committees.
Mr Fraser also serves
as a Non-Executive
Director of Cathedral
Underwriting Limited.
Samantha
Hoe-Richardson
Non-Executive Director
Samantha Hoe-Richardson
since 2014 has been
Chairman of the Audit
Committee. She is also a
Non-Executive Director
of Unum Ltd and Unum
European Holding Company
Ltd. Unum is one of the
UK’s leading employee
benefits providers through
the workplace. She also
chairs their Audit
Committees. Prior to
this, she was Head of
Environment & Sustainability
for Network Rail and
formerly Head of
Environment for Anglo
American plc, one of the
world’s leading mining and
natural resources companies.
She was also a director and
founder of Anglo American
Zimele Green Fund (Pty)
Ltd, which supports
entrepreneurs in South
Africa. Prior to her role
with Anglo American,
Ms Hoe-Richardson worked
in investment banking and
audit and she holds a masters
degree in nuclear and
electrical engineering from
the University of Cambridge.
She also has a Chartered
Accountancy qualification.
Ms Hoe-Richardson is also
a Non-Executive Director
of LUK.
Robert Lusardi
Non-Executive Director
Robert Lusardi is currently
a private investor and has
spent his career as a senior
executive in the financial
services industry. From
1980 until 1998 he was
an investment banker with
Lehman Brothers, ultimately
as Managing Director in
charge of the insurance and
asset management practices.
From 1998 until 2005 he was
a member of the Executive
Management Board of XL
Group plc, first as Group
CFO then as CEO of one
of their three operating/
reporting segments; from
2005 until 2010 he was an
EVP of White Mountains
(an insurance merchant
bank) and CEO of certain
subsidiaries; and from 2010
to 2015 he was CEO of
PremieRe Holdings LLC
(a private insurance entity).
He has been a director of a
number of insurance-related
entities including Symetra
Financial Corporation,
Primus Guaranty Ltd.,
OneBeacon Insurance
Group Ltd., Esurance
Inc., Delos Inc. and FSA
International Ltd. He is
also on the board of Oxford
University’s 501(c)3
charitable organisation.
He received his BA and
MA degrees in Engineering
and Economics from Oxford
University and his MBA
from Harvard University.
Tom Milligan
Non-Executive Director
Tom Milligan was Co-Chief
Executive Officer of Ariel
Re Holdings Ltd., until his
retirement in 2015. He
began his career in the City
in 1991 with Guy Carpenter
& Co. In 2005, Mr Milligan
joined Goldman Sachs
Group Inc. to start the
GS Reinsurance Group’s
non-life activities. Mr
Milligan served as Chief
Underwriting Officer of
Arrow Capital Re and started
Goldman Sachs-owned
Lloyd’s Syndicate 1910
in 2008, serving as Active
Underwriter until 2012.
In 2012, Mr Milligan led
Goldman Sachs’ purchase
of Ariel Re and served as
Co-CEO from April 2012
until July 2014. During 2013,
Mr Milligan played a leading
role in the spin-off of GS
Reinsurance Group into
Global Atlantic Financial
Group (‘GAFG’), before
managing the sale of the
Ariel businesses from GAFG
to BTG Pactual in 2014.
He is also a Non-Executive
Director of Managing
Agency Partners Limited
and Non-Executive
Chairman of Beat Capital
Partners Ltd. Mr Milligan
graduated from Durham
University in 1991.
Christopher Head
Company Secretary
Christopher Head joined
Lancashire in September
2010. He was appointed
Company Secretary of
Lancashire Holdings Limited
in 2012 and advises on issues
of corporate governance and
generally on legal affairs for
the Group. He also advises
on the structuring of
Lancashire’s third party
capital underwriting
initiatives which have
included the Accordion
and Kinesis facilities. Prior
to joining Lancashire, he was
in-house Counsel with the
Imagine Insurance Group,
advising specifically on the
structuring of reinsurance
transactions. He transferred
to Max at Lloyd’s in 2008
as Lloyd’s and London
Counsel. Between 1998
and 2006, Mr Head was
Legal Counsel at KWELM
Management Services
Limited, where he managed
an intensive programme
of reinsurance arbitration
and litigation for insolvent
members of the HS Weavers
underwriting pool. Mr Head
is a UK solicitor having
worked until 1998 at
Barlow Lyde and Gilbert
in the Reinsurance and
International Risk Team.
Mr Head has a history
MA and legal qualification
from Cambridge University.
www.lancashiregroup.com
45
OverviewStrategyPerformanceGovernanceFinancial statements Our Board’s year
Highlights of the Board’s year
February/Q1 meeting
• The Board approved the appointment
of Andrew McKee as a Director and CEO
of CUL, subject to Lloyd’s and relevant
regulatory approvals. The Board also
approved the appointment of Nicholas
Davenport as Chairman of the Board
of Directors of CUL;
• Following its quarterly review of capital
management, the Board declared a
final ordinary dividend of $0.10 per
common share in respect of the year
ended 31 December 2016;
• The Board approved the Group’s 2017
business plan that had been updated
in light of the 1 January 2017 renewals
and market conditions;
• The Board approved updated UK and U.S.
regulatory and tax operating guidelines for
the Group;
• The Board approved the core objectives
of the Lancashire Foundation for adoption
by the Trustees of the Foundation;
• The Board approved the Group’s 2017
framework for executive remuneration;
• The Board approved the Directors’
Remuneration Policy and the Annual
Report on Remuneration, as set out in
the Directors’ Remuneration Report for
the year ended 31 December 2016, for
presentation to shareholders for approval
at the 2017 AGM;
• The Board approved the LHL 2017 RSS
rules for presentation to shareholders
for approval at the 2017 AGM; and
• The Board approved the Annual
Report and Accounts 2016.
March/Solvency II training
• Solvency II training was provided to the
Non-Executive Directors as part of the
structured programme delivered
between 2015 and 2017.
May/Q2 meeting
• The Board approved the Group’s
UK tax strategy for the year ended
31 December 2017;
• The Board approved the Solvency II
submissions as at 31 December 2016
for submission to the PRA;
• The Board approved the appointment
of Robert Lusardi as Chairman of the
Investment Committee;
July/Q3 meeting
• The Board approved the Group’s
three-year strategic plan, including the
Group’s risk appetite and capital and
solvency appetite;
• The Board approved the Group’s 2017
reforecast business plan in light of actual
experience to 30 June 2017 and market
conditions and expectations following
the 1 July 2017 renewals;
• The Board received a presentation from
• The Board declared an interim
the Group’s corporate brokers; and
• The Company’s 2017 AGM was held
at its Head Office on 3 May 2017. All
resolutions were duly passed and
approved by shareholders.
June/Board strategy session
The objective of the 2017 strategy session was
to consider the key decisions to be made in
the preparation of the Group’s three-year
strategic plan. The agenda included:
• review of the current strategy;
consideration of its continued
relevance and the views of shareholders;
• review of the Group’s underwriting lines
of business and potential opportunities;
• presentations on the London and
international specialty and reinsurance
markets and alternative capital in the
reinsurance market;
• consideration of soft market challenges
and potential hard market issues;
• review of the business’s resourcing
and training needs; and
• discussion of the strategic themes
and options for the business.
dividend of $0.05 per common share;
• The Board approved the Group’s updated
ERM strategic objectives and plan;
• The Board approved amended and
restated Terms of Reference of the
Audit Committee;
• The Board approved an updated division
of responsibilities between the Chairman
and the CEO together with an amended
Schedule of Board Reserved Matters,
which is published on the Group’s
website; and
• The Board received a presentation on
the fixed maturity market from one
of the Group’s investment managers.
October/Q3 loss events
• The Board approved the publication
of a press release in respect of the
Group’s preliminary loss estimates
from hurricanes Harvey, Irma and
Maria and the Mexican earthquakes.
November/Q4 meeting
• The Board approved the Group’s 2018
business plan;
• The Board discussed its policy on diversity;
• The Board approved a Group Solvency II
Identified Staff Remuneration policy; and
• The annual performance evaluation of the
Board and its Committees and individual
Directors was commissioned, to be
facilitated by the Company Secretary.
46
Lancashire Holdings Limited | Annual Report & Accounts 2017
Corporate governance report
Board Committees
Board and Committee administration
The Board of Directors is responsible for
the leadership and control and the long-term
success of Lancashire’s business. The Board
has reserved a number of matters for its
decision, including responsibility for setting
the Group’s values and standards, and
approval of the Group’s strategic aims
and objectives. The Board has delegated
certain matters to Committees of the Board,
as described below. Copies of the Schedule
of Board-Reserved Matters and Terms
of Reference of the Board Committees
are available on the Company’s website
at www.lancashiregroup.com.
The Board has approved and adopted a
formal division of responsibilities between
the Chairman and the CEO. The Chairman
is responsible for the leadership and
management of the Board and for providing
appropriate support and advice to the CEO.
The CEO is responsible for the management
of the Group’s business and for the
development of the Group’s strategy
and commercial objectives. The CEO is
responsible, along with the executive team,
for implementing the Board’s decisions.
The Board and its Committees meet on
at least a quarterly basis. At the regular
quarterly Board meetings, the Directors
review all areas of the Group’s business
and receive reports from management
on underwriting, reserving, finance,
investments, capital management, internal
audit, risk, legal and regulatory developments,
compliance and other matters affecting the
Group. Management provides the Board
with the information necessary for it to fulfil
its responsibilities. In addition, presentations
are made by external advisers such as the
independent actuary, the investment
managers, the external auditors, the
remuneration consultants and the corporate
brokers. The Board Committees are
authorised to seek independent professional
advice at the Company’s expense.
The Board also meets to discuss strategic
planning matters outside the formal meeting
schedule. A Board strategic planning session
was held in June 2017.
The Chairman holds regular meetings
with the Non-Executive Directors, without
the Executive Directors present, to discuss a
broad range of matters affecting the Group.
The Directors
Appointments to the Board are made
on merit, against objective criteria and
with due regard for the benefits of diversity
on the Board, including gender. The Board
considers all of the Non-Executive Directors
to be independent within the meaning of
the Code.
Michael Dawson, Simon Fraser, Samantha
Hoe-Richardson, Robert Lusardi and
Tom Milligan are independent, as each is
independent in character and judgement
and has no relationship or circumstance
likely to affect his or her independence.
Peter Clarke was independent upon his
appointment as Chairman on 4 May 2016.
At the Board meeting held on 14 February
2018, further to a recommendation by the
Nomination and Corporate Governance
Committee, the Board affirmed its judgement
that five of the eight members of the Board
are independent Non-Executive Directors.
Therefore, in the Board’s judgement, the
Board composition complies with the Code
requirement that at least half the Board,
excluding the Chairman, should comprise
Non-Executive Directors determined by
the Board to be independent.
In accordance with the provisions of the
Company’s Bye-laws and the Code, all the
Directors are subject to re-election annually
at each AGM.
www.lancashiregroup.com
47
OverviewStrategyPerformanceGovernanceFinancial statements Corporate governance report continued
Information and training
On appointment, the Directors receive
written information regarding their
responsibilities as Directors and information
about the Group. An induction process is
tailored for each new Director in the light
of his or her existing skill set and knowledge
of the Group, and includes meeting with
senior management and visiting the Group’s
operations. Information and advice regarding
the Company’s official listing, legal and
regulatory obligations and on the Group’s
compliance with the requirements of the
Code is also provided on a regular basis.
An analysis of the Group’s compliance
with the Code is collated and summarised
in quarterly reports together with a more
general summary of corporate governance
developments, which are prepared by the
Group’s legal and compliance department
for consideration by the Nomination and
Corporate Governance Committee. The
Directors have access to the Company
Secretary who is responsible for advising the
Board on all legal and governance matters.
The Directors also have access to the
Group General Counsel and independent
professional advice as required. Regular
sessions are held between the Board and
management as part of the Company’s
quarterly Board meetings, during which
in-depth presentations covering areas of
the Group’s business are made. During
these presentations the Directors have the
opportunity to consider, challenge and help
shape the Group’s commercial strategy.
Board performance evaluation
A formal performance evaluation of the
Board, its Committees and individual
Directors is undertaken on an annual
basis and the process is initiated by the
Nomination and Corporate Governance
Committee. The aim of this work is to
assess the effectiveness of the Board and
its Committees in terms of performance
and risk oversight, strategic development,
composition, supporting processes and
management of the Group. The evaluation
is forward-looking in terms of identifying
the strategic priorities as well as considering
performance, training and development
needs for the Directors within the context
of the work of each Committee and that of
the Board. The 2015 and 2016 performance
evaluations were facilitated by Lintstock
Limited, a London-based corporate advisory
firm with no other connection to the Group,
whilst the 2017 evaluation was conducted
internally and facilitated by the Company
Secretary and the Chairman.
The 2017 evaluation process involved each
Director as well as the Company Secretary,
the Group CRO, Group General Counsel
and other members of senior management
completing a questionnaire designed by the
LHL Chairman and the Company Secretary
with input from the Chairs of each of the
relevant Committees. Responses to the
completed questionnaires were collated
by the Company Secretary, who prepared
a suite of summary reports that were
discussed in draft with the Board Chairman
and Committee Chairs before being
distributed to each of the Directors.
In February 2018, the performance evaluation
reports were discussed at meetings of the
Nomination and Corporate Governance
Committee and the Board, and each
of the other Committees discussed the
report pertinent to its own operation and
performance. The Board discussions were
led by the Chairman and focused on such
matters as strategic oversight, succession
planning, Board composition and training
and priorities for 2018.
In summary, in the Board’s consideration
of the 2017 evaluation reports, the Board
concluded that it operates effectively and
has a good blend of insurance, financial
and regulatory expertise. All Non-Executive
Directors are committed to the continued
success of the Group and to making the
Board and its Committees work effectively.
Attendance at Board meetings was found
to be excellent. The CEO and the CFO,
the Company’s Executive Directors, were
also found to be operating effectively.
Appropriate infrastructure, processes and
governance mechanisms are in place to
support the effective performance of the
Board and its Committees. The Board
is considered to manage risk effectively.
The number of Directors on the Board
is considered to be appropriate.
It was noted in the evaluation process that,
in what had been a year involving significant
material losses, the Board and Committee
oversight of underwriting strategy and risk
tolerances had operated effectively and
within expectations. Engagement between
the Board and the wider body of staff
is considered to be generally strong and
beneficial to the operation of the business.
Looking ahead, the Board and Committees
will, during the course of 2018, seek to
ensure that the Group holds sufficient
capital and utilises capital tools to ensure
that the business is well-placed to be a leading
(re)insurance market participant in what
may become a more dynamic underwriting
environment than has been the case in
recent years. In this regard the Board expects
to monitor any changes to the rating agency
and regulatory capital models. The Board
also highlighted a number of themes which
will inform the business of the Board during
2018 including the attributes required in
future non-executive appointments, the
benefits of a broad diversity on our Board
and in our business and the ongoing need to
ensure a strong succession plan to meet the
requirements of the business. A number of
practical steps to optimise the focus of Board
and Committee meetings were also identified
for action.
The Board will continue to review
its procedures, training requirements,
effectiveness and development during 2018.
The Chairman’s performance appraisal
was conducted by the Senior Independent
Director, who consulted with the Non-
Executive Directors with input from the
Executive Directors during November 2017.
The discussion and feedback was positive
regarding all aspects of the Chairman’s
performance. Particular reference was made
to the strong lines of communication which
have been fostered with the Chairs of the
subsidiary boards and his support of the
senior executives. It was noted that the
Chairman also attends (at the invitation of
the relevant Committee Chairman) meetings
of those Committees of which he is not an
appointed member, thus tracking the detail
of Committees’ decision-making, as well as
providing strategic and high-level leadership
to the Board.
Following the year end, the Chairman met
with the CEO, and the CEO met with the
CFO, to conduct a performance appraisal
in respect of 2017 and to set targets for 2018.
The results of these performance evaluations
were discussed by the Chairman and the
Non-Executive Directors and are reported
in the Directors’ Remuneration Report
commencing on page 60.
48
Lancashire Holdings Limited | Annual Report & Accounts 2017
Non-Executive Directors
Peter Clarke
Michael Dawson
Simon Fraser
Samantha Hoe-Richardson
Robert Lusardi
Tom Milligan
Executive Directors
Alex Maloney
Elaine Whelan
Original date of
appointment to the Board
Board
Audit Committee
Investment
Committee
Nomination
and Corporate
Governance
Committee
Underwriting
and Underwriting
Risk Committee
Remuneration
Committee
9 June 2014
3 November 2016
5 November 2013
20 February 2013
8 July 2016
3 February 2015
5 November 2010
1 January 2013
4/4
4/4
4/4
4/4
4/4
4/4
4/4
4/4
–
–
4/4
4/4
3/41
–
–
–
4/4
–
–
–
4/4
4/4
–
4/4
4/4
4/4
–
4/4
–
4/4
–
–
–
4/4
–
–
–
4/4
4/4
–
4/4
4/4
4/4
–
4/4
–
–
–
(1) Robert Lusardi is resident in the U.S. Due to unforeseen circumstances, he was unable to attend the meeting of the Audit Committee held in London on 21 July 2017.
He was able to follow proceedings for information purposes via telephone conference. However, pursuant to the Group’s strict tax and regulatory operating guidelines,
he did not participate in the meeting.
Relations with shareholders
During 2017, the Group’s Head of Investor
Relations, usually accompanied by one or
more of the Group CEO, the Group CUO,
the Group CFO, the Chairman or a senior
member of the underwriting team, made
presentations to major shareholders, analysts
and the investor community. Formal reports
of these meetings were provided to the Board
on at least a quarterly basis. The Chairman of
the Remuneration Committee conducted a
consultation with the significant shareholders of
the Group with regard to remuneration policy
and practice in advance of the 2017 AGM.
Conference calls with shareholders and
analysts hosted by senior management are
held quarterly following the announcement
of the Group’s quarterly financial results.
The Group CEO, Group CUO and Group
CFO are generally available to answer
questions at these presentations.
Shareholders are invited to request meetings
with the Chairman, the Senior Independent
Director and/or the other Non-Executive
Directors by contacting the Head of Investor
Relations. All of the Directors are expected
to be available to meet with shareholders at
the Company’s 2018 AGM.
The Company commissions regular
independent shareholder analysis reports
together with independent research
on feedback from shareholders and
analysts following the Company’s results
announcements. This research, together
with the analysts’ notes, is made available
to all Directors.
Enterprise Risk Management
The Board is responsible for setting the
Group’s risk appetites, defining its risk
tolerances, and setting and monitoring the
Company’s risk management and internal
control systems including compliance with
risk tolerances. During 2017 the Board
carried out a robust assessment of the
principal risks affecting the Group’s business
model, future performance, solvency and
liquidity and the operation of internal
control systems.
Further discussion of the risks affecting the
Group and the policies in place to manage
them can be found in the ERM section of
this report on pages 31 to 35 and in the risk
disclosures section on pages 100 to 125.
Each of the Committees is responsible
for various elements of risk (see the various
Committee reports from page 50 to page 59
for further detail). The Group CRO reports
directly to the Group and subsidiary Boards
and facilitates and aids the identification,
evaluation, quantification and control of
risks at a Group and subsidiary level. The
Group CRO provides regular reports to
the Group and subsidiary boards covering,
amongst other things, actual risk levels
against tolerances, emerging risks, any
lessons learned from risk events and
assurance provided over key risks. During
2017, the Directors participated in a number
of training sessions addressing the Board’s
obligations under Solvency II and, in
particular, with regard to the review and
approval of the Solvency II submissions as
at 31 December 2016 for submission to the
PRA. The Board considers that a supportive
ERM culture, established at the Board and
embedded throughout the business, is of key
importance. The facilitating and embedding
of ERM and helping the Group to improve
its ERM practices are a major responsibility
assigned to the Group CRO. The Group
CRO’s remuneration is subject to annual
review by the Remuneration Committee.
The Board is satisfied that the Company’s
risk management and internal control
systems have operated effectively for
the year under review.
Committees
The Board has established Audit, Investment,
Nomination and Corporate Governance,
Underwriting and Underwriting Risk and
Remuneration Committees. Each of the
Committees has written Terms of Reference,
which are reviewed regularly and are available
on the Company’s website. The Committees’
Terms of Reference were reviewed by the
Board during 2017 and were considered
to be in line with current best practice. The
Committees are generally scheduled to meet
quarterly, although additional meetings and
information updates are arranged as business
requirements dictate. Director attendance of
the 2017 Board and Committee meetings is
set out in the table appearing above. A report
from each of the Committees is set out from
page 50 to page 59.
www.lancashiregroup.com
49
OverviewStrategyPerformanceGovernanceFinancial statements
Committee reports
Audit Committee
Samantha Hoe-Richardson
Chairman of the Audit Committee
Committee membership
The Audit Committee comprises three
independent Non-Executive Directors and
is chaired by Samantha Hoe-Richardson, a
qualified accountant. The Board considers
that the three independent Non-Executive
Directors all have recent and relevant
financial experience. The Audit Committee
as a whole has competence in the specialty
insurance and reinsurance sectors. The
internal and external auditors have the right
of direct access to the Audit Committee.
The Audit Committee’s detailed Terms
of Reference are available on the
Company’s website.
Samantha Hoe-Richardson
(Chairman)
Simon Fraser
Robert Lusardi1
Meetings attended
4/4
4/4
3/4
(1) Robert Lusardi is resident in the U.S. Due
to unforeseen circumstances, he was unable
to attend the meeting of the Audit Committee
held in London on 21 July 2017. He was able
to follow proceedings for information purposes
via telephone conference. However, pursuant to
the Group’s strict tax and regulatory operating
guidelines, he did not participate in the meeting.
Principal responsibilities of
the Committee
• Financial reporting: monitors the integrity
of the consolidated financial statements
of the Group and any other formal
statements relating to its financial
performance, including the annual
Solvency II Group reporting requirements.
Reviews and reports to the Board on
significant financial reporting issues and
judgements that those statements contain.
Reviews the Annual Report and Accounts
and advises the Board on whether,
taken as a whole, it is fair, balanced
and understandable;
• External audit: oversees the relationship
with the external auditors and is
responsible for the annual assessment
of their independence and objectivity.
Makes a recommendation to the Board,
to be put to shareholders for approval
at the AGM, for the appointment of
the Company’s external auditors;
• Internal audit: monitors and reviews
the effectiveness of the Group’s internal
audit function ensuring it has unrestricted
scope, the necessary resources and access
to information to enable it to fulfil its
mandate and in accordance with
appropriate professional standards; and
• Internal controls and risk management
systems: oversight of internal controls
and risk management systems. Reviews
the Group’s ‘whistleblowing’ and other
systems and controls for the prevention
of fraud, bribery and money laundering.
50
Lancashire Holdings Limited | Annual Report & Accounts 2017
During 2017 the focus of the Committee has been on the adequacy of the Group’s loss reserves, as well as the transition of external auditors and the continued integrity of external financial reporting. www.lancashiregroup.com
51
How the Committee discharged its responsibilities during 2017FINANCIAL REPORTING COMMITTEE RESPONSIBILITYMonitors the integrity of the Group’s consolidated financial statements, including its annual and half-yearly reports, annual Solvency II Group Pillar 3 reports, interim management statements and any other formal statements relating to the Group’s financial performance. Reports to the Board on significant financial reporting issues and judgements contained in the consolidated financial statements. COMMITTEE ACTIVITIESAt each quarterly meeting the Committee reviews the Group’s quarterly consolidated financial statements for the purposes of recommending their approval by the Board. The Group’s annual Solvency II Pillar 3 reports were reviewed at the first quarter Audit Committee meeting prior to recommendation of their approval at the May Board meeting. The Committee also monitors the activities of the Company’s Disclosure Committee and reviews the Group’s quarterly financial press releases, which it recommends to the Board for approval. The Committee receives quarterly reports from management on: •developments in accounting and financial reporting requirements; •any new and/or significant accounting treatments/transactions in the quarter; •the activities of LHL’s subsidiary companies, including consideration of any risk issues; and •loss reserving (see page 140 for further details).An annual paper is presented by management to the Committee that details the areas of significant judgement and estimation in the preparation of the consolidated financial statements. (See accounting policies (page 94) for the details of these areas.) The Committee also receives quarterly reports on the consolidated financial statements from the external auditors, including an interim review report and a year-end full audit report. These are discussed with the external auditors at the Committee’s meetings. With respect to the areas of judgement and estimation in the preparation of the consolidated financial statements, those that were considered by the Committee to be significant during 2017 were the estimation of ultimate loss reserves and the valuation of intangible assets. These are explained in detail on page 54. KPMG considered the valuation of intangible assets to be an elevated audit risk but not a significant audit risk. This was based on various factors, including the historic levels of headroom in the impairment testing and sensitivity analysis performed. In accordance with auditing guidance, KPMG’s year-end audit report identified revenue recognition through the estimation of premium revenues as an area of significant risk. The Audit Committee considered this and concluded that, whilst some premiums are subject to estimation, revenues are unlikely to be materially different from initial estimates, particularly on a consolidated Group basis.Reviews the content of the Annual Report and Accounts and advises the Board on whether, taken as a whole, it is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy. The Chairman of the Committee reviewed the early drafts of the 2017 Annual Report and Accounts in order to keep appraised of its key themes and messages. The Committee reviewed the final draft of the Annual Report and Accounts at the February 2018 Audit Committee meeting together with the external auditors’ report. The Committee advised the Board that, in its view, the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy.OverviewStrategyPerformanceGovernanceFinancial statements Committee reports continued
52
Lancashire Holdings Limited | Annual Report & Accounts 2017
EXTERNAL AUDIT COMMITTEE RESPONSIBILITYOversees the relationship with the Group’s external auditors, approves their remuneration and terms of engagement, and assesses annually their independence and objectivity taking into account relevant legal, regulatory and professional requirements and the Group’s relationship with the external auditors as a whole. This includes an annual assessment of the qualifications, expertise and resources, and independence of the external auditors and the effectiveness of the external audit process.COMMITTEE ACTIVITIESThe Committee approves the annual external audit plan and receives reports from the external auditors at each quarterly Committee meeting, including an ongoing assessment of the effective performance of the audit compared to the plan. The Committee Chairman conducts informal meetings with the external auditors and the CFO prior to, during, and after the review of the quarterly results. The Committee meets quarterly in executive session with the external auditors to discuss any issues arising from the audit, and with management to obtain feedback on the audit process. The Committee conducted an assessment of the qualifications, expertise and resources, and independence of KPMG prior to recommending its appointment as external auditor in 2017. A further review was conducted in February 2018 and the Committee concluded that the external auditors are independent and objective. Due to the appointment of KPMG as new external auditors in 2017, the formal assessment of the effectiveness of the external audit process was minimal and focused on the effectiveness of the facilitation of the external audit process by Lancashire’s staff. It is proposed to undertake a thorough review of KPMG’s effectiveness through their first year of providing external audit services for the financial year ending 31 December 2017 during the first quarter of 2018.The development and implementation of a formal policy on the provision of non-audit services by the external auditors, taking into consideration any threats to the independence and objectivity of the external auditors.The Committee has approved and adopted a formal non-audit services policy that is reviewed on an annual basis and was last updated in October 2017. The policy, which stipulates the approvals required for various types of non-audit services that may be provided by the external auditors, is on the Group’s website. During 2017, KPMG provided non-audit services in relation to specified work over the distributable reserves and pre-appointment procedures on the first quarter 2017 earnings release. Fees for non-audit services provided in 2017 totalled $20,000. The Committee gave careful consideration to the nature of the non-audit services provided and the level of fees charged, and has determined that they do not affect the independence and objectivity of KPMG as auditors.Makes a recommendation to the Board, to be put to shareholders for approval at the AGM, in relation to the appointment, re-appointment and removal of the Group’s external auditorsIt was disclosed in the 2016 Annual Report and Accounts that, following a competitive external audit tender process undertaken during the year, it was proposed to recommend the appointment of KPMG as external auditors by shareholders at the 2017 AGM. The recommendation was approved by shareholders and KPMG were appointed as external auditors with effect from the conclusion of the 2017 AGM. The lead audit partner is Rees Aronson. The Committee worked with KPMG during 2017 to achieve a smooth transition of external auditors and recommended to the Board the re-appointment of KPMG as external auditors at the 2018 AGM. www.lancashiregroup.com
53
INTERNAL AUDIT COMMITTEE RESPONSIBILITYMonitors and reviews the effectiveness of the Group’s internal audit function in the overall context of the Group’s risk management system.COMMITTEE ACTIVITIESThe Group’s internal audit function reports directly to the Committee. Each year, the Head of Internal Audit presents an annual internal audit strategy and plan to the Committee for consideration and approval. In general, the most significant business risks and controls are usually considered for audit annually whilst less critical risks are audited periodically as part of a flexible multi-year programme. The findings of each audit are reported to the Committee at the quarterly meetings and the Committee reviews the actions taken by management to implement the recommendations of internal audit. The Committee meets in executive session with the Head of Internal Audit on at least an annual basis.During 2017, the Committee reviewed and approved an updated Internal Audit Charter. This can be viewed on the Group’s website. The Group CRO undertook an annual review of the implementation of the internal audit programme during 2017 to ensure its continued efficiency and appropriate standing within the Company and the effectiveness of the internal audit function. The Committee discussed the report and its findings with the Group CRO and the Head of Internal Audit and concluded that the internal audit function is operating effectively in the overall context of the Group’s risk management system.INTERNAL CONTROLS AND RISK MANAGEMENT SYSTEMSCOMMITTEE RESPONSIBILITYReviews the adequacy and effectiveness of the Group’s internal financial controls systems that identify, assess, manage and monitor financial risks, and other internal control and risk management systems; and reviews and approves the statements to be included in the Annual Report and Accounts concerning internal control, risk management and the viability statement.COMMITTEE ACTIVITIESThe Board has ultimate responsibility for ensuring the maintenance by the Group of a robust framework of internal control and risk management systems, and has delegated the monitoring and review of these systems to the Committee. The system of internal controls is designed to manage rather than eliminate the risk of failure to achieve business objectives, and can only provide reasonable and not absolute assurance against material misstatement or loss. The Committee receives from the Head of Internal Audit an annual assessment of the Group’s governance, risk and control framework together with an analysis of themes and trends from the internal audit work and their impact on the Group’s risk profile. In 2017, the Committee and Board were satisfied that the governance, risk and control framework remains effective and appropriate for the Lancashire Group.Reviews for adequacy and security the Group’s compliance, ‘whistleblowing’ and fraud controls.During 2017, the Committee conducted an annual review of the Group’s policies and procedures relevant to financial controls and recommended the adoption by the Board of updated policies and procedures in respect of anti-money laundering, bribery and financial crime (including fraud), conflicts of interest and whistleblowing. There were no suspicious transaction or whistleblowing reports made during the year (whether arising from suspected money laundering activity or knowledge of, suspicion or concern relating to suspected acts of bribery or any other type of financial crime, dishonesty or impropriety). The Committee also keeps under review the adequacy and effectiveness of the Group’s legal and compliance function.OverviewStrategyPerformanceGovernanceFinancial statements Committee reports continued
Significant areas of
judgement or estimation
Loss reserves and expenses
As detailed on pages 140 to 142 of the
consolidated financial statements, the
estimation of ultimate loss reserves is a
complex actuarial process that incorporates
a significant amount of judgement. The
Committee considers the adequacy of
the Group’s loss reserves at each Audit
Committee meeting, for which purpose it
receives quarterly reports from the Group’s
Reserving Actuary. KPMG conduct a high-
level review of the Group’s loss reserves as
part of their first and third quarter review
procedures. The external independent
actuary and KPMG present a comparison
of Lancashire’s booked reserves to their
own best estimates at the second and
fourth quarter Audit Committee meetings.
Following the loss events in the third
quarter of 2017, the Committee met with
the Group’s Reserving Actuary and KPMG’s
actuarial partner to review the adequacy
of the Group’s loss reserves. Management
provided the Board with an analysis detailing
how the loss ranges for each event were
determined, and how they were challenged
and supported. During 2017, the Committee
focused its discussions around the Group’s
loss reserves on: the range of reasonable
actuarial estimates and the divergence
of the Group’s estimates to the external
actuarial estimates; current and prior year
loss development including ‘back-testing’
of the Group’s prior year reserves; and
reserving for each insurance operating
subsidiary. Having reviewed and challenged
these areas, the Committee concurred with
management’s valuation of the Group’s loss
reserves and the relevant disclosures around
loss reserving in the Group’s consolidated
financial statements.
Intangible asset valuation
The Group has two indefinite life intangible
assets following the acquisition of Cathedral
– goodwill and syndicate participation rights.
Intangible assets with indefinite useful lives
are subject to an impairment review at least
annually, or sooner if there is an indication
of impairment. Some of the key inputs
in the impairment review are based on
management judgement and/or estimation
(see page 95 of the consolidated financial
statements for further details). These inputs
are reviewed by the Audit Committee
annually and are considered reasonable.
The Audit Committee also considers the
Group’s internal stress tests and what stress
scenarios would have to occur to indicate an
impairment of its intangible assets. As a result
of these considerations the Audit Committee
agreed with management and KPMG that
there was no impairment of the Group’s
intangible assets.
Priorities for 2018
The Committee’s key priorities for 2018 are:
• To ensure the continued effectiveness
of the Group’s controls environment,
the operation of the business’s financial
reporting systems and the integrity
of external financial reporting.
• To continue to monitor the preparation
by the Group for the implementation
of IFRS 17.
IFRS 17, Insurance Contracts
During 2017 the International Accounting
Standards Board issued IFRS 17, which will
be mandatorily effective for annual reporting
periods beginning on or after 1 January
2021. Management is in the pre-planning
stage for this project and during 2017 it
engaged Ernst & Young LLP to assist in
the preparation of an initial operational
impact assessment. KPMG provided the
Audit Committee with preliminary training
on IFRS 17 in the fourth quarter of 2017.
During 2018 the Committee will continue
to monitor the preparation by the Group
for the implementation of IFRS 17.
54
Lancashire Holdings Limited | Annual Report & Accounts 2017
Nomination and Corporate
Governance Committee
Peter Clarke
Chairman of the Nomination and
Corporate Governance Committee
Committee membership
A majority of the members of the
Nomination and Corporate Governance
Committee are independent Non-Executive
Directors. The Committee Chairman is Peter
Clarke, who is the Chairman of the Board.
Peter Clarke (Chairman)
Michael Dawson
Samantha Hoe-Richardson
Tom Milligan
Meetings attended
4/4
4/4
4/4
4/4
Principal responsibilities of
the Committee
• Reviews the structure, size and
composition (including the skills,
knowledge, independence, experience
and diversity) of the Board;
• Considers succession planning for
Directors and other senior executives;
• Nominates candidates to fill
Board vacancies;
• Makes recommendations to the
Board concerning Non-Executive
Director independence, membership
of Committees, suitable candidates for
the role of Senior Independent Director,
and the re-election of Directors
by shareholders;
• Reviews the Company’s corporate
governance arrangements and
compliance with the Code; and
• Makes recommendations to the
Board concerning the charitable and
corporate social responsibility activities
of the Company and donations to
the Lancashire Foundation.
How the Committee discharged
its responsibilities during 2017
Board composition
The Committee reviewed the composition
of the Board to ensure that the balance of
skills, knowledge, independence, experience
and diversity continue to be appropriate for
the Group’s business to meet its strategic
objectives. The Committee also considered
whether any additional skills and experience
were needed to complement those already
on the Board.
In this regard, the Committee engaged
external executive search firms, which
have no other connection to the Group.
They identified a number of potential
candidates, although no additional
appointments were made to the Board
during the year. In accordance with
the provisions of the Code, all of the
Directors are subject to annual election
by shareholders. All of the Directors were
re-elected by shareholders at the 2017 AGM.
The Committee recommended to the
Board the appointment of Robert Lusardi
as Chairman of the Investment Committee
during the year.
Succession planning
The Committee reviewed the Company’s
succession plan for Executive Directors and
other senior executives, taking into account
the Company’s risk environment and
strategic objectives, as well as the anticipated
demands and requirements of the business.
One notable development to the succession
plan was the introduction of a risk-weighted
traffic light system to provide a ‘dashboard’
indication of areas in which succession risk
is considered to be lower or more elevated.
The Committee has continued to focus in its
dialogue with management on the delivery of
training and support and the development
of talent across the Group. In 2017, there
were further positive developments in the
management of the Cathedral operations
as well as a number of planned promotions
within the underwriting teams.
www.lancashiregroup.com
55
During 2018, the Committee will continue to monitor governance developments, in particular the anticipated changes to the UK Corporate Governance Code, to ensure that the Group maintains its flexible and proactive culture to best serve the strategic needs of our business.OverviewStrategyPerformanceGovernanceFinancial statements Committee reports continued
Subsidiary boards
The Committee monitored the composition
of subsidiary boards during 2017 and
recommended appointments to the boards
of LICL, KCML and CUL. The Committee
also recommended the appointment of
Nicholas Davenport as Chairman of the
Board of CUL in succession to Tony Minns.
Corporate governance
The Committee keeps under review
the Company’s corporate governance,
particularly compliance with the Code, and
is responsible for making recommendations
to the Board concerning the process for
conducting and facilitating the annual
performance evaluation of the Board, its
Committees and the individual Directors
– see page 48.
During 2017, the Committee recommended
the approval and adoption by the Board of
an amended Schedule of Reserved Matters,
and an amended and restated Terms of
Reference of the Audit Committee. Copies
of these documents are available on the
Company’s website.
The Committee also recommended
the approval by the Board of an updated
protocol for the division of responsibilities
and roles of the Chairman and Group CEO
and the responsibilities and reporting lines
of the CEOs of Group subsidiaries.
The Committee considered statistics
relevant to the gender composition of
the Board, Group management excluding
LHL Non-Executive Directors, and overall
Group employees. These statistics are shown
opposite. The Committee also reviewed
comparative pay data by gender within
the Lancashire Group. The Committee
recommended approval by the Board of an
updated diversity policy, which is posted on
the Company’s website. The Board remains
of the view that the skills and experience
needed to take the business of the Company
forward are of paramount importance in
selecting Board members, members of
executive committees and senior management
or, indeed, any role within the business. The
Committee and Board recognise that there
is increasingly an expectation within society,
in particular as a result of the work of the
Hampton-Alexander Review, that businesses
should adopt a fixed percentage target for
gender diversity. Accordingly the Board
has modified its previously stated position
so as to adopt a goal for the representation
of women on the Board of LHL and the
principal management executive committee
of 33 per cent by 2020. The Board does not
view the new goal as a ‘black line’ but rather
a flexible target against which the business
should measure its performance and strategy.
Identifying ‘the best person for the job’
remains paramount in identifying the
right candidate. Lancashire’s approach to
recruitment and in particular ensuring the
benefits of a broad diversity throughout the
business is discussed further on page 40 in
the discussion of the workplace culture.
The Committee also recommended the
approval by the Board of an updated Slavery
and Human Trafficking statement, a copy of
which is posted on the Company’s website.
The Lancashire Foundation
The Committee is responsible for
monitoring and making recommendations
to the Board in relation to the Company’s
charitable giving policy and the operation
of, and reporting requirements for, the
Lancashire Foundation. During 2017,
the Committee received a report on
the Foundation, including its objectives,
governance, investment strategy, donations
policy and charitable activities, and considered
the ways in which the Foundation engages
with employees throughout the Group. The
Committee made a recommendation to the
Board that during 2018, due to the Group’s
financial performance in what was a year
impacted by significant catastrophe losses,
there should not be a donation from the
Group to the Foundation. It was, however,
noted by the Committee and the Board
that the Foundation had sufficient assets
to implement its plans and to meeting its
spending commitments over the next
three years.
Priorities for 2018
The Committee’s key priorities for 2018 are:
• To continue to develop the succession
plans for Directors and senior executives,
in line with the Group’s strategic objectives,
and to support management in the
development of the talent pipeline;
• To review the outcome of the 2017
performance evaluation process as
it relates to the Committee and the
composition of the Board, and to agree
and monitor any required actions; and
• To continue the Committee’s focus
on corporate governance requirements,
regulatory developments and compliance
with the Code, specifically in light of the
anticipated changes to the Code which
have been tabled for industry consultation
during 2018.
LHL Board members
Male: 6 (75%)
Female: 2 (25%)
Total: 8
Group management excluding LHL
Non-Executive Directors
Overall Group employees
Male: 14 (73.7%)
Female: 5 (26.3%)
Total: 19
Male: 123 (60%)
Female: 81 (40%)
Total: 204
56
Lancashire Holdings Limited | Annual Report & Accounts 2017
Investment Committee
Robert Lusardi
Chairman of
the Investment Committee
Committee membership
The Investment Committee comprises
two independent Non-Executive Directors,
the Chairman of the Board, one Executive
Director (the CFO) and the Chief
Investment Officer (who is not a Director).
Robert Lusardi (Chairman)1
Peter Clarke1
Tom Milligan
Elaine Whelan
Denise O’Donoghue
Meetings attended
4/4
4/4
4/4
4/4
4/4
(1) Peter Clarke stepped down as Chairman of
the Investment Committee with effect from
3 May 2017 and was succeeded by Robert Lusardi.
Principal responsibilities of
the Committee
• Recommends investment strategies,
guidelines and policies to the Board
of the Company and other members
of the Group to approve annually;
• Recommends and sets risk asset
definitions and risk tolerance levels;
• Recommends to the relevant boards the
appointment of investment managers
to manage the Group’s investments;
• Monitors the performance of investment
strategies within the risk framework; and
• Establishes and monitors compliance with
investment operating guidelines relating
to the custody of investments and the
related internal controls.
How the Committee discharged
its responsibilities during 2017
The Committee regularly discussed and
kept under review macro-economic, capital
markets and global political developments
during the year, in particular fiscal and
political developments in the U.S. and
the ongoing impact of the UK’s Brexit
negotiations on investment strategy
and performance. The Committee
also considered regular reports on the
performance of the Group’s investment
portfolios, including asset allocation and
compliance with pre-defined guidelines and
tolerances; and recommended amendments
to portfolio investment guidelines to the
boards of LHL, LICL, LUK and CUL.
The Committee focused in its discussions
on the investment strategy priorities of
preserving capital, ensuring the appropriate
balance of risk assets and affording sufficient
liquidity in the investment portfolio. These
questions of investment strategy were all
framed within the context of the Board’s
objective of ensuring appropriate
connectivity with, and support for,
the Group’s underwriting operations.
The Committee also recommended to the
Board and the boards of certain subsidiaries
the appointment of a new investment
manager to manage cash and cash
equivalents on a Group platform.
The Committee received presentations from
two of the portfolio investment managers
during the year. During the fourth quarter of
2017, the Committee considered the impact
on the portfolio of the payment of claims
arising from the large loss events of late 2017,
noting in particular that, in what had been
a significant year for catastrophe losses, the
portfolio had performed well in meeting
the liquidity requirements of the business.
Priorities for 2018
The Committee’s key priorities for 2018 are:
• To maintain a continued focus on the
preservation of capital, the maintenance
of liquidity and the management of
interest rate and other emerging
investment risks; and
• A review of the asset allocation strategy
taking into account a rising interest rate
environment, market valuations, expected
returns, and the current state of insurance
underwriting markets.
www.lancashiregroup.com
57
Our investment philosophy is to preserve capital and to ensure liquidity in our investments while ensuring appropriate connectivity with, and support for, the Group’s underwriting operations. The Group’s strategy has been to remain relatively short in duration over the course of 2017 and into 2018 in anticipation of rising interest rates.OverviewStrategyPerformanceGovernanceFinancial statements Committee reports continued
Underwriting and Underwriting Risk Committee
Alex Maloney
Chairman of the Underwriting and
Underwriting Risk Committee
Committee membership
During 2017, the Underwriting and
Underwriting Risk Committee comprised
one Executive Director (the Group CEO)
and two Non-Executive Directors together
with the Group CUO, the CUO of LICL, the
CUO and Reinsurance Manager of LUK, the
Active Underwriters for Syndicates 2010 and
3010, and the Deputy Group Chief Actuary
(who are not Directors).
Alex Maloney (Chairman)
Jon Barnes1
Michael Dawson
Paul Gregory
Hayley Johnston
Tom Milligan
Sylvain Perrier
Ben Readdy
John Spence2
Richard Williams3
Meetings attended
4/4
3/3
4/4
4/4
4/4
4/4
4/4
4/4
3/4
0/1
(1) Jon Barnes was appointed as a member of
the Underwriting and Underwriting Risk
Committee with effect from 15 February 2017.
(2) John Spence was unable to attend the 25 July 2017
meeting of the Underwriting and Underwriting
Risk Committee.
(3) Richard Williams retired as a member of
the Underwriting and Underwriting Risk
Committee with effect from 15 February 2017.
Principal responsibilities of
the Committee
• Reviews Group underwriting strategy;
• Oversees the development of, and
adherence to, underwriting guidelines
by operating company CUOs;
• Reviews underwriting performance;
• Reviews significant changes in
underwriting rules and policies;
• Establishes, reviews and maintains strict
underwriting criteria and limits; and
• Monitors underwriting risk and its
consistency with the Group’s risk
profile and risk appetite.
How the Committee discharged
its responsibilities during 2017
The Committee is actively engaged in the
development of strategy and the formal
underwriting risk tolerances, which are
reviewed by the Committee and approved
by the Board. Underwriting risk is the key
risk faced by the Group. Specifically, the
Committee receives quarterly risk data
tracking movements in the Group’s
exposures to modeled PMLs and RDSs.
The Committee also monitors underwriting
performance on a quarterly basis. Good risk
selection remains at the heart of the Group’s
strategy, in particular in the recent soft phase
of the market cycle. The Committee also
reviewed management reports on the
structuring and pricing of the outwards
reinsurance protections purchased across
the Group. The Committee received
quarterly update reports from the Active
Underwriters of Syndicates 2010 and 3010,
the Chief Underwriting Officers for LUK and
LICL and the CEO of KCML during 2017.
The Committee also received quarterly
reports of significant claims and related
developments.
The Committee enhanced the reporting
of new business options developed or
considered by management during the
course of 2017, which afforded scope for
fruitful debate on risk and opportunities.
During 2017, the Committee meetings
were open to attendance by all of the Board
members and provided a useful forum for
the discussion of underwriting performance,
risk tolerances and strategic initiatives.
The Committee and Board place great
importance on the management of the
Company’s capital so as to match capital
to the underwriting requirements of the
business in all parts of the underwriting cycle.
A more detailed analysis of the Group’s
underwriting performance appears in the
Business Review section of this Annual
Report and Accounts on pages 24 to 30.
Priorities for 2018
The Committee’s key priorities for 2018 are:
• To continue to monitor the development
of a forward-looking and disciplined
underwriting strategy appropriate for
the Group’s underwriting platforms,
within a framework of appropriate
risk tolerances; and
• To work actively with management in the
identification, analysis and consideration
of such new underwriters and/or lines of
business as may complement or enhance
existing underwriting strategy.
58
Lancashire Holdings Limited | Annual Report & Accounts 2017
The Committee provides a forum for discussing the trends in the pricing and coverage terms for the market sectors in which we operate. The losses to the market in 2017 have demonstrated the value of the work which our underwriters, management and the Committee perform in managing our risk exposures through the insurance cycle. Remuneration Committee
Simon Fraser
Chairman of
the Remuneration Committee
Committee membership
The Remuneration Committee comprises
three independent Non-Executive Directors
and the Chairman of the Board.
Simon Fraser (Chairman)
Peter Clarke
Michael Dawson
Robert Lusardi
Meetings attended
4/4
4/4
4/4
4/4
Principal responsibilities of
the Committee
• Sets the remuneration policy for,
and determines the total individual
remuneration packages, including
pension arrangements of, the Company’s
Chairman, the Executive Directors,
Company Secretary and other designated
senior executives, to deliver long-term
benefits to the Group;
• Agrees personal objectives for each
Executive Director and the related
performance and pay-out metrics
for the performance element of the
annual bonus;
• Determines each year whether awards will
be made under the Group’s RSS and, if so,
the overall amount of such awards, the
individual awards to Executive Directors
and other designated senior executives,
and the performance targets to be used;
• Ensures that contractual terms
on termination or retirement, and
any payments made, are fair to the
individual and the Company; and
• Oversees any major changes in employee
benefit structures throughout the Group.
How the Committee discharged
its responsibilities during 2017
During 2017, the Committee reviewed the
Group incentive packages to ensure that
remuneration is structured appropriately
to promote the long-term success of the
Company. The Committee also reviewed
the RSS structure for Executive Directors
to ensure that the performance metrics
continue to align the interests of the
Company with its investors and management.
The Committee considered the salary
and bonus awards for 2017 for Executive
Directors and other designated senior
executives. The Committee also approved the
grant of awards under the Company’s RSS.
The Committee reviewed Executive
Directors’ shareholdings in the context of
the Company’s share ownership guidelines
for senior/key executives and discussed
revisions to the guidelines to reflect more
recent changes to the composition of the
senior management team.
The Committee also reviewed the policy for
Executive Directors’ remuneration, which
has a three-year life following its approval
by shareholders at the 2017 AGM. The
Committee considers the policy fit for
purpose and does not propose any
amendments at the 2018 AGM.
During 2017, the Committee recommended
the approval and adoption by the Board
of a Group Solvency II Identified Staff
Remuneration policy. The Committee
noted progress made during the year
on the alignment of remuneration practices
across the Group and that further such
alignment measures will be implemented
by the management team during 2018.
The Committee also recommended changes
to the companies comprising the Company’s
peer group for comparator purposes in light
of recent M&A activity.
The Committee considered a number of
proposals relating to the treatment of RSS
awards held by departing employees.
The Directors’ Remuneration Policy and the
Annual Report on Remuneration, for which
the Committee is responsible, can be found
on pages 60 to 79. The report contains a
summary of the debate which has been had
within the Committee and the Board on
the alignment of remuneration and Group
performance both in the current year
and over a longer time frame.
Priorities for 2018
The Committee’s key priorities for 2018 are:
• To review the ongoing appropriateness
and relevance of the Group’s remuneration
structures, ensuring that they are in line
with the Group’s business strategy, risk
profile, objectives, risk management
practices and long-term interests; and
• To review arrangements for remuneration
across the wider Group with a view to
further aligning the processes for
appraisal, objective setting and
remuneration across the Lloyd’s
and non-Lloyd’s platforms.
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59
The Committee seeks to implement a Remuneration Policy which ensures the retention of our most valued staff whilst affording linkage between remuneration and appropriate targets for company and personal performance. We seek to achieve a balance that avoids the incentivisation of excessive risk-taking or a culture of short-termism.OverviewStrategyPerformanceGovernanceFinancial statements Directors’ Remuneration Report
Annual statement
Dear Shareholder,
I am pleased to present the 2017 Directors’ Remuneration Report
to shareholders.
Shareholder decisions at the 2017 AGM
Lancashire’s Directors’ Remuneration Policy was approved by
shareholders at the May 2017 AGM. There were minor (largely
housekeeping) changes to the Policy, which had previously been
approved by shareholders in 2014. Shareholders also approved a
set of revised rules for Lancashire’s long-term incentive RSS. The
replacement 2017 RSS rules have substantially the same terms as the
previous scheme, but incorporated some minor changes to bring the
new rules more in line with current best practice. The new 2017 RSS
rules took effect from the 2017 AGM.
Remuneration and strategy
The Group’s goal continues to be to reward its employees fairly
and responsibly by providing an appropriate balance between fixed
remuneration and variable remuneration linked to the achievement
of suitably challenging Group and individual performance measures.
There is a strong link between the Remuneration Policy and the
business strategy. As highlighted elsewhere in this Annual Report
and Accounts, our strategy focuses on the effective operation of the
business necessary to maximise long-term RoE and the delivery of
superior total shareholder returns on a risk-adjusted basis over the
course of the insurance cycle. Our Remuneration Policy and the
way it is implemented are closely aligned to this strategy.
As I reported in the 2016 Annual Report and Accounts, the Board
and management believe that the insurance industry is cyclical in its
fundamental characteristics. At the low point in the insurance cycle,
which we witnessed throughout 2016 and the first half of 2017, the
Board has sought to prioritise achieving acceptable, but more modest,
returns whilst moderating overall risk levels through underwriting
discipline and prudent reinsurance planning. Of equal importance
has been the need to ensure that throughout the softer part of the
market cycle the business has continued to service the needs of its
core clients and brokers. The Board has prioritised the need to
ensure the continuing relevance of the business to its clients,
shareholders and other stakeholders, and to position the
business well for the time when market conditions turn.
Performance outcomes for 2017 – A challenging year
On account of the severe year for insured losses, due to the sequence
of major natural catastrophe losses which occurred during 2017, the
Group has produced an RoE of negative 5.9 per cent, which is the
only negative full year annual RoE since the Group’s foundation in
2005 (see the strategy and performance reviews of this Annual Report
and Accounts on pages 12 to 41).
Notwithstanding this, the Board and Committee were, on balance,
satisfied with the outcomes in light of these events. Whilst the annual
earnings have been impacted in comparison with previous years,
there has not been a significant impairment to capital even in the
face of the number of loss events. The business is well-positioned
to compete in the market as we enter 2018 in what we expect to
be an improving phase of the insurance cycle. This is in no small
amount down to the work and planning of our management team
in delivering a portfolio of business which was better able to respond
to the challenge of a series of severe loss events notwithstanding the
softer rating environment in which the Group and the whole
(re)insurance sector have been operating in recent years.
Against the background described above there has been a decrease
in total remuneration of 49 per cent for the CEO and 47 per cent for
the CFO between 2016 and 2017 (see the comparison table for single
figure remuneration on page 70). This movement is driven by an
RoE of negative 5.9 per cent for 2017 compared with 13.5 per cent
for 2016, which affected vesting levels on the 2015 RSS awards
(see below and page 73 for further details).
Executive Directors’ annual bonus performance targets set at
the beginning of 2017 for personal and financial performance
were stretching, and given the Company’s 2017 lower return in
comparison with previous years (as a result of the severe catastrophe
loss environment) resulted in no annual bonus in relation to the
financial element which made up 75 per cent of the annual bonus
opportunity. The Board did however consider that both the Executive
Directors had performed strongly in managing risk within the
business and in positioning the Group well for what we hope will be
a better rating environment in 2018 and 2019, therefore a bonus was
awarded for the personal component in respect of 2017 performance.
In summary, annual bonuses for our Executive Directors were
achieved substantially below target level at only 17 per cent of
maximum bonus for the CEO and 18 per cent of maximum
bonus for the CFO (see page 72 for further details).
In relation to long-term incentives, the 2015 Performance RSS awards
were 75 per cent based on absolute RoE targets and 25 per cent on
relative TSR against specified peer group companies over the three-
year period to 31 December 2017. Our TSR performance (in U.S.
dollars) over this period ranked the Company below the median of
the designated peer group of 11 companies, resulting in 0 per cent
vesting for the TSR component.
Our average RoE performance over this three-year performance
period was 7.0 per cent against a threshold target of the 13-week
Treasury bill rate plus 6 per cent and a maximum payout of the 13-
week Treasury bill rate plus 15 per cent, resulting in 30.1 per cent of
the RoE component of the 2015 Performance RSS awards vesting.
Overall, the 2015 Performance RSS awards vested at 22.5 per cent.
This compared with the overall 67.4 per cent vesting of the 2014
Performance RSS awards due to 89.8 per cent vesting of the RoE
portion of those awards and 0 per cent vesting of the TSR portion
of the awards, which we reported last year.
The total remuneration received by our Executive Directors in 2017
was accordingly significantly lower than that received in 2016 (see
page 70 for the comparison data) and significantly lower than in
many previous years, as demonstrated by the table of Total
Remuneration History for the CEO on page 78.
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Lancashire Holdings Limited | Annual Report & Accounts 2017
The Committee has decided that the best way to avoid one loss-
making year having too big an impact on a series of RSS awards in
the future is to separate the financial element of the award into three
annual tranches. The RSS awards will still only vest after the three-
year period, and the two-year subsequent holding period of course
remains in place. We believe that this will help to create long-term
value for our senior people in the future and avoid the problem of a
big natural catastrophe year overly impacting the shares element of
our remuneration structure. This will improve the retention value
of the long-term incentive awards.
The Committee will also be able to exercise downwards discretion at
the end of an award period if it feels that the Executive Directors have
not managed the business well, including in a loss-making year falling
within the performance period of an RSS award.
In addition, for our long-term RSS award TSR calculation, we are
moving to an absolute TSR with a challenging threshold from the
relative TSR calculation used in previous years. This is due to the
radical reduction in the number of quoted peers which the Company
now has as a result of M&A both in the UK and Bermuda. The
Committee believes this has left the Company with no really relevant
competitor group in the quoted sector and leads to unhelpful
volatility in this part of the award. Further details are set out on
pages 69 and 70 of this report.
The final section of this report is the Annual Report on
Remuneration, which provides detailed disclosure on how the Policy
will be implemented for 2018 and how Directors have been paid in
relation to 2017.
The disclosures provide our shareholders with the information
necessary to form a judgement as to the link between Company
performance and how the Executive Directors are paid. This Annual
Statement together with the Annual Report on Remuneration will be
subject to an advisory vote and I hope that you will be able to support
the resolution at the forthcoming AGM. The Committee is committed
to maintaining an open and constructive dialogue with our
shareholders on remuneration matters and I welcome any
feedback you may have.
Simon Fraser
Chairman of the Remuneration Committee
The Committee believes in setting challenging performance criteria
and having a significant proportion of the overall package linked to
Company performance. However, the Committee also continues
to recognise the need to ensure that Executive Directors are
appropriately remunerated and incentivised even in the more
challenging phases of the insurance cycle, as at present.
It is also important that the Committee and the Board ensure that
Executive Director compensation is structured in such a way as to
discourage excessive risk to the business.
The like-for-like employee costs for the Group were $39.8 million in
2017 compared with $72.1 million in 2016 (see page 78 for further
detail). This 45 per cent decrease in employee costs is primarily
attributed to the decrease in annual bonus and long-term incentive
award grants.
Overall, in light of the annual and three-year performance delivered,
the Committee is satisfied that there has been a robust link between
performance and reward for Executive Directors. However, in the
context of the steep decline in Executive Director remuneration for
2017, when compared with previous years, it is recognised by our
Executive Directors that in a significant loss-making year (due to
higher than normal natural catastrophe losses) it is appropriate for
their remuneration outcomes to be aligned with the fortunes of our
shareholders. In the insurance sector, which is powerfully cyclical,
Lancashire will continue to ensure that there remains appropriate
alignment between executive remuneration and Company
performance not only in loss-affected years, but also in those
future years when the Group hopes to produce results more
in line with its cross-cycle return target.
Application of Remuneration Policy for 2018
The Remuneration Committee has reviewed the 2017 Directors’
Remuneration Policy approved by shareholders and considers it to
remain fit for purpose.
The Board has decided to apply the targets for the annual bonus
on substantially the same basis as agreed for 2017. For the three-year
longer-term RSS incentive awards, the Committee has decided to
modify the structure for the 2018 awards, whilst remaining within
the bounds of our overarching shareholder-approved Policy.
The loss-making year of 2017 has had a very negative impact on the
long-term RSS awards made in 2015, and is also expected to have a
similar impact on the 2016 and 2017 RSS awards as we have used
a rolling three-year average return to calculate the Company’s
performance. In fact the Board believes that management’s
performance in each of these years has been excellent and the
financial results have been strong, given the market backdrop
in 2015 and 2016 and the natural catastrophe frequency in 2017.
Nevertheless, the impact of the 2017 year is expected to result in
much lower levels of vesting of the long-term RSS awards granted
in all these three years for senior management than the Board
believes is warranted.
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www.lancashiregroup.com
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Directors’ Remuneration Report continued
Directors’ Remuneration Policy section
As a company incorporated in Bermuda, Lancashire is not bound
by UK law or regulation in the area of Directors’ remuneration
to the same extent that it applies to UK incorporated companies.
However, by virtue of the Company’s premium listing on the
LSE, and for the purposes of explaining its compliance against
the requirements of the UK Corporate Governance Code, the
Board is committed to providing full information on Directors’
remuneration to shareholders.
The Company’s Remuneration Policy was approved by shareholders
at the 2017 AGM and is effective for a period of three years from the
2017 AGM until the AGM in 2020 (or until amended by a decision of
shareholders). The 2017 Remuneration Policy was developed taking
into account the principles of the Code and the views of our
major shareholders.
The 2017 Remuneration Policy contains details of the Company’s
policy to govern future payments that will be made to Directors.
The Annual Report on Remuneration also details the remuneration
paid to Directors in respect of the 2017 financial year in accordance
with the shareholder-approved Policy.
Governance and approach
The Company’s Remuneration Policy is geared towards providing a
level of remuneration which attracts, retains and motivates Executive
Directors of the highest calibre to further the Company’s interests
and to optimise long-term shareholder value creation, within
appropriate risk parameters. The Remuneration Policy also seeks
to ensure that Executive Directors are provided with appropriate
incentives to drive individual performance and to reward them fairly
for their contribution to the successful performance of the Company.
• the Company has the power to clawback bonuses (including the
deferred element of the annual bonus) and long-term incentive
payments made to Executive Directors in the event of material
misstatements in the Group’s consolidated financial statements,
errors in the calculation of any performance condition, or the
Executive Director ceasing to be a Director and/or employee
due to gross misconduct.
How the views of shareholders are taken into account
The Committee Chairman and, where appropriate, the Company
Chairman, consult with major investors and representative bodies
on any significant remuneration proposal relating to Executive
Directors. Views of shareholders at the AGM, and feedback
received at other times, will be considered by the Committee.
How the views of employees are taken into account
The Remuneration Committee takes into account levels of
pay elsewhere in the Group when determining the pay levels for
Executive Directors. The Remuneration Policy for all staff is, in
principle, broadly the same as that for Executive Directors in that
any of the Group’s employees may be offered similarly structured
packages, with participation in annual bonus and long-term incentive
plans, although award types (restricted cash, restricted stock or
performance shares) and size may vary between different categories
of staff. For Executive Directors, with higher remuneration levels,
a higher proportion of the compensation package is subject to
performance pay, share-based remuneration and deferral.
This ensures that there is a strong link between remuneration,
Company performance and the interests of shareholders.
Reflecting good practice in this area, Executive Directors’ pension
provision is no more generous than the pension contributions made
to employees in the Group (in percentage of salary terms).
The Remuneration Committee and the Board have again considered
whether any element of the Remuneration Policy could conceivably
encourage Executive Directors to take inappropriate risks and have
concluded that this is not the case, given the following:
The Company does not consult with employees on Executive
Directors’ remuneration. However, as noted above, the Committee
is made aware of pay structures across the wider Group when setting
the Remuneration Policy for Executive Directors.
• there is an appropriate balance between fixed and variable
pay, and therefore Executive Directors are not required
to earn performance-related pay to meet their day-to-day
living expenses;
• there is a blend of short-term and long-term performance metrics
with an appropriate mix of performance conditions, meaning that
there is no undue focus on any one particular metric;
• there is a high level of share ownership amongst Executive
Directors, meaning that there is a strong focus on sustainable
long-term shareholder value; and
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Lancashire Holdings Limited | Annual Report & Accounts 2017
Remuneration Policy table
Base Salary
Purpose and Link to Strategy Helps recruit, motivate and retain high-calibre Executive Directors by offering salaries at market
Operation
competitive levels.
Reflects individual experience and role.
Normally reviewed annually and fixed for 12 months, typically effective from 1 January. Positioning and annual
increases influenced by:
• role, experience and performance;
• change in broader workforce salary;
• changes to the size and complexity of the business; and
• changes in responsibility or position.
Salaries are benchmarked periodically against insurance company peers in the UK, U.S. and in Bermuda.
Opportunity
No maximum.
Benefits
Purpose and Link to Strategy Market competitive structure to support recruitment and retention.
Medical cover aims to ensure minimal business interruption as a result of illness.
Operation
Executive Directors’ benefits may include healthcare, dental, vision, gym membership and life insurance. Other
additional benefits may be offered from time to time that the Committee considers appropriate based on the
Executive Director’s circumstances.
Executive Directors who are expatriates or are required to relocate may be eligible for a housing allowance or
other relocation-related expenses.
Any reasonable business-related expense can be reimbursed, including any personal tax thereon if such
expense is determined to be a taxable benefit.
Opportunity
No maximum.
Pension
Purpose and Link to Strategy Contribution towards funding post-retirement lifestyle.
Operation
The Company operates a defined contribution pension scheme (via outsourced pension providers)
or cash-in-lieu of pension.
There is a salary sacrifice structure in the UK.
There is the opportunity for additional voluntary contributions to be made by individuals, if elected.
Opportunity
Company contribution is currently 10 per cent of base salary.
Annual Bonus1,2
Purpose and Link to Strategy Rewards the achievement of financial and personal targets.
Operation
The annual bonus is based on financial and personal performance.
The precise weightings may differ each year, although there will be a greater focus on financial as opposed to
personal performance.
The Committee will have the ability to override the bonus outcome by either increasing or decreasing the
amount payable (subject to the cap) to ensure a robust link between reward and performance.
At least 25 per cent of each Executive Director’s bonus is automatically deferred into shares as nil-cost
options or conditional awards over three years, with one third vesting each subsequent year.
A dividend equivalent provision operates enabling dividends to be accrued (in cash or shares) on
unvested deferred bonus shares in the form of nil-cost options up to the point of exercise.
The bonus is subject to clawback if the consolidated financial statements of the Company were materially
misstated or an error occurred in assessing the performance conditions on bonus and/or if the Executive
ceased to be a Director or employee due to gross misconduct.
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www.lancashiregroup.com
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Directors’ Remuneration Report continued
Opportunity
Performance Metrics
The maximum bonus for Executive Directors for achieving target level of performance as a percentage of salary is
200 per cent of salary. Maximum opportunity is two times target.
Note: The Committee may set bonus opportunities less than the amounts set out above – see Implementation of
Policy section of the Annual Report on Remuneration.
The weightings that apply to the bonus measures and the degree of stretch in objectives may vary each year
depending on the business aims and the broader economic or industry environment at the start of the relevant
year. For Executive Directors, the financial component will be at least 75 per cent of the overall opportunity,
and no more than 25 per cent will be based on personal or strategic objectives.
Financial Performance
The financial component is based on the Company’s key financial measures of performance. For any year, these
may include RoE, growth in BVS, profit, comprehensive income, combined ratio, investment return or any other
financial KPI3.
Typically, a sliding scale of targets applies for financial performance targets. Bonus is earned on an incremental
basis once a predetermined threshold level is achieved. Up to 25 per cent of the total bonus opportunity is
payable for achieving threshold/median, rising to maximum bonus for stretch/upper quartile performance.
The degree of stretch in targets may vary each year depending on the business aims and the broader economic
or industry environment at the start of the relevant year.
Personal Performance
Personal performance is based upon achievement of clearly articulated objectives. A performance rating is
attributed to participating Executive Directors, which determines the payout for this part of the bonus.
Long Term Incentives (LTI)
Purpose and Link
to Strategy
Operation2,3
Opportunity
Performance Metrics
Rewards Executive Directors for achieving superior returns for shareholders over a longer time frame.
Enables Executive Directors to build a meaningful shareholding over time and align goals with shareholders.
RSS awards are normally made annually in the form of nil-cost options (or conditional awards) with vesting
dependent on the achievement of performance conditions over at least three financial years, commencing with
the year of grant. This three-year period is longer than the typical pattern of loss reserve development on the
Group’s insurance business, which is approximately two years.
The number of awards will normally be determined by reference to the share price around the time of grant
unless the Committee, at its discretion, determines otherwise.
The Committee considers carefully the quantum of awards each year to ensure that they are competitive in light
of peer practice and the targets set.
Awards are subject to clawback if there is a material misstatement in the Company’s consolidated financial
statements, an error in the calculation of any performance conditions or if the Executive Director ceases to
be a Director or employee due to gross misconduct.
A dividend equivalent provision operates enabling dividends to be accrued (in cash or shares) on RSS awards up
to the point of exercise.
The Committee has the discretion, in exceptional circumstances, to settle an award made to Executive Directors
in cash.
A two-year post-vesting holding period applies to awards made to Executive Directors since 2016.
Award levels are determined primarily by seniority. A maximum individual grant limit of 350 per cent
of salary applies.
Note: The Committee may set the normal level of award at less than the percentage set out above – see
Implementation of Remuneration Policy section of the Annual Report on Remuneration.
Awards vest at the end of a three-year performance period based on performance measures reflecting the
long-term strategy of the business at the time of grant.
These may include measures such as TSR, RoE/BVS, Company profitability, or any other relevant
financial measures.
If more than one measure is used, the Committee will review the weightings between the measures chosen and the
target ranges prior to each LTI grant to ensure that the overall balance and level of stretch remains appropriate.
A sliding scale of targets applies for financial metrics with no more than 25 per cent vesting for
threshold performance.
For TSR, none of this part of the award will vest below median ranking or achievement of an index. No more than
25 per cent of this part of the award will vest for achieving median or index.
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Lancashire Holdings Limited | Annual Report & Accounts 2017
Remuneration Policy table continued
Share Ownership Guidelines4
Under the guidelines, Executive Directors are expected to maintain an interest equivalent in value to no less than two times salary over time.
Until such time as the guideline threshold is achieved Executive Directors are required to retain no less than 50 per cent of the net of tax value
of awards that vest under the RSS.
Chairman and Non-Executive Directors’ fees
Purpose and Link to Strategy Helps recruit, motivate and retain a Chairman and Non-Executive Directors of a high calibre by offering
Operation
a market competitive fee level.
The Chairman is paid a single fee for his responsibilities as Chairman. The level of these fees is reviewed
periodically by the Committee and the CEO by reference to broadly comparable businesses in terms of size
and operations.
In general, the Non-Executive Directors are paid a single fee for all responsibilities, although supplemental fees
may be payable where additional responsibilities are undertaken, including a Non-Executive Director role on a
subsidiary board.
Any reasonable business-related expenses (including any personal tax payable) can be reimbursed.
Opportunity
No maximum.
(1) The Committee operates the annual bonus plan and RSS according to their respective rules and in accordance with the Listing Rules. The Committee, consistent with
normal market practice, retains discretion over a number of areas relating to the operation and administration of these plans and this discretion forms part of this policy.
(2) All historic awards that were granted under any current or previous share scheme operated by the Company that remain outstanding remain eligible to vest based on
their original award terms and this provision forms part of the policy.
(3) Performance measures: these may include the performance indicators shown on pages 18 to 19 or others described within the Annual Report and Accounts Glossary
commencing on page 153 or any other measure that supports the achievement of the Company’s short to long-term objectives.
(4) Share ownership interest equivalent is defined as wholly owned shares or the net of taxes value of RSS awards which have vested but are unexercised and the net of tax
value of deferred bonus RSS awards. Shares include those owned by persons closely associated with the relevant Executive Director.
Illustrations of annual application of Remuneration Policy
The charts below show the potential total remuneration opportunities for the Executive Directors in 2018 at different levels of performance
under the Directors’ Remuneration Policy.
)
M
$
(
I
N
O
T
A
S
N
E
P
M
O
C
L
A
T
O
T
7
6
5
4
3
2
1
0
6.01
42%
42%
16%
Maximum
3.48
36%
36%
28%
On-target
CEO
0.95
100%
Fixed pay
Fixed pay
Annual bonus
LTI Awards (RSS)
4.13
39%
42%
19%
Maximum
2.46
32%
35%
33%
On-target
CFO
0.79
100%
Fixed pay
Fixed pay = 2018 Salary + Actual Value of 2017 Benefits + 2018 Pension Contribution.
On-target = Fixed Pay + Target Bonus (being half the Maximum Bonus Opportunity) + Target Value of 2018 RSS grant (assuming 50 per cent
vesting with face values of grant).
Maximum = Fixed Pay + Maximum Bonus Opportunity + Maximum Value of 2018 RSS grant (assuming 100 per cent vesting with the face
values of grant).
No account has been taken of any share price growth or dividend equivalent accruals.
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Directors’ Remuneration Report continued
Approach to recruitment remuneration
The remuneration package for a new Executive Director would be set in accordance with the terms of the Company’s prevailing approved
Remuneration Policy at the time of appointment and take into account the skills and experience of the individual, the market rate for a
candidate of that experience and the importance of securing the relevant individual.
Salary would be provided at such a level as is required to attract the most appropriate candidate. The Committee retains the flexibility to set
base salary for a newly appointed Executive Director below the mid-market level and allow them to progress quickly to or around mid-market
level once expertise and performance have been proven. This decision would take into account all relevant factors noted above.
The annual bonus and LTI potential would be in line with the Policy. Depending on the timing of the appointment, the Committee may deem
it appropriate to set different bonus performance measures for the performance year during which he or she became an Executive Director.
The Committee may grant an LTI award shortly after joining, up to the plan limits set out in the Remuneration Policy table (assuming the
Company is not in a closed period).
In addition, the Committee may offer additional cash and/or share-based elements to replace deferred or incentive pay forfeited by an
executive leaving a previous employer. It would seek to ensure, where possible, that these awards would be consistent with awards forfeited
in terms of vesting periods (which may be less than three years), expected value and performance conditions.
For an internal Executive Director appointment, any variable pay element awarded in respect of the prior role may be allowed to pay out
according to its terms, adjusted as relevant to take into account the appointment. In addition, any other ongoing remuneration obligations
existing prior to appointment may continue.
The Committee may agree that the Company will meet certain relocation expenses as appropriate and is able to provide expatriate benefits
including housing, a relocation allowance, assignment-related costs or tax equalisation.
Service contracts and loss of office payment policy for Executive Directors
Executive Directors have service contracts with six-month notice periods. In the event of termination, the Executive Directors’ contracts provide
for compensation up to a maximum of base salary plus the value of benefits to which the Executive Directors are contractually entitled for the
unexpired portion of the notice period. The Company may pay statutory claims. No Executive Director has a contractual right to a bonus for
any period of notice not worked.
The service contract for a new appointment will be on similar terms as existing Executive Directors, with the facility to include a notice period
of no more than 12 months from either party.
The Company seeks to apply the principle of mitigation in the payment of compensation on the termination of the service contract of any
Executive Director. There are no special provisions in the service contracts for payments to Executive Directors on a change of control of
the Company.
In the event of an exit of an Executive Director, the overriding principle will be to honour contractual remuneration entitlements and
determine, on an equitable basis, the appropriate treatment of deferred and performance-linked elements of the package, taking account
of the circumstances. Failure will not be rewarded.
Depending on the leaver classification, an Executive Director may be eligible for certain payments or benefits continuation after cessation
of employment.
If an Executive Director resigns or is summarily dismissed, salary, pension and benefits will cease on the last day of employment and there will
be no further payments.
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Lancashire Holdings Limited | Annual Report & Accounts 2017
Leaver on arranged terms or good leaver
If an Executive Director leaves on agreed terms, including compassionate circumstances, there may be payments after cessation of employment.
Salary, pension and benefits will be paid up to the length of the agreed notice period or agreed period of gardening leave.
Subject to performance, a bonus may be payable at the discretion of the Committee pro-rata for the portion of the financial year worked.
Vested but unexercised deferred bonus RSS awards will remain exercisable. Unvested deferred bonus RSS awards will ordinarily vest in full,
relative to the normal vesting period. All such vested awards must be exercised within 12 months of the vesting date.
Vested but unexercised RSS awards may remain exercisable for 12 months. Unvested awards may vest on the normal vesting date unless
the Committee determines that such awards shall instead vest at the time of cessation. Unvested awards will only vest to the extent that the
performance conditions have been satisfied (over the full or curtailed period as relevant). A pro-rata reduction in the size of awards may apply,
based upon the period of time after the grant date and ending on the date of cessation of employment relative to the three-year or other
relevant vesting period.
The Committee has discretion to permit unvested RSS awards to vest early rather than continue on the normal vesting timetable and also
retains discretion as to whether or not to apply (or to apply to a lesser extent) the pro-rata reduction to the RSS awards where it feels the
reduction would be inappropriate.
Depending upon circumstances, the Committee may consider other payments in respect of any claims in connection with a termination of
employment where deemed appropriate, including an unfair dismissal award, outplacement support and assistance with legal fees.
Terms of appointment for Non-Executive Directors
The Non-Executive Directors serve subject to the Company’s Bye-laws and under letters of appointment. They are appointed subject
to re-election at the AGM and are also terminable by either party on six months’ notice except in the event of earlier termination in
accordance with the Bye-laws. The Non-Executive Directors are typically expected to serve for up to six years, although the Board may invite
a Non-Executive Director to serve for an additional period. Their letters of appointment are available for inspection at the Company’s
registered office and at each AGM.
In accordance with best practice under the Code, the Board ordinarily submits the Directors individually for re-election by the shareholders at
each AGM.
Legacy arrangements
In approving the Policy, authority is given to the Company for the duration of the Policy to honour commitments paid, promised to be paid
or awarded to: (i) current or former Directors prior to the date of this Policy being approved (provided that such payments or promises were
consistent with any Remuneration Policy of the Company which was approved by shareholders and was in effect at the time they were made); or
(ii) to an individual (who subsequently is appointed as a Director of the Company) at a time when the relevant individual was not a Director of
the Company and, in the opinion of the Committee, was not paid, promised to be paid or awarded as financial consideration of that individual
becoming a Director of the Company, even where such commitments are inconsistent with the provisions of the revised Policy.
For the avoidance of doubt, this includes all awards granted under the 2008 RSS rules in accordance with the Policy approved at the 2014 AGM
and the current Policy which was subsequently approved by shareholders at the 2017 AGM, and to employees of the Company who are not
Directors at the date of grant. Outstanding RSS awards that remain unvested or unexercised at the date of this report (including for current
Executive Directors as detailed on page 74 of the Annual Report on Remuneration) remain eligible for vesting or exercise based on their
original award terms.
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Directors’ Remuneration Report continued
Annual Report on Remuneration
This Annual Report on Remuneration together with the Chairman’s Statement, as detailed on pages 60 and 61, will be subject to an advisory
vote at the 2018 AGM. The information on page 70 with respect to Directors’ emoluments and onwards through page 79 has been audited
by KPMG.
Implementation of Remuneration Policy for 2018
In relation to the Policy described in the previous section, the following section sets out additional disclosure on the expected application of the
Policy for 2018.
Base salary and fees
Executive Directors
Increases and resulting salaries effective from 1 January 2018 are set out below:
• CEO – salary increased by 3 per cent to $844,135.
• CFO – salary increased by 3 per cent to $579,640.
• For 2018, increases of 3 per cent are in line with the salary increases for Group employees.
Non-Executive Directors
The Chairman’s and Non-Executive Directors’ fees are as follows for 2018:
• The fee for the Chairman (Peter Clarke) will remain at $350,000 per annum.
• The Non-Executive Director fee will remain at $175,000 per annum.
Other Fees
• Samantha Hoe-Richardson is a Non-Executive Director of LUK in which capacity she will receive a fee of $64,500 per annum.
• Simon Fraser is a Non-Executive Director of CUL in which capacity he will receive a fee of $80,000 per annum.
Annual bonus
For 2018, the CEO and CFO will have a target bonus of 150 per cent of salary and, therefore, a maximum opportunity of 300 per cent of
salary. This is within the approved policy limit and it is in line with last year’s opportunity and represents a maximum bonus opportunity
which is 100 per cent of salary less than the set policy limit.
The financial and personal portions of the annual bonus will remain unchanged with 75 per cent on financial performance and 25 per cent on
personal performance.
Financial Performance (75 per cent)
The Company’s most important financial KPI is RoE, which is the core indicator of the delivery of our strategic priorities of ensuring
underwriting comes first, effectively balancing risk and return and managing capital nimbly through the insurance cycle (see the strategic
overview on pages 14 and 15 of this Annual Report and Accounts). For 2018, the financial component for annual bonus is to be based on
the performance of the Group’s RoE, measured as the internal rate of return of the change in FCBVS plus accrued dividends.
A sliding scale range of RoE targets has been set by reference to the Risk Free Rate of Return as follows:
• 25 per cent of target bonus shall be payable at a threshold level of RoE equal to RFRoR + 6 per cent (0 per cent will be payable below
this threshold).
• 50 per cent of target bonus shall be payable at a level of RoE equal to RFRoR + 7 per cent.
• 100 per cent of target bonus shall be payable at a level of RoE equal to RFRoR + 8 per cent.
• 200 per cent of target bonus shall be payable at a level of RoE equal to RFRoR + 14 per cent.
There shall be linear interpolation between these points. The Board considers that these target ranges are appropriately challenging, given
the current insurance market conditions, and will help to ensure a strong link between remuneration for the Executive Directors and the
Company’s financial performance, the strategy and risk profile of the business and the investment return environment, without encouraging
excessive risk-taking. In future years, the Committee would not normally expect to set reference points below the levels outlined above and,
when appropriate, will set higher targets.
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Lancashire Holdings Limited | Annual Report & Accounts 2017
Personal Performance (25 per cent)
This element of the bonus plan is based upon the individual achievement of clearly articulated objectives created at the beginning of each year.
The table below sets out a broad summary of the 2018 personal objectives for each Executive Director.
Executive Director
Alex Maloney
Elaine Whelan
Personal Performance
Effective leadership and management of the senior executive team and Group.
Development of the general business strategy.
Contribution aligned to the Lancashire Group Values.
Effective leadership and management of the finance function and the Bermuda office.
Development of the general business strategy.
Contribution aligned to the Lancashire Group Values.
The personal targets are broadly common among the Executive Directors, with variances being attributable to the specifics of their respective
roles. Specific granular areas for personal development within the set broad personal objectives are discussed between the Chairman and the
Executive Directors and agreed by the Committee. As part of the 2018 annual performance reviews, each Executive Director will receive a
performance rating which will determine the level of personal performance bonus payout for which each Executive Director will be eligible.
Restricted Share Scheme
Performance Conditions
For Executive Directors, 2018 RSS awards are subject to a range based on (i) annual growth in FCBVS plus accrued dividends and (ii) absolute
TSR performance conditions, both measured by reference to a period ending on 31 December 2020. These metrics aim to provide an
appropriate focus on the Company’s underlying financial performance and cycle management, and in the case of absolute TSR to provide
an objective reward for delivering value to shareholders.
Weighting
For 2018, the weighting is 85 per cent on annual growth in FCBVS plus accrued dividends and 15 per cent on absolute TSR.
Target ranges
The annual growth in FCBVS plus accrued dividends target range for 2018 awards is:
• threshold – 6 per cent; and
• maximum – 13 per cent.
Within the three-year performance period each of the separate financial years will be treated as a separate element, each one contributing
one-third to the overall outcome of the vesting of this element of the RSS award. In each year performance will be measured against the target
range to determine the ultimate level of vesting in respect of one-third of the RSS award. Vesting will only occur after completion of the full
three-year performance period, and continued employment of the Executive Director at the time of vesting. This change in the 2018 RSS
award is intended to ensure that any single year which is significantly affected by catastrophe losses does not substantially diminish the
long-term incentive and retention value of all subsisting RSS awards. Please see the Chairman’s Statement on pages 60 and 61 for a
further discussion of the rationale for the changes to the 2018 RSS awards.
The relevant element of the RSS award will not vest if annual growth in FCBVS plus accrued dividends is below threshold, 25 per cent of the
relevant element of the RSS award will vest at threshold, and 100 per cent of the relevant element of the RSS award will vest at maximum.
Performance between threshold and maximum is determined on a straight-line basis.
The Board and Committee consider that the maximum target represents exceptional performance, particularly in light of the challenging
market conditions and significant insured loss environment experienced in 2017. The target range closely aligns the longer-term remuneration
of our Executive Directors with strong performance, the implementation of the business strategy and the interests of our shareholders, but is
not so stretching as to encourage excessive risk taking.
Overriding downwards discretion
If any year produces a return that the Committee believes is significantly worse than competitors and reflects poor management decisions, the
Remuneration Committee will use its discretion to determine that no part (or a lesser part) of the RSS award accrued over the full three-year
period shall vest.
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Directors’ Remuneration Report continued
The TSR target range for 2018 awards is:
• threshold – 8 per cent compound annual growth; and
• maximum – 12 per cent compound annual growth.
Absolute TSR will be measured over the full three-year performance period rather than looking at each year separately.
None of the award will vest if TSR is below threshold, 25 per cent of the award will vest at threshold, and 100 per cent of the award will vest at
maximum. Performance between threshold and maximum is determined on a straight-line basis.
Shareholder consultation in respect of 2018 RSS awards
The Chairman of the Remuneration Committee consulted with a number of major shareholders before the Committee and Board
approved these changes. The Board considers that these developments improve long-term alignment between Executive Directors and
the Company’s shareholders.
Award levels
2018 RSS award levels are as follows:
• CEO – shares to the value of $2,532,405 (being 300 per cent of salary)
• CFO – shares to the value of $1,594,010 (being 275 per cent of salary)
The number of shares awarded shall be determined based on the closing average share price for a period of five trading days immediately prior
to the date of the award.
Post-vesting holding period
For RSS awards made in 2016 or subsequent years, Executive Directors are expected to hold vested RSS awards (or the resultant net of
tax shares) which had a performance period of at least three years, for a further period of not less than two years following vesting.
Single figure on remuneration
The following table presents the Executive Directors’ emoluments in U.S. dollars in respect of the years ended 31 December 2017 and
31 December 2016.
Executive Directors
Alex Maloney4,, CEO
Elaine Whelan4, CFO
Salary
$
811,311
810,266
562,268
547,423
2017
2016
2017
2016
Pension
$
81,227
81,027
56,275
54,636
Taxable
Benefits1
$
21,910
20,127
155,960
Annual Bonus5,6
$
420,000
1,825,627
310,000
Long-Term
Incentives
(RSS)2,3
$
601,925
1,063,364
414,458
Total4
$
1,936,373
3,800,411
1,498,961
114,445
1,253,598
880,831
2,850,933
(1) Benefits comprise Bermudian payroll taxes, social insurance, medical, dental and vision coverage and housing and other allowances paid by the Company for expatriates
(as is the case for the CFO), but exclude UK National Insurance contributions.
(2) For 2017, the long-term incentive values are based on the 2015 RSS awards which vest at 22.5 per cent on 15 February 2018 and are based on a three-year performance
period that ended on 31 December 2017. The values are based on the average share price for the last quarter of 2017 and include the value of dividends accrued on
vested shares.
(3) For 2016, the long-term incentive values were based on the 2014 RSS awards which vested at 67.4 per cent on 16 February 2017 and were based on a three-year
performance period that ended on 31 December 2016. The values are re-presented from the 2016 Annual Report and Accounts based on the share price at the
vesting date, 16 February 2017, and include the value of dividends accrued on vested shares.
(4) Some amounts were paid in Sterling and converted at the average exchange rate of 1.2806 for the year as they are set in U.S. dollars.
(5) Bonus targets were set at the beginning of 2017 and based on a clear split between Company financial performance and personal performance on a 75:25 basis. Company
financial performance is based on absolute financial performance against the RFRoR. The Company financial performance component paid out at 0 per cent of target as
the RoE was negative 5.9 per cent against a target level of RFRoR +8 per cent. The personal element of Executive Directors’ bonus opportunity was the only bonus element
to payout; however this element was also paid out at a modified rate considering the significant loss year experienced. Final bonus payout to Executive Directors will be
17 per cent of the maximum for the CEO and 18 per cent of the maximum for the CFO. For full details of Executive Directors’ bonuses and the associated performance
delivered see pages 71 and 72. 25 per cent of Executive Directors’ annual bonus is deferred into RSS awards without performance conditions, vesting at 33.3 per cent over
a three-year period.
(6) Annual bonus figures for the Executive Directors for 2016 have been re-presented to reflect final relative performance data which was used to calculate the bonus figures
and were finalised after all peer data was released in 2017, after the 2016 Directors’ Remuneration Report was published. For 2016, the relative component had been
provisionally stated to pay out at 50 per cent of the maximum, however after final results of all peers were released, this element paid out at 188 per cent of target
(with final bonus payout being 76 per cent of the maximum for the CEO and CFO).
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Lancashire Holdings Limited | Annual Report & Accounts 2017
Non-Executive Directors’ fees
Current Non-Executive Directors
Peter Clarke1
Michael Dawson2
Simon Fraser3
Samantha Hoe-Richardson4
Robert Lusardi5
Tom Milligan6
Former Non-Executive Directors
Emma Duncan7
Martin Thomas8
Fee
$
Other
$
Total
$
350,000
290,769
175,000
28,269
175,000
175,000
175,000
175,000
175,000
84,808
175,000
175,000
–
91,538
–
–
–
–
–
80,000
66,974
64,500
13,350
–
–
–
–
–
–
–
350,000
290,769
175,000
28,269
255,000
241,974
239,500
188,350
175,000
84,808
175,000
175,000
–
91,538
–
111,250
34,375
145,625
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
(1) Peter Clarke was appointed as a Non-Executive Director with effect from 9 June 2014 and as LHL Chairman with effect from 4 May 2016 and his 2016 fees were
proportionally pro-rated for the year.
(2) Michael Dawson was appointed as a Non-Executive Director with effect from 3 November 2016 and his 2016 fees were proportionally pro-rated for the year.
(3) Simon Fraser was additionally appointed as a Non-Executive Director of CUL with effect from 29 February 2016 and his 2016 fees were proportionally pro-rated for
the year.
(4) Samantha Hoe-Richardson was additionally appointed as a Non-Executive Director of LUK with effect from 18 October 2016 and her 2016 fees were proportionally pro-
rated for the year.
(5) Robert Lusardi was appointed as a Non-Executive Director with effect from 8 July 2016 and his 2016 fees were proportionally pro-rated for the year.
(6) Tom Milligan was appointed as a Non-Executive Director with effect from 3 February 2015.
(7) Emma Duncan retired from the Board on 8 July 2016 and her 2016 fees were proportionally pro-rated for the year.
(8) Martin Thomas retired from the Board on 4 May 2016 and his 2016 fees were proportionally pro-rated for the year.
2018 annual bonus payments in respect of 2017 performance
As detailed in the Policy Report, each Executive Director participates in the annual bonus plan, under which performance is measured over
a single financial year.
The target value of bonus was 150 per cent of salary for the CEO and CFO respectively, and the maximum payable was two times the target
value. The RoE is negative 5.9 per cent.
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OverviewStrategyPerformanceGovernanceFinancial statements
Directors’ Remuneration Report continued
Financial performance
75 per cent of the 2017 bonus was based on Company performance conditions and the extent to which these were achieved is as follows:
Performance Measure
Absolute RoE
Financial Performance Weighting
(of total bonus)
%
75
Threshold
%
RFRoR
+6%
Target
%
Max
%
Actual
performance
%
% payout
RFRoR
+8%
RFRoR
+14%
-5.9 0% of target payable in respect of
Company performance
In 2017 there was a higher than average frequency and severity of material natural catastrophe losses which resulted in the Lancashire Group
delivering the lowest financial return since its inception in 2005. Bonus targets were set at the beginning of 2017 and based on a clear split
between Company financial performance and personal performance on a 75:25 basis. The Company financial performance component did not
payout at all (i.e. zero per cent of target) as RoE was negative 5.9 per cent against a target level of RFRoR +8 per cent and a threshold of RFRoR
+6 per cent.
Personal performance
25 per cent of the 2017 bonus was based on performance against clearly defined personal objectives set at the start of the year.
The table below sets out a summary of the 2017 personal objectives for each Executive Director.
Executive Director
Alex Maloney
Elaine Whelan
Personal Performance
Effective leadership and management of the senior executive team and Group.
Development of the general business strategy.
Contribution aligned to the Lancashire Group Values.
Effective leadership and management of the finance function and the Bermuda office.
Development of the general business strategy.
Contribution aligned to the Lancashire Group Values.
The personal targets were broadly common among the Executive Directors, with variances being attributable to the specifics of their respective
roles and performance targets relating to areas of personal development.
During the 2017 annual performance reviews of each Executive Director, a performance rating was assigned to determine the level of bonus
payout for which each Executive Director was eligible; however this element was paid out at a modified rate considering the significant loss
year experienced.
Notwithstanding the financial performance of the Group in what was a significant year for catastrophe loss activity (in this regard please see
the strategy and performance sections on pages 12 to 41 of this Annual Report and Accounts) the Executive Directors each achieved a strong
performance rating against their objectives, in particular in delivering an underwriting portfolio which operated in such a way as to moderate
loss exposures through a combination of underwriting discipline and a carefully structured reinsurance programme. The leadership of the
Executive Directors in delivering a team of employees with strong professional skills at all levels throughout the Group is considered by the
Board to position the business well for the challenges and opportunities which lie ahead. For the 2017 performance against personal objectives,
the ratings were determined following a process for the evaluation of performance of the Executive Directors against the agreed personal
targets and discussion and agreement of the outcomes with the Chairman and members of the Board. The outcomes are expressed as a
percentage of the maximum award as illustrated in the table below.
A table of performance measures and total 2017 bonus achievement is set out below:
Executive Director
Alex Maloney
Elaine Whelan
Financial
performance
(max % of
total bonus)
%
Personal
performance
(max % of
total bonus)
%
Bonus
% of maximum
awarded
%
75
75
25
25
17
18
Value of bonus
paid in cash
(75 per cent of
total bonus)
$
Value of bonus
deferred into
RSS awards
(25 per cent of
total bonus)1
$
315,000
232,500
105,000
77,500
Total
bonus value1
$
420,000
310,000
(1) 25 per cent of total bonus award will be deferred into RSS awards with one third vesting annually, each year, over a three-year period with the first third becoming
exercisable in February 2019, subject to the Company not being in a closed period. These awards vest on the relevant dates subject to continued employment only.
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Lancashire Holdings Limited | Annual Report & Accounts 2017
Long-term share awards with performance periods ending in the year – 2015 RSS awards
The 2015 RSS awards were based on a three-year performance period ending on 31 December 2017 and vest following the determination of
financial results by the Board. The tables below set out the achievement against the performance conditions attached to the award, resulting in
aggregate vesting of 22.5 per cent, and the actual number of awards vesting (with their estimated value).
Performance level
Below threshold
Threshold
Stretch or above
Actual achieved
TSR
(relative to a comparator group of 11 companies)
(relevant to 25% of the 2015 RSS awards)
Average annual RoE
(over three years in excess of 13-week Treasury bill rate)
(relevant to 75% of the 2015 RSS awards)
Performance required
% vesting
Performance required (%)
% vesting
Below median
Median
Upper quartile or above
Below median
0
25
100
0
Below 6
6
15 or above
7.0
0
25
100
30.1
Details of the vesting for each Executive Director, based on the above, are shown in the table below:
Executive Director
Alex Maloney
Elaine Whelan
Number of
shares at grant
Number of
shares to lapse
Number of
shares to vest
Dividend accrual
on vested shares
value2
$
Value of shares
including dividend
accrual1
$
244,208
168,149
189,261
130,315
54,947
37,834
129,799
89,373
601,925
414,458
(1) The value of the vested shares is based on the 2015 RSS awards which vest at 22.5 per cent on 15 February 2018 and are based on a three-year performance period that
ended on 31 December 2017. The values are provisionally based on the average share price of the last quarter of 2017 (being $8.59 based on the exchange rate of 1.242).
The values will be re-presented in 2018 with the value at the vesting date. The vested awards are subject to the clawback provision set out on page 64.
(2) Dividends accrue on awards at the record date of a dividend payment and upon exercise the cash value of the accrued dividends is paid to the employee on the number of
vested awards net of tax required.
Scheme interests awarded during the year
The table below sets out the performance RSS awards that were granted as nil-cost options on 14 March 2017.
Executive Director
Alex Maloney
Elaine Whelan
Number of awards
granted during
the year
Face value
of awards
granted during
the year1,3
$
286,666 2,458,640
1,547,583
180,441
% vesting
at threshold
performance
25
25
Grant date2
14-Mar-2017
14-Mar-2017
(1) The awards were based on the five-day average closing share price prior to the award date, being £7.02 (a share price of $8.57 based on the exchange rate of 1.2214) and
the awards were granted as nil-cost options.
(2) These awards are due to vest subject to performance conditions being met at the end of the performance period ending 31 December 2019 and become exercisable in the
first open period following the release of the Company’s 2019 year-end results after the meeting of the Board in February 2020.
(3) The exercise share price is determined once an award has vested on the basis of the share price on the date an award is exercised.
Loss of office payments
There were no loss of office payments during the 2017 year.
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Directors’ Remuneration Report continued
Details of all outstanding share awards
In addition to awards made during the 2017 financial year, the table below sets out details of all outstanding RSS awards held by
Executive Directors.
Performance and deferred bonus awards under the nil-cost option Restricted Share Scheme (RSS)
Grant date1
Exercise
price
Awards
held at
1-Jan-17
Awards
granted
during the year
Awards
vested
during the year
Awards
lapsed
during the year
Awards
exercised
during the year
Awards
held at
31-Dec-17
End of
performance
period
Alex Maloney,
Group CEO
Total
Elaine Whelan,
Group CFO &
LICL CEO
Total
Performance RSS2,3
Deferred Bonus RSS4
Performance RSS2,3
Deferred Bonus RSS4
Performance RSS2,3
Deferred Bonus RSS4
Performance RSS2,3
Deferred Bonus RSS4
Performance RSS2,3
Deferred Bonus RSS4
Performance RSS2,3
Deferred Bonus RSS4
Performance RSS2,3
Deferred Bonus RSS4
Performance RSS2,3
Deferred Bonus RSS4
19-Feb-14
5-Mar-14
12-Feb-15
20-Mar-15
18-Feb-16
11-Mar-16
14-Mar-17
14-Mar-17
19-Feb-14
5-Mar-14
12-Feb-15
20-Mar-15
18-Feb-16
11-Mar-16
14-Mar-17
14-Mar-17
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
124,333
9,810
244,208
27,953
219,254
56,224
–
–
681,782
102,989
7,986
168,149
19,693
157,104
38,607
–
–
494,528
–
–
–
–
–
–
286,666
53,215
339,881
–
–
–
–
–
–
180,441
36,541
216,982
83,801
9,810
–
13,977
–
18,741
–
–
126,329
69,416
7,986
–
9,846
–
12,869
–
–
100,117
40,532
–
–
–
–
–
–
–
40,532
33,573
–
–
–
–
–
–
–
33,573
83,801
9,810
–
13,977
–
18,741
–
–
126,329
69,416
7,986
–
9,846
–
12,869
–
–
100,117
– 31-Dec-16
–
244,208 31-Dec-17
13,976
219,254 31-Dec-18
37,483
286,666 31-Dec-19
53,215
854,802
– 31-Dec-16
–
168,149 31-Dec-17
9,847
157,104 31-Dec-18
25,738
180,441 31-Dec-19
36,541
577,820
(1) The market values of the common shares on the dates of grant were:
(3) The vesting dates of the RSS performance awards are subject to being out of a
• 19 February 2014 £7.34
• 5 March 2014 £7.26
• 12 February 2015 £6.36
• 20 March 2015 £6.30
• 18 February 2016 £6.17
• 11 March 2016 £5.37
closed period and are as follows:
• 2014 – 16 February 2017;
• 2015 – 15 February 2018;
• 14 March 2017 £7.02
• 2016 – first open period following the release of the Company’s 2018 year-end results; and
(2) The vesting of the RSS performance awards above is subject to two performance
• 2017 – first open period following the release of the Company’s 2019 year-end results.
conditions as follows:
• 25 per cent of each award is subject to a performance condition measuring the TSR
performance of the Company against the TSR performance of a select group of comparator
companies (see page 76 for a list of comparator companies for each grant year), over a three-
year performance period. 25 per cent of this part of the award vests for median performance
by the Company, rising to 100 per cent vesting of this part of the award for upper quartile
performance by the Company or better (with proportionate vesting between these
two points).
• The other 75 per cent of each award is subject to a performance condition based on average
annual RoE over a three-year performance period. 25 per cent of this part of the award will
vest if average annual RoE over the performance period exceeds the criteria set out in the
table on page 75, whilst all of this part of the award will vest if the Company’s average RoE
is equal to the more stringent criteria set out in the table on page 75. Between these two
points vesting will take place on a straight-line basis from 25 per cent to 100 per cent for
RoE performance.
(4) The vesting dates of the RSS Deferred Bonus awards are subject to being out
of a closed period and, for the 2014 to 2017 Deferred Bonus awards, are
as follows:
• 2014 – vest 33.33 per cent over a three-year period at the first open period following the
release of the Company’s year-end results for 2014, 2015 and 2016;
• 2015 – vest 33.33 per cent over a three-year period at the first open period following the
release of the Company’s year-end results for 2015, 2016 and 2017;
• 2016 – vest 33.33 per cent over a three-year period at the first open period following the
release of the Company’s year-end results for 2016, 2017 and 2018; and
• 2017 – vest 33.33 per cent over a three-year period at the first open period following the
release of the Company’s year-end results for 2017, 2018 and 2019.
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Lancashire Holdings Limited | Annual Report & Accounts 2017
Relative TSR targets for RSS (25 per cent weighting)
100%
25%
Nil
RoE targets for RSS (75 per cent weighting)
100%
25%
Nil
* Average annual growth in FCBVS plus accrued dividends.
Absolute TSR targets for RSS (15 per cent weighting)
100%
25%
Nil
2014
2015
2016
2017
75th percentile
= median
< median
75th percentile
= median
< median
75th percentile
= median
< median
75th percentile
= median
< median
2014
2015
2016
RFRoR +15%
RFRoR + 6%
< RFRoR + 6%
RFRoR +15%
RFRoR + 6%
< RFRoR + 6%
RFRoR +15%
RFRoR + 6%
< RFRoR + 6%
Annual growth in FCBVS plus accrued dividends targets for RSS (85 per cent weighting)
100%
25%
Nil
* See page 69 and 70 for the vesting methodology to be applied for the 2018 RSS awards.
2017*
13%
6%
< 6%
2018*
12%
8%
< 8%
2018*
13%
6%
< 6%
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Directors’ Remuneration Report continued
Historical Peer Group Data for 2017 and prior RSS awards (relative TSR element)
Peer Companies 11
Amlin plc1
Arch Capital Group Limited2, 4
Argo Group International Holdings, Ltd.
Aspen Insurance Holdings Limited
Axis Capital Holdings Limited
Beazley plc
Catlin Group Ltd.3
Endurance Specialty Holdings Ltd.4,7
Everest Re Group, Ltd.5
The Hanover Insurance Group6
Hiscox Ltd.
Montpelier Re Holdings Ltd.7
Novae Group plc8,9
Renaissance Re Holdings Ltd.
Validus Holdings Ltd. 10
XL Group Ltd9
2014 awards
2015 awards
2016 awards
2017 awards
X
–
X
X
X
X
X
X
–
–
X
X
–
X
X
–
X
–
X
X
X
X
–
X
X
X
X
–
X
X
X
X
–
X
X
X
X
X
–
X
X
X
X
–
X
X
X
X
–
X
X
X
X
X
–
–
X
X
X
–
X
X
X
X
(1) Mitsui Sumitomo Insurance Company acquired Amlin plc on 1 February 2016. Accordingly, the Committee decided to use Amlin plc as a comparator company up to
30 June 2015 and it was replaced with Everest Re Group, Ltd with effect from 1 July 2015.
(2) Arch Capital Group Limited was added to the peer group of companies with effect from 1 October 2016 as a replacement for Endurance Specialty Holdings Ltd.
(3) Catlin Group Ltd. was acquired by the XL Group Ltd. with effect from 1 May 2015 and so was used as a comparator company up to 31 December 2014 and was replaced
by Novae Group plc.
(4) Sompo Holdings Inc. announced on 5 October 2016 that it intended to acquire Endurance Specialty Holdings Ltd. (‘Endurance’). The transaction subsequently
achieved shareholder approval. Accordingly, the Committee decided to use Arch Capital Group Limited as a comparator company with effect from 1 October 2016
as a replacement for Endurance.
(5) Everest Re Group, Ltd. was added to the peer group of companies with effect from 1 July 2015 as a replacement for Amlin plc.
(6) The Hanover Insurance Group was added to the peer group of companies with effect from 1 January 2015 as a replacement for Montpelier Re Holdings Ltd.
(7) Montpelier Re Holdings Ltd. was acquired by Endurance with effect from 31 July 2015 and so was used as a comparator company up to 31 December 2014 and was
replaced by The Hanover Insurance Group.
(8) Novae Group plc was added to the peer group of companies with effect from 1 January 2015 as a replacement for Catlin Group Ltd.
(9) Novae Group plc was acquired by Axis Capital Holdings Limited with effect from 2 October 2017 and so was used as a comparator company up to 30 June 2017 and was
replaced by XL Group Ltd as of 1 July 2017.
(10) American International Group, Inc. announced on 22 January 2018 that it is set to acquire Validus Holdings Ltd.; a replacement within the peer group of companies
effective 1 January 2018 has not yet been identified but consideration of this has been initiated.
(11) For 2018 RSS awards the Board adopted a range of absolute TSR targets. See page 70 for further details.
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Lancashire Holdings Limited | Annual Report & Accounts 2017
Directors’ shareholdings and share interests
Formal shareholding guidelines were first introduced in 2012 and have subsequently been modified. The guidelines require the CEO and CFO
to build and maintain a shareholding in the Company worth two times annual salary as set out in the Policy Report.
Details of the Directors’ interests in shares are shown in the table below.
Directors
Alex Maloney
Elaine Whelan
Peter Clarke
Michael Dawson
Simon Fraser
Samantha Hoe-Richardson
Robert Lusardi
Tom Milligan
Total as at 1 January 2017
As at 31 December 2017
Number of Common Shares
Legally owned
Subject to deferral
under the RSS
Subject to
performance
conditions
under the RSS
Vested but
unexercised
awards under
other share-
based plans
1,195,294
923,504
14,000
–
1,000
3,947
3,000
1,000
580,302
524,370
44,000
7,200
1,000
3,947
3,000
1,000
104,674
72,126
N/A
N/A
N/A
N/A
N/A
N/A
750,128
505,694
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Total
1,435,104
1,102,190
44,000
7,200
1,000
3,947
3,000
1,000
Shareholding
guideline
achieved?
Yes
Yes
N/A
N/A
N/A
N/A
N/A
N/A
Note: Share ownership interest equivalent is defined as wholly owned shares or the net of taxes value of RSS awards which have vested but are unexercised and the net of tax
value of deferred bonus RSS awards. Shares include those owned by persons closely associated with the relevant Executive Director.
Performance graph
The following graph shows the Company’s performance, measured by TSR, compared with the performance of the FTSE 250 Index.
The Company’s common shares commenced trading on the main market of the LSE on 16 March 2009 and the Company joined the
FTSE 250 Index on 22 June 2009 and is currently a constituent of this.
TOTAL SHAREHOLDER RETURN
£
500
450
400
350
300
250
200
150
100
50
0
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Lancashire Holdings
FTSE 250 Index
Source: Datastream (Thomson Reuters)
This graph shows the value, by 31 December 2017, of £100 invested in LHL on 31 December 2008 compared with the value of £100 invested in
the FTSE 250 Index. The other points plotted are the values at intervening financial year ends.
www.lancashiregroup.com
www.lancashiregroup.com
79
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OverviewStrategyPerformanceGovernanceFinancial statements
Directors’ Remuneration Report continued
Total Remuneration History for CEO
The table below sets out the total single figure remuneration for the CEOs over the last nine years with the annual bonus paid as a percentage
of the maximum and the percentage of long-term share awards vesting in each year.
2009
2010
2011
2012
2013
Total remuneration ($000s)
Annual bonus (%)
LTI vesting (%)
7,244
68
N/A
9,945
94
99.6
9,623 10,460 10,175
80
100
73
100
73
99
Richard Brindle
20141
Alex Maloney
20142
10,072
80
613
2,405
73
50
2015
2016
3,853
72
75
3,8004
764
67
2017
1,936
17
22.5
(1) Richard Brindle was the CEO from 2005 until he retired from the Group and as a Director on 30 April 2014.
(2) Alex Maloney was appointed CEO effective 1 May 2014, after the retirement of Mr Brindle. For the purposes of this table his numbers have been pro-rated to account for
only his time in office as CEO for 2014.
(3) Mr Brindle was afforded good leaver status and all RSS award interests were vested upon his departure, using estimated TSR and RoE values at the time of his retirement.
The amounts in the table above reflect all awards which vested in 2014. Further particulars of the vesting were reported in the Group’s 2014 Annual Report and Accounts.
(4) Alex Maloney’s 2016 total remuneration and annual bonus percentage have been re-presented in the above table to reflect changes made after the publication of the
2016 Annual Report and Accounts. These changes are primarily due to the disclosed relative RoE performance which impacted his annual bonus figure for 2016 and
the re-presentation of his LTI award vesting and dividend accrual value at the vesting date, as disclosed on page 70.
The table above shows the total remuneration figure for the former CEO during each of the relevant financial years; figures for the current
CEO are shown since his appointment to the position on 1 May 2014. The total remuneration figure includes the annual bonus and LTI awards
which vested based on performance in those years. The annual bonus and LTI percentages show the payout for each year as a percentage of
the maximum.
Percentage change in CEO remuneration
The following table sets out the percentage change in the aggregate value of salary, benefits and bonus for the CEO from the preceding year
and the average percentage change in respect of the employees of the Group taken as a whole.
Base salary
Benefits
Bonus
Year-on-year
change
CEO2
%
Average
year-on-year
change employees1,3
%
0
2
(77)
8
8
(79)
(1) Employee numbers were calculated on a per permanent employee headcount basis for the years ending 31 December 2017 and 31 December 2016, adjusted for any
joiners and leavers during this period.
(2) The underlying salary increase from 2016 to 2017 for the CEO was 3 per cent. However some amounts were paid in Sterling and converted at the average exchange rate of
1.2806 for the year, which has resulted in the overall 0 per cent base salary year-on-year change above.
(3) The underlying salary increase from 2016 to 2017 for Group employees was 3 per cent. The 8 per cent increase reflects staff promotions and other adjustments made
during the year.
Relative importance of the spend on pay
The following table sets out the percentage change in dividends and overall spend on pay in the year ended 31 December 2017 compared with
the year ended 31 December 2016.
Employee remuneration costs
Dividends
2017
$m
39.8
29.9
2016
$m
Percentage change
%
72.1
178.9
(45)
(83)
80
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Lancashire Holdings Limited | Annual Report & Accounts 2017
Lancashire Holdings Limited | Annual Report & Accounts 2017
Committee members, attendees and advice
For Remuneration Committee membership and attendance at meetings through 2017, please refer to page 59 of this Annual Report
and Accounts. The Remuneration Committee’s responsibilities are contained in its Terms of Reference, a copy of which is available on the
Company’s website. These responsibilities include determining the framework for the remuneration, including pension arrangements, for
all Executive Directors, the Chairman and senior executives. The Committee is also responsible for approving employment contracts for
senior executives.
Remuneration Committee adviser
The Remuneration Committee is advised by NBS, a trading name of Aon Hewitt, being a subsidiary of Aon plc. NBS was appointed by the
Remuneration Committee in 2007. NBS has discussions with the Remuneration Committee Chairman regularly on Committee process and
topics which are of particular relevance to the Company.
Aon Benfield (which is part of Aon but is a separate business division from Aon Hewitt) provides reinsurance broking services to the Group.
The primary role of NBS is to provide independent and objective advice and support to the Committee’s Chairman and members. In order
to manage any possible conflict of interest, NBS operates as a distinct business within the Aon Group and there is a robust separation between
the business activities and management of NBS and all other parts of Aon Hewitt and the wider Aon Group. The Committee is satisfied that the
advice that it receives is objective and independent. NBS is also a signatory to the Remuneration Consultants Group (‘RCG’) Code of Conduct
which sets out guidelines for managing conflicts of interest, and has confirmed to the Committee its compliance with the RCG Code.
The total fees paid to NBS in respect of its services to the Committee for the year ended 31 December 2017 were $68,072 (2016 – $159,473).
Fees are predominantly charged on a ‘time spent’ basis.
Engagement with shareholders
Details of votes cast for and against the resolution to approve last year’s Remuneration Report are shown below along with the votes to approve
the 2017 Remuneration Policy which have been stated below; any matters discussed with shareholders during the year are provided in the
Implementation of Remuneration Policy for 2018 section of the report starting on page 68.
Vote to approve 2016 Annual Report
on Remuneration
Vote to approve 2017-2019
Remuneration Policy
Total number
of votes
% of
votes cast
Total number
of votes
143,579,559
8,228,480
151,808,039
9,418,682
94.6
5.4
100.0
144,229,951
7,870,777
152,100,728
9,125,993
% of
votes cast
94.8
5.2
100.0
For
Against
Total
Abstentions
Approved by the Board of Directors and signed on behalf of the Board.
Simon Fraser
Chairman of the Remuneration Committee
14 February 2018
www.lancashiregroup.com
www.lancashiregroup.com
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OverviewStrategyPerformanceGovernanceFinancial statements
Directors’ report
Overview of the Group
Lancashire Holdings Limited is a Bermuda incorporated company (Registered Company No. 37415) with operating subsidiaries in Bermuda
and London, and two Syndicates at Lloyd’s.
The Company’s common shares were admitted to trading on AIM in December 2005 and were subsequently moved up to the Official List
and to trading on the main market of the LSE on 16 March 2009. The shares have been included in the FTSE 250 Index since 22 June 2009.
Principal activities
The Company’s principal activity, through its wholly owned subsidiaries, is the provision of global specialty insurance and reinsurance
products. On 7 November 2013, the Company completed the acquisition of CCL, an established Lloyd’s insurance group, and in June 2013
established Kinesis, a third party capital and underwriting management facility, to complement the Group’s longstanding specialty insurance
activities. An analysis of the Group’s business performance can be found in the Business Review on pages 24 to 30.
Dividends
For the year ended 31 December 2017, the following dividends were declared:
• an interim dividend of $0.05 per common share was declared on 26 July 2017 and paid on 6 September 2017 in pounds sterling at
the pound/U.S. dollar exchange rate of 1.2965 or £0.0386 per common share; and
• a final dividend of $0.10 per common share was declared on 14 February 2018 to be paid on 21 March 2018 in pounds sterling at
the pound/U.S. dollar exchange rate on the record date of 23 February 2018 or approximately £0.07 per common share.
Dividend policy
The Group intends to maintain a strong balance sheet at all times, while generating an attractive risk-adjusted total return for shareholders.
We actively manage capital to achieve those aims. Capital management is expected to include the payment of a sustainable annual (interim
and final) dividend, supplemented by special dividends from time to time. Dividends will be linked to past performance and future prospects.
Under most scenarios, the annual dividend is not expected to reduce from one year to the next. Special dividends are expected to vary
substantially in size and in timing. The Board may cancel the payment of any dividend between declaration and payment for purposes of
compliance with regulatory requirements or for exceptional business reasons.
at a price of £6.90 realising £32,606.
Transactions in own shares
Current Directors
• Peter Clarke (Non-Executive Chairman)
• Michael Dawson (Non-Executive Director)
• Simon Fraser (Senior Independent Non-Executive Director)
• Samantha Hoe-Richardson (Non-Executive Director)
• Robert Lusardi (Non-Executive Director)
• Alex Maloney (Chief Executive Officer)
• Tom Milligan (Non-Executive Director)
• Elaine Whelan (Chief Financial Officer)
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Lancashire Holdings Limited | Annual Report & Accounts 2017
The Directors’ beneficial interests in the Company’s common shares as at 31 December 2017 and 2016 including interests held by family
There have been no changes in Directors’ shareholdings between the end of the financial year and the date of this Report.
(1) Peter Clarke conducted the following transactions in the Company’s shares during 2017:
• 2 November – purchase of 30,000 shares at a price of £7.46 costing £223,791.
(2) Michael Dawson conducted the following transactions in the Company’s shares during 2017:
• 28 February – purchase of 7,200 shares at a price of £6.93 costing £49,896.
(3) Includes 100,000 shares owned by his spouse, Amanda Maloney. Alex Maloney conducted the following transactions in the Company’s shares during 2017:
• 29 March – exercise of 83,801 RSS awards and 42,528 deferred bonus RSS awards and related sale of 59,539 shares to cover tax liabilities,
at a price of £6.72 realising £400,310.
(4) Includes 11,590 shares owned by her spouse, Kilian Whelan. Elaine Whelan conducted the following transactions in the Company’s shares during 2017:
• 27 February – exercise of 69,416 RSS awards and 30,701 deferred bonus RSS awards and related sale of 4,723 shares to cover tax liabilities,
The Company did not repurchase any of its own common shares during 2017 or 2016.
The Group’s current repurchase programme has 20,134,191 common shares remaining to be purchased as at 31 December 2017
(approximately $172.7 million at the 31 December 2017 share price). The purpose of the Company’s repurchase programme is to acquire
shares to use in the future towards satisfying its obligations under its RSS awards. Further details of the share repurchase authority and
programme are set out in note 18 to the consolidated financial statements on page 147. The repurchase programme is subject to renewal
at the 2018 AGM in an amount of up to 10 per cent of the then issued common share capital.
Details of the Directors’ remuneration are set out in the Directors’ Remuneration Report on pages 60 to 79.
As at 14 February 2018, the Company was aware of the following interests of 3 per cent or more in the Company’s issued share capital:
Directors’ interests
members were as follows:
Directors
Peter Clarke1
Michael Dawson2
Simon Fraser
Robert Lusardi
Alex Maloney3
Tom Milligan
Elaine Whelan4
Samantha Hoe-Richardson
Directors’ remuneration
Substantial shareholders
Name
Invesco Limited
Setanta Asset Management Limited
Wellington Management
Dimensional Fund Advisors LP
Frank W. Cawood
Franklin Mutual Advisers, LLC
The Vanguard Group, Inc
BlackRock, Inc.
Troy Asset Management Limited
Common shares
Common shares
held as at
held as at
31 December 2017
31 December 2016
44,000
14,000
7,200
1,000
3,947
3,000
580,302
1,000
524,370
–
1,000
3,947
3,000
513,512
1,000
428,976
Number of shares as
at 14 February 2018
% of shares
in issue
18.1
36,515,214
18,023,741
11,359,428
9,501,507
9,302,300
7,639,246
7,397,922
6,990,810
6,864,893
9.0
5.6
4.7
4.6
3.8
3.7
3.5
3.4
www.lancashiregroup.com
83
Directors’ interests
The Directors’ beneficial interests in the Company’s common shares as at 31 December 2017 and 2016 including interests held by family
members were as follows:
Directors
Peter Clarke1
Michael Dawson2
Simon Fraser
Samantha Hoe-Richardson
Robert Lusardi
Alex Maloney3
Tom Milligan
Elaine Whelan4
Common shares
held as at
31 December 2017
Common shares
held as at
31 December 2016
44,000
7,200
1,000
3,947
3,000
580,302
1,000
524,370
14,000
–
1,000
3,947
3,000
513,512
1,000
428,976
There have been no changes in Directors’ shareholdings between the end of the financial year and the date of this Report.
(1) Peter Clarke conducted the following transactions in the Company’s shares during 2017:
• 2 November – purchase of 30,000 shares at a price of £7.46 costing £223,791.
(2) Michael Dawson conducted the following transactions in the Company’s shares during 2017:
• 28 February – purchase of 7,200 shares at a price of £6.93 costing £49,896.
(3) Includes 100,000 shares owned by his spouse, Amanda Maloney. Alex Maloney conducted the following transactions in the Company’s shares during 2017:
• 29 March – exercise of 83,801 RSS awards and 42,528 deferred bonus RSS awards and related sale of 59,539 shares to cover tax liabilities,
at a price of £6.72 realising £400,310.
(4) Includes 11,590 shares owned by her spouse, Kilian Whelan. Elaine Whelan conducted the following transactions in the Company’s shares during 2017:
• 27 February – exercise of 69,416 RSS awards and 30,701 deferred bonus RSS awards and related sale of 4,723 shares to cover tax liabilities,
at a price of £6.90 realising £32,606.
Transactions in own shares
The Company did not repurchase any of its own common shares during 2017 or 2016.
The Group’s current repurchase programme has 20,134,191 common shares remaining to be purchased as at 31 December 2017
(approximately $172.7 million at the 31 December 2017 share price). The purpose of the Company’s repurchase programme is to acquire
shares to use in the future towards satisfying its obligations under its RSS awards. Further details of the share repurchase authority and
programme are set out in note 18 to the consolidated financial statements on page 147. The repurchase programme is subject to renewal
at the 2018 AGM in an amount of up to 10 per cent of the then issued common share capital.
Directors’ remuneration
Details of the Directors’ remuneration are set out in the Directors’ Remuneration Report on pages 60 to 79.
Substantial shareholders
As at 14 February 2018, the Company was aware of the following interests of 3 per cent or more in the Company’s issued share capital:
Name
Invesco Limited
Setanta Asset Management Limited
Wellington Management
Dimensional Fund Advisors LP
Frank W. Cawood
Franklin Mutual Advisers, LLC
The Vanguard Group, Inc
BlackRock, Inc.
Troy Asset Management Limited
Number of shares as
at 14 February 2018
% of shares
in issue
36,515,214
18,023,741
11,359,428
9,501,507
9,302,300
7,639,246
7,397,922
6,990,810
6,864,893
18.1
9.0
5.6
4.7
4.6
3.8
3.7
3.5
3.4
www.lancashiregroup.com
www.lancashiregroup.com
83
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OverviewStrategyPerformanceGovernanceFinancial statements
Directors’ report continued
Corporate governance – compliance statement
The Company’s compliance with the Code is summarised in the Corporate Governance section of this Annual Report and Accounts
on pages 47 to 49.
The Company confirms, in accordance with the principle of ‘comply or explain’, that the Board considers that the Company has complied
with the principles and provisions as set out in the Code throughout the year ended 31 December 2017. With regard to the diversity policy
for the Group and its implementation please see the report of the Nomination and Corporate Governance Committee, specifically page 56.
Donations
In June 2017 the Company made a cash donation of $702,358 to the Lancashire Foundation.
The Foundation owns 330,713 common shares in the Company and during the 2017 calendar year received dividends of £39,090 declared on
those shares.
Lancashire established the Lancashire Foundation as a Bermuda charitable trust in 2007, with the aim of creating a trust for the benefit
of charitable causes in Bermuda, the UK and worldwide. During 2012, the assets of the Lancashire Foundation were transferred to the
Lancashire Foundation charitable trust established in England and Wales and registered with the Charity Commission. The Lancashire
Foundation’s trustees are two senior employees and a subsidiary Non-Executive Director. The Trustees make donations following
recommendations made by the Company’s Donations Committee consisting of some of the Group’s employees.
A summary of the work of the Lancashire Foundation during 2017 can be found in the Corporate Responsibility section on pages 36 to 41.
The Group did not make any political donations or expenditure during 2017 or 2016.
Health and safety
The Group considers the health and safety of its employees to be a management responsibility equal to that of any other function.
The Group operates in compliance with health and safety legislative requirements in Bermuda and the UK.
Greenhouse gas emissions
The Group’s greenhouse gas emissions are detailed in the Corporate Responsibility section on page 39.
Employees
The Group is an equal opportunity employer, and does not tolerate unfair discrimination, bullying or harassment of any kind in any area
of employment or corporate life. The Group believes that education and training for employees is a continuous process and employees are
encouraged to discuss training needs with their managers. The Group’s health and safety, equal opportunities, training and other policies,
including labour standards, working conditions and benefits, are available to all employees in the staff handbook, which is available on the
Group’s intranet and provided to all new staff during their induction.
Creditor payment policy
The Group aims to pay all creditors promptly and in accordance with contractual and legal obligations.
Financial instruments and risk exposures
Information regarding the Group’s risk exposures is included in the ERM report on pages 31 to 33 and in the risk disclosures section
on pages 100 to 125 of the consolidated financial statements. The Group’s use of derivative financial instruments can be found on
pages 114 to 116.
Accounting standards
The Group’s consolidated financial statements are prepared in accordance with accounting principles generally accepted under IFRS as
adopted by the European Union. Where IFRS is silent, as it is in respect of certain aspects relating to the measurement of insurance products,
the IFRS framework allows reference to another comprehensive body of accounting principles. In such instances, the Group’s management
determines appropriate measurement bases, to provide the most useful information to users of the consolidated financial statements, using
their judgement and considering U.S. GAAP.
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82
Lancashire Holdings Limited | Annual Report & Accounts 2017
Lancashire Holdings Limited | Annual Report & Accounts 2017
Directors’ report continued
Corporate governance – compliance statement
on pages 47 to 49.
The Company’s compliance with the Code is summarised in the Corporate Governance section of this Annual Report and Accounts
The Company confirms, in accordance with the principle of ‘comply or explain’, that the Board considers that the Company has complied
with the principles and provisions as set out in the Code throughout the year ended 31 December 2017. With regard to the diversity policy
for the Group and its implementation please see the report of the Nomination and Corporate Governance Committee, specifically page 56.
Donations
those shares.
In June 2017 the Company made a cash donation of $702,358 to the Lancashire Foundation.
The Foundation owns 330,713 common shares in the Company and during the 2017 calendar year received dividends of £39,090 declared on
Lancashire established the Lancashire Foundation as a Bermuda charitable trust in 2007, with the aim of creating a trust for the benefit
of charitable causes in Bermuda, the UK and worldwide. During 2012, the assets of the Lancashire Foundation were transferred to the
Lancashire Foundation charitable trust established in England and Wales and registered with the Charity Commission. The Lancashire
Foundation’s trustees are two senior employees and a subsidiary Non-Executive Director. The Trustees make donations following
recommendations made by the Company’s Donations Committee consisting of some of the Group’s employees.
A summary of the work of the Lancashire Foundation during 2017 can be found in the Corporate Responsibility section on pages 36 to 41.
The Group did not make any political donations or expenditure during 2017 or 2016.
Health and safety
The Group considers the health and safety of its employees to be a management responsibility equal to that of any other function.
The Group operates in compliance with health and safety legislative requirements in Bermuda and the UK.
The Group’s greenhouse gas emissions are detailed in the Corporate Responsibility section on page 39.
Greenhouse gas emissions
Employees
The Group is an equal opportunity employer, and does not tolerate unfair discrimination, bullying or harassment of any kind in any area
of employment or corporate life. The Group believes that education and training for employees is a continuous process and employees are
encouraged to discuss training needs with their managers. The Group’s health and safety, equal opportunities, training and other policies,
including labour standards, working conditions and benefits, are available to all employees in the staff handbook, which is available on the
Group’s intranet and provided to all new staff during their induction.
Creditor payment policy
The Group aims to pay all creditors promptly and in accordance with contractual and legal obligations.
Financial instruments and risk exposures
Information regarding the Group’s risk exposures is included in the ERM report on pages 31 to 33 and in the risk disclosures section
on pages 100 to 125 of the consolidated financial statements. The Group’s use of derivative financial instruments can be found on
pages 114 to 116.
Accounting standards
The Group’s consolidated financial statements are prepared in accordance with accounting principles generally accepted under IFRS as
adopted by the European Union. Where IFRS is silent, as it is in respect of certain aspects relating to the measurement of insurance products,
the IFRS framework allows reference to another comprehensive body of accounting principles. In such instances, the Group’s management
determines appropriate measurement bases, to provide the most useful information to users of the consolidated financial statements, using
their judgement and considering U.S. GAAP.
Annual General Meeting
The notice of the 2018 AGM, to be held on 2 May 2018 at the Company’s head office, 29th Floor, 20 Fenchurch Street, London EC3M 3BY,
UK, is contained in a separate circular to shareholders which is made available to shareholders at the same time as this Annual Report and
Accounts. The notice of the AGM is also available on the Company’s website.
Electronic and web communications
Provisions of the Bermuda Companies Act 1981 enable companies to communicate with shareholders by electronic and/or website
communications. The Company will notify shareholders (either in writing or by other permitted means) when a relevant document
or other information is placed on the website and a shareholder may request a hard copy version of the document or information.
Going concern and viability statement
The Business Review section on pages 24 to 30 sets out details of the Group’s financial performance, capital management, business
environment and outlook. In addition, further discussion of the principal risks and material uncertainties affecting the Group can be found
on pages 34 and 35. Starting on page 100, the risk disclosures section of the consolidated financial statements sets out the principal risks to
which the Group is exposed, including insurance, market, liquidity, credit, operational and strategic, together with the Group’s policies for
monitoring, managing and mitigating its exposures to these risks. The Board considers annually and on a rolling basis a three-year strategic
plan for the business which the Company progressively implements via a detailed three-year business plan considered by the Board at the
November and February meetings. A three-year plan period aligns to the short-tail nature of the Group’s liabilities and the agility in the
business model, allowing the Group to adapt capital and solvency quickly in response to market cycles, events and opportunities. This is
consistent with the outlook period in the Group’s 2018 ORSA report. The three-year strategic plan was last approved by the Board in July
2017 and the detailed business plan was approved by the Board at the November 2017 meeting. The Board receives quarterly reports from
the Group CRO and sets, approves and monitors risk tolerances for the business. The Board will receive the Group’s 2018 ORSA report
during the first quarter 2018 for review and challenge.
During 2017, the Board carried out a robust assessment of the principal risks facing the Group, including those that would threaten its
business model, future performance, solvency or liquidity. As part of this assessment the business plan was stressed for a number of scenarios
and the impact on capital (on both an IFRS and Solvency II basis) evaluated. The Directors believe that the Group is well placed to manage
its business risks successfully, having taken into account the current economic outlook. Accordingly, the Board believes that, taking into
account the Group’s current position, and subject to the principal risks faced by the business, the Group will be able to continue in operation
and to meet its liabilities as they fall due for the period up to 31 December 2020, being the period considered under the Group’s current
three-year business plan and the Group’s 2018 ORSA report.
The Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due
over the period to 31 December 2020. Accordingly, the Board has adopted and continues to consider appropriate the going concern basis in
preparing the Annual Report and Accounts.
Auditors
Resolutions will be proposed at the Company’s 2018 AGM to re-appoint KPMG LLP as the Company’s auditors and to authorise the Directors
to set the auditors’ remuneration.
Disclosure of information to the auditors
Each of the persons who is a Director at the date of approval of this Annual Report and Accounts confirms that:
• so far as the Director is aware, there is no relevant audit information of which the Company’s auditors are unaware; and
• the Director has taken all the steps that he or she ought to have taken as a Director in order to make himself or herself aware of any
relevant audit information and to establish that the Company’s auditors are aware of that information.
Approved by the Board of Directors and signed on behalf of the Board.
Christopher Head
Company Secretary
14 February 2018
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Lancashire Holdings Limited | Annual Report & Accounts 2017
www.lancashiregroup.com
www.lancashiregroup.com
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83
OverviewStrategyPerformanceGovernanceFinancial statements
Statement of Directors’ responsibilities
The Directors are responsible for preparing the Annual Report and Accounts and the Group’s consolidated financial statements in
accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year that give a true and fair view of the state of
affairs of the Group and of the profit or loss of the Group for that year. The consolidated financial statements have been prepared in
accordance with IFRS. Where IFRS is silent, as it is in respect of certain aspects relating to the measurement of insurance products, U.S.
GAAP is considered. Further detail on the basis of preparation is described in the consolidated financial statements. In preparing the
consolidated financial statements, the Directors are required to:
• select suitable accounting policies and apply them consistently;
• make judgements and accounting estimates that are reasonable and prudent;
• state whether they have been prepared in accordance with IFRS;
• state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the
Group’s consolidated financial statements;
• provide additional disclosures where compliance with the specific requirements of IFRS are considered to be insufficient to enable users to
understand the impact of particular transactions, events and conditions on the financial position and performance; and
• prepare the consolidated financial statements on the going concern basis unless it is inappropriate to presume that the Group will
continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s transactions and
disclose with reasonable accuracy at any time the financial position of the Group, and enable them to ensure that the consolidated financial
statements comply with applicable laws and regulations. They are also responsible for safeguarding the assets of the Group and hence for
taking reasonable steps for the prevention and detection of fraud and other irregularities.
Directors’ responsibility statement
The Directors confirm that to the best of their knowledge:
1. the consolidated financial statements, prepared in accordance with IFRS, give a true and fair view of the assets, liabilities, financial
position and profit of the Group;
2. the Board considers the Annual Report and Accounts, taken as a whole, are fair, balanced and understandable and provide
the information necessary for shareholders to assess the Group’s position and performance, business model and strategy; and
3. the Strategy and the Business Review sections of this Annual Report and Accounts include a fair review of the development and
performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that
the Group faces.
Legislation in Bermuda governing the preparation and dissemination of the consolidated financial statements may differ from legislation
in other jurisdictions. In addition, the rights of shareholders under Bermuda law may differ from those for shareholders of companies
incorporated in other jurisdictions.
By order of the Board
14 February 2018
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Lancashire Holdings Limited | Annual Report & Accounts 2017
Independent auditors’ report to the members of Lancashire Holdings Limited
1 Our opinion is unmodified
We have audited the consolidated financial statements of Lancashire Holdings Limited (“the Group”) for the year ended 31 December 2017
which comprise the consolidated balance sheet as at 31 December 2017, the consolidated statements of comprehensive (loss) income,
changes in shareholders’ equity and cash flows for the year then ended, and the related notes, including the accounting policies.
In our opinion the consolidated financial statements:
• give a true and fair view of the state of the Group’s affairs as at 31 December 2017 and of its loss for the year then ended; and
• have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities
are described below. We have fulfilled our ethical responsibilities under, and are independent of the Group in accordance with, UK ethical
requirements including the FRC Ethical Standard as applied to listed entities. We believe that the audit evidence we have obtained is a
sufficient and appropriate basis for our opinion.
2 Key audit matters: our assessment of risks of material misstatement
Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the consolidated financial
statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including
those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the
engagement team. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in
forming our opinion thereon, and we do not provide a separate opinion on these matters.
www.lancashiregroup.com
www.lancashiregroup.com
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OverviewStrategyPerformanceGovernanceFinancial statements
Independent auditors’ report to the members of Lancashire Holdings Limited continued
In arriving at our audit opinion above, the key audit matters, in decreasing order of audit significance, were as follows:
Valuation of gross and net insurance contract liabilities for losses and loss adjustment expenses
($933.5m gross, $649.4m net; 2016: $679.8m gross, $543.1m net)
Refer to page 51 (Audit Committee report), page 97 (accounting policy) and pages 140 to 142 (financial disclosures)
Risk
Response
The Group maintains reserves to cover the estimated
ultimate cost of settling all losses and loss adjustment
expenses arising from events which have occurred up
to the balance sheet date, regardless of whether those
losses have been reported to the Group.
We have used our own actuarial specialists to assist us in performing our
procedures in this area.
Our procedures included:
• Methodology choice
Subjective valuation
The valuation of loss reserves is a complex process
which requires the exercise of significant judgement. Key
judgements relate to the assumptions applied in setting the
estimates of both the gross and net liabilities that have been
incurred but not reported, and assessing the evidence for
the release or strengthening of provisions for claims.
We also consider there to be greater judgement associated
with reserves held for classes of business where losses tend
to relate to low frequency high severity events, which limits
the availability of historical loss data for use in calculating
expected ultimate losses. For these classes in particular,
there is a greater level of required judgement in estimating
the initial expected loss ratios in the most recent
underwriting years.
Assessing and challenging the reserving methodology (on a gross basis and
net of outwards reinsurance) based on our knowledge and understanding
of the reserving policy within the Group. This has also involved comparing
the Group’s reserving methodology with industry practice and
understanding the rationale for key differences.
• Historical experience
Challenging the quality of the Group’s historical reserving estimates by
monitoring the development of losses against initial estimates.
• Independent re-performance
Applying our own assumptions, across all classes of business, to perform re-
projections on the insurance contract liabilities for loss and loss adjustment
expenses on both a gross and net basis and comparing these to the Group’s
projected results. Where there were significant variances in the results, we
have challenged the Group’s assumptions. Our independent re-projections
focussed on classes of business where losses tend to relate to low frequency
high severity events.
• Benchmarking assumptions
Assessing and challenging the reserving assumptions by comparing
the Group’s loss experience to peers in the market, on a gross and net
basis, including on a contract by contract basis for large loss and
catastrophe events.
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Lancashire Holdings Limited | Annual Report & Accounts 2017
Independent auditors’ report to the members of Lancashire Holdings Limited continued
Risk
Response
The Group maintains reserves to cover the estimated
We have used our own actuarial specialists to assist us in performing our
ultimate cost of settling all losses and loss adjustment
procedures in this area.
expenses arising from events which have occurred up
to the balance sheet date, regardless of whether those
losses have been reported to the Group.
Our procedures included:
• Methodology choice
Subjective valuation
The valuation of loss reserves is a complex process
which requires the exercise of significant judgement. Key
judgements relate to the assumptions applied in setting the
estimates of both the gross and net liabilities that have been
incurred but not reported, and assessing the evidence for
Assessing and challenging the reserving methodology (on a gross basis and
net of outwards reinsurance) based on our knowledge and understanding
of the reserving policy within the Group. This has also involved comparing
the Group’s reserving methodology with industry practice and
understanding the rationale for key differences.
• Historical experience
the release or strengthening of provisions for claims.
Challenging the quality of the Group’s historical reserving estimates by
We also consider there to be greater judgement associated
with reserves held for classes of business where losses tend
• Independent re-performance
monitoring the development of losses against initial estimates.
to relate to low frequency high severity events, which limits
Applying our own assumptions, across all classes of business, to perform re-
the availability of historical loss data for use in calculating
expected ultimate losses. For these classes in particular,
projections on the insurance contract liabilities for loss and loss adjustment
expenses on both a gross and net basis and comparing these to the Group’s
there is a greater level of required judgement in estimating
projected results. Where there were significant variances in the results, we
the initial expected loss ratios in the most recent
underwriting years.
have challenged the Group’s assumptions. Our independent re-projections
focussed on classes of business where losses tend to relate to low frequency
high severity events.
• Benchmarking assumptions
Assessing and challenging the reserving assumptions by comparing
the Group’s loss experience to peers in the market, on a gross and net
basis, including on a contract by contract basis for large loss and
catastrophe events.
In arriving at our audit opinion above, the key audit matters, in decreasing order of audit significance, were as follows:
Valuation of gross and net insurance contract liabilities for losses and loss adjustment expenses
($933.5m gross, $649.4m net; 2016: $679.8m gross, $543.1m net)
Premiums which are estimated or earned based on non-standard profiles, included in gross premiums written
(2017: $591.6m, 2016: $633.9m)
Refer to page 51 (Audit Committee report), page 96 (accounting policy) and pages 102 to 106 (financial disclosures)
Refer to page 51 (Audit Committee report), page 97 (accounting policy) and pages 140 to 142 (financial disclosures)
Risk
Subjective estimate
Pricing for certain contracts is based on a best estimate of
ultimate premiums as a result of premiums being based upon
future events which are unknown at the balance sheet date.
Judgement is involved in determining the ultimate estimates
in order to establish the appropriate premium value and,
ultimately, the cash to be received. As updated information
is received over the life of the contract, adjustments are
made to the premium recognised.
There is also judgement required in determining the
appropriate earnings profile to be applied to each contract,
particularly where standard (straight line over the contract
period) earning profiles are not applied.
Response
Our procedures included:
• Control operation
Testing the design, implementation and operating effectiveness of
key controls over the periodic review of premium estimates booked.
• Historical comparisons
Performing procedures to understand the development of estimated
premium income by comparing the Group’s estimated premium
income to actual premium income once received and verifying
actual premium income back to source documentation for a
sample of policies.
• Assessing application
Assessing the appropriateness of non-standard earnings profiles
applied in the context of the type of contracts being written and
practice across the market.
3 Our application of materiality and an overview of the scope of our audit
Materiality for the consolidated financial statements as a whole was set at $7.0 million, determined with reference to a benchmark of
normalised profit before tax of $139.2 million, of which it represents 5.0 per cent. This was computed by averaging the last five years of profit
before tax to allow for fluctuations in the business cycle.
We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding $0.3 million, in addition to
other identified misstatements that warranted reporting on qualitative grounds.
We subjected 8 of the 9 components, including the parent company, UK insurance company, Bermuda insurance company and Lloyd’s
operations to full scope audits for group reporting purposes. Including the audit of the consolidation adjustments our scope covered
100 per cent of gross premiums written, loss before tax and total assets.
The work on 7 of the 8 components was performed by component auditors and the other one, which was the parent company, was
performed by the Group audit team. The Group audit team instructed the component auditors, based in the UK and Bermuda, as to
the significant areas to be covered, including the relevant risks detailed above and the information to be reported back. The Group audit
team approved the component materialities, which ranged from $9,500 to $3.8 million having regard to the size and risk profile of the
various components across the Group. The Group audit team visited all component locations in Bermuda and the UK. Video and telephone
conference meetings were also held with these component auditors. At these visits and meetings, the findings reported to the Group audit
team were discussed in more detail, and any further work required by the Group audit team was then performed by the component auditors.
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Lancashire Holdings Limited | Annual Report & Accounts 2017
www.lancashiregroup.com
www.lancashiregroup.com
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OverviewStrategyPerformanceGovernanceFinancial statements
Independent auditors’ report to the members of Lancashire Holdings Limited continued
4 We have nothing to report on going concern
We are required to report to you if we have anything material to add or draw attention to in relation to the Directors’ statement on page 83 of
the Annual Report and Accounts on the use of the going concern basis of accounting with no material uncertainties that may cast significant
doubt over the Group’s use of that basis for a period of at least twelve months from the date of approval of the financial statements.
We have nothing to report in this respect.
5 We have nothing to report on the other information in the Annual Report and Accounts
The Directors are responsible for the other information presented in the Annual Report and Accounts. Our opinion on the consolidated
financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated
below, any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the
information therein is materially misstated or inconsistent with the consolidated financial statements or our audit knowledge. Based solely on
that work we have not identified material misstatements in the other information.
Directors’ Remuneration Report
In addition to our audit of the consolidated financial statements, the Directors have engaged us to audit the information in the Directors’
Remuneration Report that is described as having been audited, which the Directors have decided to prepare as if the Company were required
to comply with the requirements of Schedule 8 to The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations
2008 (SI 2008 No. 410) made under the UK Companies Act 2006.
In our opinion the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the UK
Companies Act 2006, as if those requirements applied to the Company.
Disclosures of principal risks and longer-term viability
Based on the knowledge we acquired during our consolidated financial statements audit, we have nothing material to add or draw attention
to in relation to:
• the Directors’ confirmation within the going concern and viability statement on page 83 that they have carried out a robust assessment of
the principal risks facing the Group, including those that would threaten its business model, future performance, solvency and liquidity;
• the Risk Disclosures describing these risks and explaining how they are being managed and mitigated; and
• the Directors’ explanation in the going concern and viability statement of how they have assessed the prospects of the Group, over what
period they have done so and why they considered that period to be appropriate, and their statement as to whether they have a reasonable
expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment,
including any related disclosures drawing attention to any necessary qualifications or assumptions.
Corporate governance disclosures
We are required to report to you if:
• we have identified material inconsistencies between the knowledge we acquired during our consolidated financial statements audit and
the Directors’ statement that they consider that the Annual Report and Accounts taken as a whole is fair, balanced and understandable
and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy; or
• the section of the Annual Report and Accounts describing the work of the Audit Committee does not appropriately address matters
communicated by us to the Audit Committee.
We are required to report to you if the Corporate Governance Statement does not properly disclose a departure from the eleven provisions of
the UK Corporate Governance Code specified by the Listing Rules for our review.
We have nothing to report in these respects.
88
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Lancashire Holdings Limited | Annual Report & Accounts 2017
Independent auditors’ report to the members of Lancashire Holdings Limited continued
4 We have nothing to report on going concern
We are required to report to you if we have anything material to add or draw attention to in relation to the Directors’ statement on page 83 of
the Annual Report and Accounts on the use of the going concern basis of accounting with no material uncertainties that may cast significant
doubt over the Group’s use of that basis for a period of at least twelve months from the date of approval of the financial statements.
We have nothing to report in this respect.
5 We have nothing to report on the other information in the Annual Report and Accounts
The Directors are responsible for the other information presented in the Annual Report and Accounts. Our opinion on the consolidated
financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated
below, any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the
information therein is materially misstated or inconsistent with the consolidated financial statements or our audit knowledge. Based solely on
that work we have not identified material misstatements in the other information.
In addition to our audit of the consolidated financial statements, the Directors have engaged us to audit the information in the Directors’
Remuneration Report that is described as having been audited, which the Directors have decided to prepare as if the Company were required
to comply with the requirements of Schedule 8 to The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations
2008 (SI 2008 No. 410) made under the UK Companies Act 2006.
In our opinion the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the UK
Companies Act 2006, as if those requirements applied to the Company.
6 Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on page 84, the Directors are responsible for: the preparation and fair presentation of the
consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the European Union; such
internal control as they determine is necessary to enable the preparation of the consolidated financial statements that are free from material
misstatement, whether due to fraud or error; assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters
related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Group or to cease
operations, or have no realistic alternative but to do so.
Auditors’ responsibilities
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue our opinion in an auditors’ report. Reasonable assurance is a high level of
assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when
it exists. Misstatements can arise from fraud, other irregularities or error and are considered material if, individually or in aggregate, they
could reasonably be expected to influence the economic decisions of users taken on the basis of the consolidated financial statements.
Directors’ Remuneration Report
A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities.
7 The purpose of our audit work and to whom we owe our responsibilities
This report is made solely to the Company’s members, as a body, in accordance with section 90 of the Bermuda Companies Act 1981 and
the terms of our engagement. Our audit work has been undertaken so that we might state to the Company’s members those matters we are
required to state to them in an auditors’ report, and the further matters we are required to state to them in accordance with the terms agreed
with the Company, and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone
other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed.
Disclosures of principal risks and longer-term viability
to in relation to:
Based on the knowledge we acquired during our consolidated financial statements audit, we have nothing material to add or draw attention
Rees Aronson
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
• the Directors’ confirmation within the going concern and viability statement on page 83 that they have carried out a robust assessment of
the principal risks facing the Group, including those that would threaten its business model, future performance, solvency and liquidity;
• the Risk Disclosures describing these risks and explaining how they are being managed and mitigated; and
• the Directors’ explanation in the going concern and viability statement of how they have assessed the prospects of the Group, over what
period they have done so and why they considered that period to be appropriate, and their statement as to whether they have a reasonable
expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment,
including any related disclosures drawing attention to any necessary qualifications or assumptions.
15 Canada Square
London, E14 5GL
14 February 2018
Corporate governance disclosures
We are required to report to you if:
• we have identified material inconsistencies between the knowledge we acquired during our consolidated financial statements audit and
the Directors’ statement that they consider that the Annual Report and Accounts taken as a whole is fair, balanced and understandable
and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy; or
• the section of the Annual Report and Accounts describing the work of the Audit Committee does not appropriately address matters
communicated by us to the Audit Committee.
We are required to report to you if the Corporate Governance Statement does not properly disclose a departure from the eleven provisions of
the UK Corporate Governance Code specified by the Listing Rules for our review.
We have nothing to report in these respects.
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Lancashire Holdings Limited | Annual Report & Accounts 2017
www.lancashiregroup.com
www.lancashiregroup.com
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OverviewStrategyPerformanceGovernanceFinancial statements
Consolidated statement of comprehensive (loss) income
For the year ended 31 December 2017
Gross premiums written
Outwards reinsurance premiums
Net premiums written
Change in unearned premiums
Change in unearned premiums on premiums ceded
Net premiums earned
Net investment income
Net other investment income
Net realised gains (losses) and impairments
Share of (loss) profit of associate
Other income
Net foreign exchange gains
Total net revenue
Insurance losses and loss adjustment expenses
Insurance losses and loss adjustment expenses recoverable
Net insurance losses
Insurance acquisition expenses
Insurance acquisition expenses ceded
Other operating expenses
Equity based compensation
Total expenses
Results of operating activities
Financing costs
(Loss) profit before tax
Tax credit
(Loss) profit for the year
(Loss) profit for the year attributable to:
Equity shareholders of LHL
Non-controlling interests
(Loss) profit for the year
Other comprehensive income to be reclassified to profit or loss in subsequent periods
Net change in unrealised gains/losses on investments
Other comprehensive income
Total comprehensive (loss) income for the year
Total comprehensive (loss) income attributable to:
Equity shareholders of LHL
Non-controlling interests
Total comprehensive (loss) income for the year
Notes
2
2
2
2
3
3
3
15
22
2, 12
2, 12
2, 4
2, 4
5, 6, 20
6
7
8
3, 10
2017
$m
591.6
(193.6)
398.0
22.6
7.3
427.9
30.5
1.2
9.1
(9.4)
17.2
2.3
478.8
538.0
(202.6)
335.4
120.7
(5.1)
83.6
(0.4)
534.2
(55.4)
17.5
(72.9)
2.3
(70.6)
(71.1)
0.5
(70.6)
4.9
4.9
(65.7)
(66.2)
0.5
(65.7)
2016
$m
633.9
(175.2)
458.7
25.7
3.7
488.1
29.8
6.9
(2.4)
5.1
20.5
4.4
552.4
212.2
(69.7)
142.5
135.1
(3.0)
98.5
10.7
383.8
168.6
18.2
150.4
3.9
154.3
153.8
0.5
154.3
4.1
4.1
158.4
157.9
0.5
158.4
(Loss) earnings per share
Basic
Diluted
21
21
($0.36)
($0.36)
$0.77
$0.76
90
Lancashire Holdings Limited | Annual Report & Accounts 2017
Consolidated balance sheet
As at 31 December 2017
Assets
Cash and cash equivalents
Accrued interest receivable
Investments
Inwards premiums receivable from insureds and cedants
Reinsurance assets
– Unearned premiums on premiums ceded
– Reinsurance recoveries
– Other receivables
Other receivables
Corporation tax receivable
Investment in associate
Property, plant and equipment
Deferred acquisition costs
Intangible assets
Total assets
Liabilities
Insurance contracts
– Losses and loss adjustment expenses
– Unearned premiums
– Other payables
Amounts payable to reinsurers
Deferred acquisition costs ceded
Other payables
Corporation tax payable
Deferred tax liability
Interest rate swap
Long-term debt
Total liabilities
Shareholders’ equity
Share capital
Own shares
Other reserves
Accumulated other comprehensive loss
Retained earnings
Total shareholders’ equity attributable to equity shareholders of LHL
Non-controlling interests
Total shareholders’ equity
Total liabilities and shareholders’ equity
Notes
9, 17
10, 11, 17
13
12
13
13
11, 15
16
12
14
17
17
18
18
19
10
22
2017
$m
2016
$m
256.5
6.1
1,654.6
297.9
41.2
284.1
20.7
42.4
–
59.4
2.6
76.7
153.8
2,896.0
933.5
350.9
40.7
65.5
2.5
48.0
2.8
16.5
2.0
326.3
1,788.7
100.7
(12.1)
866.2
(1.5)
153.6
1,106.9
0.4
1,107.3
2,896.0
308.8
6.6
1,648.4
270.0
33.9
136.7
16.5
43.6
1.1
49.7
5.3
81.5
153.8
2,755.9
679.8
373.5
37.4
52.7
0.4
61.0
–
18.7
3.7
320.9
1,548.1
100.7
(23.2)
881.6
(6.4)
254.6
1,207.3
0.5
1,207.8
2,755.9
The consolidated financial statements were approved by the Board of Directors on 14 February 2018 and signed on its behalf by:
Peter Clarke
Director/Chairman
Elaine Whelan
Director/CFO
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OverviewStrategyPerformanceGovernanceFinancial statements
Consolidated statement of changes in shareholders’ equity
For the year ended 31 December 2017
Balance as at 31 December 2015
Total comprehensive income for the year
Shares donated to trust
Distributed by trust
Dividends on common shares
Dividends paid to minority interest holders
Equity based compensation – expense
Balance as at 31 December 2016
Total comprehensive (loss) for the year
Shares donated to trust
Distributed by trust
Dividends on common shares
Dividends paid to minority interest holders
Equity based compensation – credit
Balance as at 31 December 2017
Notes
18, 19, 22
18, 19
18
22
19
18, 19, 22
18, 19
18
22
19
Share capital
$m
100.7
–
–
–
–
–
–
100.7
–
–
–
–
–
–
100.7
Own
shares
$m
(30.4)
–
0.6
6.6
–
–
–
(23.2)
–
1.2
9.9
–
–
–
(12.1)
Other reserves
$m
880.8
–
(0.6)
(9.5)
–
–
10.9
881.6
–
(1.2)
(13.8)
–
–
(0.4)
866.2
Accumulated
other
comprehensive
loss
$m
(10.5)
4.1
–
–
–
–
–
(6.4)
4.9
–
–
–
–
–
(1.5)
Shareholders’
equity
attributable
to equity
shareholders
of LHL
$m
1,220.3
157.9
–
(2.9)
(178.9)
–
10.9
1,207.3
(66.2)
–
(3.9)
(29.9)
–
(0.4)
1,106.9
Retained
earnings
$m
279.7
153.8
–
–
(178.9)
–
–
254.6
(71.1)
–
–
(29.9)
–
–
153.6
Non-
controlling
interests
$m
0.5
0.5
–
–
–
(0.5)
–
0.5
0.5
–
–
–
(0.6)
–
0.4
Total
shareholders’
equity
$m
1,220.8
158.4
–
(2.9)
(178.9)
(0.5)
10.9
1,207.8
(65.7)
–
(3.9)
(29.9)
(0.6)
(0.4)
1,107.3
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Lancashire Holdings Limited | Annual Report & Accounts 2017
Statement of consolidated cash flows
For the year ended 31 December 2017
Cash flows (used in) from operating activities
(Loss) profit before tax
Tax refunded (paid)
Depreciation
Interest expense on long-term debt
Interest and dividend income
Net amortisation of fixed maturity securities
Equity based compensation
Foreign exchange losses (gains)
Share of loss (profit) of associate
Net other investment income
Net realised (gains) losses and impairments
Net unrealised gains on interest rate swaps
Changes in operational assets and liabilities
– Insurance and reinsurance contracts
– Other assets and liabilities
Net cash flows (used in) from operating activities
Cash flows from investing activities
Interest and dividends received
Purchase of property, plant and equipment
Investment in associate
Purchase of investments
Proceeds on sale of investments
Net cash flows from investing activities
Cash flows used in financing activities
Interest paid
Dividends paid
Dividends paid to minority interest holders
Distributions by trust
Net cash flows used in financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of exchange rate fluctuations on cash and cash equivalents
Cash and cash equivalents at end of year
Notes
2017
$m
2016
$m
(72.9)
1.3
1.8
16.4
(37.1)
2.8
(0.4)
9.4
9.4
(1.2)
(9.1)
(1.7)
52.0
(9.4)
(38.7)
150.4
(1.3)
2.3
15.6
(38.5)
5.0
10.7
(2.3)
(5.1)
(6.9)
2.4
(1.1)
(71.7)
(10.6)
48.9
37.6
(0.6)
(19.1)
(1,196.1)
1,209.5
31.3
38.4
(0.4)
2.9
(1,214.0)
1,341.8
168.7
(16.3)
(29.9)
(0.6)
(3.9)
(50.7)
(58.1)
308.8
5.8
256.5
(15.4)
(178.9)
(0.5)
(2.9)
(197.7)
19.9
291.8
(2.9)
308.8
5
7
6
15
3
3
22
18
9
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OverviewStrategyPerformanceGovernanceFinancial statements Accounting policies
Summary of significant accounting policies
The basis of preparation, consolidation principles and significant accounting policies adopted in the preparation of these consolidated
financial statements are set out below.
Basis of preparation
The Group’s consolidated financial statements are prepared in accordance with accounting principles generally accepted under IFRS as
adopted by the European Union.
Where IFRS is silent, as it is in respect of certain aspects relating to the measurement of insurance products, the IFRS framework allows
reference to another comprehensive body of accounting principles. In such instances, the Group’s management determines appropriate
measurement bases, to provide the most useful information to users of the consolidated financial statements, using their judgement and
considering U.S. GAAP. In the course of preparing the consolidated financial statements, no judgements have been made in the process
of applying the Group’s accounting policies, other than those involving estimations as noted in the ‘Use of Estimates’ section below, that
have had a significant effect on amounts recognised in the consolidated financial statements.
All amounts, excluding share data or where otherwise stated, are in millions of U.S. dollars.
While a number of new or amended IFRS and IFRIC standards have recently been issued, there are no standards issued that have had a
material impact on the Group.
IFRS 15, Revenue from Contracts with Customers, is effective for annual periods beginning on or after 1 January 2018. IFRS 15 will not have a
material impact on the results and disclosures reported in the consolidated financial statements.
IFRS 17, Insurance Contracts, issued in May 2017, specifies the financial reporting for insurance contracts by an insurer. The new standard is
effective for annual periods beginning on or after 1 January 2021 and will include a number of significant changes regarding the measurement
and disclosure of insurance contracts both in terms of liability measurement and profit recognition. The Group will continue to assess the
impact the new standard will have on its results and the presentation and disclosure thereof.
IFRS 9, Financial Instruments: Classification and Measurement, has been issued but is not yet effective, and therefore has not yet been
adopted by the Group. The Group continues to apply IAS 39, Financial Instruments: Recognition and Measurement and classifies its fixed
maturity securities, equity securities and hedge funds as AFS or FVTPL. The new standard is effective for annual periods beginning on or after
1 January 2018, although it has been deferred for insurers until 1 January 2021 to align with the implementation date of IFRS 17. IFRS 9 is not
expected to have a material impact on the results and disclosures reported in the consolidated financial statements.
The consolidated balance sheet of the Group is presented in order of decreasing liquidity.
Use of estimates
The preparation of financial statements in conformity with IFRS requires the Group to make estimates and assumptions that affect the
reported and disclosed amounts at the balance sheet date and the reported and disclosed amounts of revenues and expenses during the
reporting period. Actual results may differ materially from the estimates made.
The most significant estimate made by management is in relation to losses and loss adjustment expenses. This is discussed on page 96 and 97
and also in the risk disclosures section from page 108. Estimates in relation to losses and loss adjustment expenses recoverable are discussed
on page 96.
Estimates are also made in determining the estimated fair value of certain financial instruments and equity compensation plans. The
estimation of the fair value of financial instruments is discussed on pages 97 and 98 and in note 10. Management judgement is applied
in determining impairment charges. The estimation of the fair value of equity based compensation awards granted is discussed in note 6.
Intangible assets are recognised on the acquisition of a subsidiary. The fair value of intangible assets arising from the acquisition of a subsidiary
is largely based on the estimated expected cash flows of the business acquired and the contractual rights of that business. The Group determines
whether indefinite life intangible assets are impaired at least on an annual basis. This requires an estimation of the recoverable amount of the
CGU to which the intangible assets are allocated. The assumptions made by management in performing impairment tests of intangible assets
are subject to estimation uncertainty. Details of the key assumptions used in the estimation of the recoverable amounts of the CGU are
contained in note 16.
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Basis of consolidation
The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as at and for the year ended
31 December 2017. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and
continue to be consolidated until the date when such control ceases. Intercompany balances, profits and transactions are eliminated. Control
is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect
those returns through its power over the investee.
The Group participates on two Syndicates at Lloyd’s, which are managed by the Group’s managing agent subsidiary. In view of the several
liability of underwriting members at Lloyd’s, the Group recognises its proportion of all the transactions undertaken by the Syndicates in which
it participates within its consolidated statement of comprehensive (loss) income. Similarly, the Group’s proportion of the Syndicates’ assets
and liabilities has been reflected in its consolidated balance sheet. This proportion is calculated by reference to the Group’s participation
as a percentage of each Syndicate’s total capacity for each year of account.
Subsidiaries’ accounting policies are generally consistent with the Group’s accounting policies. Where they differ, adjustments are made on
consolidation to bring accounting policies in line.
Associate
Investments, in which the Group has significant influence over the operational and financial policies of the investee, are recognised at cost
and thereafter accounted for using the equity method. Under this method, the Group records its proportionate share of income and loss
from such investments in its consolidated statement of comprehensive (loss) income for the period. Adjustments are made to investment
in associate accounting policies, where necessary, in order to be consistent with the Group’s accounting policies.
Foreign currency translation
The functional currency, which is the currency of the primary economic environment in which operations are conducted, for all Group
entities is U.S. dollars. Items included in the financial statements of each of the Group’s entities are measured using the functional currency.
The consolidated financial statements are also presented in U.S. dollars.
Foreign currency transactions are recorded in the functional currency for each entity using the exchange rates prevailing at the dates of
the transactions, or at the average rate for the period when this is a reasonable approximation. Monetary assets and liabilities denominated
in foreign currencies are translated at period end exchange rates. The resulting exchange differences on translation are recorded in the
consolidated statement of comprehensive (loss) income in profit or loss. Non-monetary assets and liabilities carried at historical cost and
denominated in a foreign currency are translated at historic rates. Non-monetary assets and liabilities carried at estimated fair value and
denominated in a foreign currency are translated at the exchange rate at the date the estimated fair value was determined, with resulting
exchange differences recorded in the consolidated statement of comprehensive (loss) income in profit or loss.
Intangible assets
The cost of intangible assets acquired in a business combination is their fair value as at the date of acquisition. Following initial recognition,
intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. The useful lives of intangible
assets are assessed to be either finite or indefinite depending on the nature of the asset. Intangible assets with finite lives are amortised over
their useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. Intangible
assets with indefinite useful lives are tested for impairment at least annually at the CGU level by comparing the net present value of the future
earnings stream of the CGU to the carrying value of the intangible asset. Such intangible assets are not amortised. The useful life of an
intangible asset with an indefinite life is reviewed annually to determine whether the indefinite life assessment continues to be supportable.
Goodwill
Goodwill is deemed to have an indefinite life and, after initial recognition, is measured at cost less any accumulated impairment losses.
Goodwill is tested for impairment annually, or when events or changes in circumstances indicate that it might be impaired.
Syndicate participation rights
Syndicate participation rights purchased in a business combination are initially measured at fair value and are subsequently measured at cost
less any accumulated impairment losses. Syndicate participation rights are considered to have an indefinite life as they will provide benefits
over an indefinite future period and are therefore not subject to an annual amortisation charge. The value of the syndicate participation
rights is reviewed for impairment at least annually, or when events or changes in circumstances indicate that it might be impaired.
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OverviewStrategyPerformanceGovernanceFinancial statements Accounting policies continued
Insurance contracts
Classification
Insurance contracts are those contracts that transfer significant insurance risk at the inception of the contract. Contracts that do not transfer
significant insurance risk are accounted for as investment contracts. Insurance risk is transferred when an insurer agrees to compensate a
policyholder if a specified uncertain future event adversely affects the policyholder.
Premiums and acquisition costs
Premiums are first recognised as written at the later of a contract’s binding or inception date. The group writes both excess of loss and pro-rata
(proportional) contracts. For the majority of excess of loss contracts, premiums written are recorded based on the minimum and deposit
or flat premium, as defined in the contract. Subsequent adjustments to the minimum and deposit premium are recognised in the period in
which they are determined. For pro-rata contracts and excess of loss contracts where no deposit is specified in the contract, premiums written
are recognised based on estimates of ultimate premiums provided by the insureds or ceding companies. Initial estimates of premiums written
are recognised in the period in which the contract incepts, or the period in which the contract is bound if later. Subsequent adjustments,
based on reports of actual premium by the insureds or ceding companies, or revisions in estimates, are recorded in the period in which
they are determined.
Premiums written are earned rateably over the term of the underlying risk period of the insurance contract, except where the period of risk
differs significantly from the contract period. In these circumstances, premiums are recognised over the period of risk in proportion to the
amount of insurance protection provided. The portion of the premium related to the unexpired portion of the risk period is reflected in
unearned premiums.
Where contract terms require the reinstatement of coverage after an insured’s or ceding company’s loss, the estimated mandatory
reinstatement premiums are recorded as premiums written when a specific loss event occurs. Reinstatement premiums are not recorded
for losses included within the provision for IBNR that do not relate to a specific loss event.
Inwards premiums receivable from insureds and cedants are recorded net of commissions, brokerage, premium taxes and other levies on
premiums, unless the contract specifies otherwise. These balances are reviewed for impairment, with any impairment loss recognised as an
expense in the period in which it is determined.
Acquisition costs represent commissions, brokerage, profit commissions and other variable costs that relate directly to the successful securing
of new contracts and the renewing of existing contracts. They are generally deferred over the period in which the related premiums are
earned to the extent they are recoverable out of expected future revenue margins. All other acquisition costs are recognised as an expense
when incurred.
Outwards reinsurance
Outwards reinsurance premiums comprise the cost of reinsurance contracts entered into. Outwards reinsurance premiums are accounted
for in the period in which the contract incepts, or the period in which the contract is bound if later. The provision for the reinsurers’ share
of unearned premiums represents that part of reinsurance premiums ceded which are estimated to be earned in future financial periods.
Unearned reinsurance commissions are recognised as a liability using the same principles.
Any amounts recoverable from reinsurers are estimated using the same methodology as for the underlying losses. The Group monitors the
creditworthiness of its reinsurers on an ongoing basis and assesses any reinsurance assets for impairment, with any impairment loss recognised
as an expense in the period in which it is determined.
Losses
Losses comprise losses and loss adjustment expenses paid in the period and changes in the provision for outstanding losses and ACR,
including the provision for IBNR and related expenses. Losses and loss adjustment expenses are charged to income as they are incurred.
A portion of the Group’s business is in classes with high attachment points of coverage, including property catastrophe excess of loss.
Reserving for losses in such programmes is inherently complicated in that losses in excess of the attachment level of the Group’s policies are
characterised by high severity and low frequency and other factors which could vary significantly as losses are settled. This limits the volume
of industry loss experience available from which to reliably predict ultimate losses following a loss event.
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Losses and loss adjustment expenses represent the estimated ultimate cost of settling all losses and loss adjustment expenses arising from
events which have occurred up to the balance sheet date, including a provision for IBNR. The Group does not discount its liabilities for
unpaid losses. Outstanding losses are initially set on the basis of reports of losses received from third parties. ACRs are determined where the
Group’s best estimate of the reported loss is greater than that reported. Estimated IBNR reserves may also consist of a provision for additional
development in excess of losses reported by insureds or ceding companies, as well as a provision for losses which have occurred but which have
not yet been reported by insureds or ceding companies. IBNR reserves are set on a best estimate basis and are estimated by management using
various actuarial methods as well as a combination of the Group’s own loss experience, historical insurance industry loss experience,
underwriters’ experience, estimates of pricing adequacy trends and management’s professional judgement.
The estimation of the ultimate liability arising is a complex process which incorporates a significant amount of judgement. It is reasonably
possible that uncertainties inherent in the reserving process, delays in insureds or ceding companies reporting losses to the Group, together
with the potential for unforeseen adverse developments, could lead to a material change in losses and loss adjustment expenses.
Liability adequacy tests
At each balance sheet date, the Group performs a liability adequacy test using current best estimates of future cash outflows generated by its
insurance contracts, plus any investment income thereon. If, as a result of these tests, the carrying amount of the Group’s insurance liabilities is
found to be inadequate, the deficiency is charged to income for the period, initially by writing off deferred acquisition costs and subsequently
by establishing a provision.
Financial instruments
Cash and cash equivalents
Cash and cash equivalents are carried in the consolidated balance sheet at amortised cost and include cash in hand, deposits held on call
with banks and other short-term highly liquid investments with a maturity of three months or less at the date of purchase. Carrying amounts
approximate fair value due to the short-term nature and high liquidity of the instruments.
Interest income earned on cash and cash equivalents is recognised on the effective interest rate method. The carrying value of accrued interest
income approximates estimated fair value due to its short-term nature and high liquidity.
Investments
The Group’s fixed maturity and equity securities are quoted or unquoted investments that are classified as AFS or at FVTPL and are carried at
estimated fair value. The classification of the Group’s financial assets is determined at the time of initial purchase and depends on the nature
of the investment. A financial asset is classified at FVTPL if it is managed and evaluated on a fair value basis and if acquired principally for the
purpose of selling in the short-term, or if it forms part of a portfolio of financial assets in which there is evidence of short-term profit taking.
Equity securities classified as AFS are those that are neither classified as held for trading nor designated at FVTPL. Fixed maturity securities
classified as AFS are those that are intended to be held for an indefinite period of time and that may be sold in response to needs for liquidity
or in response to changes in market conditions.
The Group’s hedge funds are unquoted investments classified at FVTPL and are carried at estimated fair value. Estimated fair values are
determined using a combination of the most recent NAVs provided by each fund’s independent administrator and the estimated performance
provided by each hedge fund manager.
Regular way purchases and sales of investments are recognised at estimated fair value including, in the case of investments not carried
at FVTPL, transaction costs attributable to the acquisition of that investment on the trade date and are subsequently carried at estimated
fair value. The estimated fair values of quoted and unquoted investments are determined based on bid prices from recognised exchanges,
broker-dealers, recognised indices or pricing vendors. Unrealised gains and losses from changes in the estimated fair value of AFS investments
are included in accumulated other comprehensive loss in shareholders’ equity. Changes in estimated fair value of investments classified at
FVTPL are recognised in current period net other investment income.
Investments are derecognised when the Group has transferred substantially all of the risks and rewards of ownership. On derecognition of
an AFS investment, previously recorded unrealised gains and losses are removed from accumulated other comprehensive loss in shareholders’
equity and included in current period profit or loss. Realised gains and losses are included in net investment income in the period in which
they arise.
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Amortisation and accretion of premiums and discounts on AFS fixed maturity securities are calculated using the effective interest rate method
and are recognised in current period net investment income. Interest income is recognised on the effective interest rate method. The carrying
value of accrued interest income approximates estimated fair value due to its short-term nature and high liquidity. Dividends on equity
securities are recorded as income on the date the dividends become payable to the holders of record.
The Group regularly reviews the carrying value of its AFS investments for evidence of impairment. An investment is impaired if its carrying
value exceeds the estimated fair value and there is objective evidence of impairment to the asset. Such evidence would include a prolonged
decline in estimated fair value below cost or amortised cost, where other factors, such as expected cash flows, do not support a recovery in
value. If an impairment is deemed appropriate, the difference between cost or amortised cost and estimated fair value is removed from
accumulated other comprehensive loss in shareholders’ equity and charged to current period profit or loss. Impairment losses on fixed
maturity securities may be subsequently reversed through profit or loss while impairment losses on equity securities are not subsequently
reversed through profit or loss.
Derivative financial instruments
Derivatives are classified as financial assets or liabilities at FVTPL and are recognised at estimated fair value on the date a contract is entered
into, the trade date, and are subsequently carried at estimated fair value. Derivative instruments with a positive estimated fair value are
recorded as derivative financial assets and those with a negative estimated fair value are recorded as derivative financial liabilities.
Derivative financial instruments include exchange-traded future and option contracts, forward foreign currency contracts, interest rate
swaps, credit default swaps and interest rate swaptions. They derive their value from the underlying instrument and are subject to the same
risks as that underlying instrument, including liquidity, credit and market risk. Estimated fair values are based on exchange or broker-dealer
quotations, where available, or discounted cash flow models, which incorporate the pricing of the underlying instrument, yield curves and
other factors. Changes in the estimated fair value of instruments are recognised in profit or loss. The Group does not currently hold any
derivatives classified as hedging instruments. For discounted cash flow techniques, estimated future cash flows are based on management’s
best estimates and the discount rate used is an appropriate market rate.
Derivative financial assets and liabilities are offset and the net amount is reported in the consolidated balance sheet only to the extent there
is a legally enforceable right of offset and there is an intention to settle on a net basis, or to realise the assets and liabilities simultaneously.
Derivative financial assets and liabilities are derecognised when the Group has transferred substantially all of the risks and rewards of
ownership or the liability is discharged, cancelled or expired.
Other income
Fees are recognised in line with services provided. Profit commissions are recognised in line with the underlying performance. Contingent
profit commissions due on open years of account are recognised when it is virtually certain that they will be realised.
Long-term debt
Long-term debt is recognised initially at fair value, net of transaction costs incurred. Thereafter it is held at amortised cost, with the
amortisation calculated using the effective interest rate method. Derecognition occurs when the obligation has been extinguished.
Property, plant and equipment
Property, plant and equipment is carried at historical cost, less accumulated depreciation and any impairment in value. Depreciation
is calculated to write off the cost over the estimated useful economic life on a straight-line basis as follows:
IT equipment
Office furniture and equipment
Leasehold improvements
33% per annum
20% to 33% per annum
20% per annum
The assets’ residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each balance sheet date.
An item of property, plant or equipment is derecognised on disposal or when no future economic benefits are expected to arise from the
continued use of the asset.
Gains and losses on the disposal of property, plant and equipment are determined by comparing proceeds with the carrying amount of the
asset, and are included in the consolidated statement of comprehensive (loss) income. Costs for repairs and maintenance are charged to profit
or loss as incurred.
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Leases
Rentals payable under operating leases are charged to profit or loss on a straight-line basis over the lease term.
Employee benefits
Equity compensation plans
The Group currently operates an RSS under which nil-cost options have been granted. The fair value of the equity instruments granted
is estimated on the date of grant. The estimated fair value is recognised as an expense pro-rata over the vesting period of the instrument,
adjusted for the impact of any non-market vesting conditions. No adjustment to vesting assumptions is made in respect of market vesting
conditions.
At each balance sheet date, the Group revises its estimate of the number of RSS nil-cost options that are expected to become exercisable.
It recognises the impact of the revision of original estimates, if any, in the consolidated statement of comprehensive (loss) income, and a
corresponding adjustment is made to other reserves in shareholders’ equity over the remaining vesting period.
On exercise, the differences between the expense charged to the consolidated statement of comprehensive (loss) income and the actual cost
to the Group, if any, is transferred to other reserves.
Pensions
The Group operates a defined contribution plan. On payment of contributions to the plan there is no further obligation for the Group.
Contributions are recognised as employee benefits in the consolidated statement of comprehensive (loss) income in the period when
the services are rendered.
Tax
Income tax represents the sum of the tax currently payable and any deferred tax. The tax payable is calculated based on taxable profit for
the period using tax rates and tax laws enacted or substantively enacted at the year end reporting date and any adjustments to tax payable
in respect of prior periods. Taxable profit for the period can differ from that reported in the consolidated statement of comprehensive
(loss) income due to non-taxable income and certain items which are not tax deductible or which are deferred to subsequent periods.
Deferred tax is recognised on all temporary differences between the assets and liabilities in the consolidated balance sheet and their tax base,
except when the deferred tax liability arises from the initial recognition of goodwill. Deferred tax assets or liabilities are accounted for using
the balance sheet liability method. Deferred tax assets are recognised to the extent that realising the related tax benefit through future taxable
profits is likely and are reassessed each year for recognition.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and
when the deferred income taxes relate to the same fiscal authority.
Where the current estimated fair value of equity based compensation awards differs from the estimated fair value at the time of grant, adjusted
where applicable for dividends, the related corporation tax and deferred tax charge or credit is recognised directly in other reserves.
Own shares
Own shares include shares repurchased under share repurchase authorisations and held in treasury, plus shares repurchased and held in
trust, for the purposes of employee equity based compensation schemes. Own shares are deducted from shareholders’ equity. No gain or loss
is recognised on the purchase, sale, cancellation or issue of own shares and any consideration paid or received is recognised directly in equity.
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OverviewStrategyPerformanceGovernanceFinancial statements Risk disclosures
Risk disclosures: Introduction
The Group is exposed to risks from several sources. These include insurance risk, market risk, liquidity risk, credit risk, operational risk and
strategic risk. The primary risk to the Group is insurance risk.
The primary objective of the Group’s ERM framework is to ensure that the capital resources held are matched to the risk profile of the Group
and that the balance between risk and return is considered as part of all key business decisions. The Group has formulated, and keeps under
review, a risk appetite which is set by the Board of Directors. The Group’s appetite for risk will vary marginally from time to time to reflect the
potential risks and returns that present themselves. However, protecting the Group’s capital and providing investors with a superior risk-
adjusted return over the long term are constants. The risk appetite of the Group is central to how the business is run and permeates into the
risk appetites that the individual operating entity boards of directors have adopted. These risk appetites are expressed through detailed risk
tolerances at both a Group and an operating entity level. Risk tolerances represent the maximum amount of capital, generally on a modeled
basis, that the Group and its entities are prepared to expose to certain risks.
The Board of Directors is responsible for setting and monitoring the Group’s risk appetite and tolerances, whereas the individual entity
boards of directors are responsible for setting and monitoring entity level risk tolerances. All risk tolerances are subject to at least an annual
review and consideration by the respective boards of directors. The LHL Board and individual entity boards of directors review actual risk
levels versus tolerances, emerging risks and any risk learning events at least quarterly. In addition, on at least a monthly basis, management
reviews the output from SHARP in order to assess modeled potential losses against risk tolerances and ensure that risk levels are managed
in accordance with them.
Economic capital model
The foundation of the Lancashire Companies’ risk-based capital approach to decision making is their economic capital model, BLAST, which
is based on the widely accepted economic capital modeling tool, ReMetrica. Management uses BLAST primarily for monitoring its insurance
risks. However, BLAST is also used to monitor other risks including market, credit and operational risks.
BLAST covers the risks for LICL, LUK and Kinesis but does not cover Cathedral’s risks. Due to the particular requirements of Lloyd’s
regulations, Cathedral has its own internal model which is vetted by Lloyd’s as part of its own capital and solvency regulations. To formulate
an overall Group view of risk, exposures from Cathedral are combined with LICL, LUK and Kinesis.
BLAST produces data in the form of a stochastic distribution for all classes, including non-elemental classes. The distribution includes the
mean outcome and the result at various return periods, including very remote events. BLAST calculates projected financial outcomes for each
insurance class, as well as the overall portfolio including diversification credit. Diversification credit arises as individual risks are generally not
strongly correlated and are unlikely to all produce profits or losses at the same time. BLAST also measures the Group’s aggregate insurance
exposures. It therefore helps senior management and the Board of Directors to determine the level of capital required to meet the combined
risk from a wide range of categories. Assisted by BLAST, the Group seeks to achieve an improved risk-adjusted return over time.
BLAST is used in strategic underwriting decisions, as part of the Group’s annual business planning process, reforecasting and to assist in
portfolio optimisation, taking account of inwards business and all major reinsurance purchases. Management also utilises BLAST in assessing
the impact of strategic decisions on individual classes of business that the Group writes, or is considering writing, as well as the overall resulting
financial impact to the Group. BLAST output, covering all of the risk groups to which the Group is exposed, is reviewed, including the
anticipated loss curves, combined ratios and risk-adjusted profitability, to determine profitability and risk tolerance headroom by class.
The six primary risk categories, insurance risk, market risk, liquidity risk, credit risk, operational risk and strategic risk, are discussed in detail
on page 101 to 125.
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A. Insurance risk
The Group underwrites worldwide, predominantly short-tail, insurance and reinsurance contracts that transfer insurance risk, including
risks exposed to both natural and man-made catastrophes. The Group’s exposure in connection with insurance contracts is, in the event of
insured losses, whether premiums will be sufficient to cover the loss payments and expenses. Insurance and reinsurance markets are cyclical
and premium rates and terms and conditions vary by line of business depending on market conditions and the stage of the cycle. Market
conditions are impacted by capacity and recent loss events, and broader economic cycle impacts amongst other factors. The Group’s
underwriters assess likely losses using their experience and knowledge of past loss experience, industry trends and current circumstances.
This allows them to estimate the premiums sufficient to meet likely losses and expenses and desired levels of profitability consistent with
the Group’s risk-adjusted RoE targets.
The Group considers insurance risk at an individual contract level, at a segment level, a geographic level and at an aggregate portfolio level.
This ensures careful risk selection, limits on concentration and appropriate portfolio diversification are accomplished. The four principal
classes of business for the Group, excluding the Lloyd’s segment, are Property, Energy, Marine and Aviation. These classes, plus the Group’s
Lloyd’s segment, are deemed to be the Group’s five operating segments. The level of insurance risk tolerance per peril is set by the respective
boards of directors at both the LHL and individual entity level.
A number of controls are deployed to manage the amount of insurance exposure assumed:
• the Group has a rolling three-year strategic plan that helps establish the over-riding business goals that the Board of Directors aims
to achieve;
• a detailed business plan is produced annually, which includes expected premiums and combined ratios by class and considers risk-adjusted
profitability, capital usage and requirements. The plan is approved by the Board of Directors and is monitored, reviewed and updated on an
ongoing basis;
• for Cathedral, the Syndicate business forecast and business plan are subject to review and approval by Lloyd’s;
• BLAST, SHARP and Cathedral’s internal models are used to measure occurrence risks, aggregate risks and correlations between classes and
other non-insurance risks, and the outputs and assumptions from BLAST and SHARP are reviewed periodically by the RRC;
• each authorised class has a predetermined normal maximum line structure;
• each underwriter has a clearly defined limit of underwriting authority;
• the Group and individual operating entities have predetermined tolerances on probabilistic and deterministic losses of capital for certain
single events;
• risk levels versus tolerances are monitored on a regular basis;
• a daily underwriting call is held for LICL and LUK to peer review insurance proposals, opportunities and emerging risks;
• a daily post-binding review process with exception reporting to management based on underwriting authority operates at Cathedral;
• sophisticated pricing and aggregation models are utilised in certain areas of the underwriting process, and are updated frequently;
• BLAST and other modeling tools are deployed to model catastrophes and resultant losses to the portfolio and the Group; and
• reinsurance may be purchased to mitigate both frequency and severity of losses on a treaty or facultative basis and to improve
risk-adjusted RoE as modeled in BLAST.
Some of the Group’s business provides coverage for natural catastrophes (e.g. hurricanes, earthquakes, wildfires and floods) and is subject to
potential seasonal variation. A proportion of the Group’s business is exposed to large catastrophe losses in North America, Europe and Japan
as a result of windstorms. The level of windstorm activity, and landfall thereof, during the North American, European and Japanese wind
seasons may materially impact the Group’s loss experience. The North American and Japanese wind seasons are typically June to November
and the European wind season November to March. The Group also bears exposure to large losses arising from other non-seasonal natural
catastrophes, such as earthquakes, tsunamis, droughts, floods and tornadoes, from risk losses throughout the year and from war, terrorism and
political risk and other events. The Group’s associate bears exposure to catastrophe losses and any significant loss event could potentially result
in impairment in the value of the Group’s investment in associate.
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OverviewStrategyPerformanceGovernanceFinancial statements Risk disclosures continued
The Group’s exposures to certain peak zone elemental losses, as a percentage of tangible capital, including long-term debt, are shown below.
Net loss estimates are before income tax and net of reinstatement premiums and outwards reinsurance. The exposure to catastrophe losses
that would result in an impairment to the investment in associate is included in the figures below.
As at 31 December 2017
Zones
Gulf of Mexico1
Non-Gulf of Mexico – U.S.
California
Pan-European
Japan
Japan
Pacific North West
(1) Landing hurricane from Florida to Texas.
As at 31 December 2016
Zones
Gulf of Mexico1
Non-Gulf of Mexico – U.S.
California
Pan-European
Japan
Japan
Pacific North West
(1) Landing hurricane from Florida to Texas.
100 year return period
estimated net loss
250 year return period
estimated net loss
$m
% of tangible
capital
$m
% of tangible
capital
173.8
140.9
96.1
77.2
51.6
46.6
33.1
13.6
11.0
7.5
6.0
4.0
3.6
2.6
253.6
306.5
181.1
125.1
68.1
85.6
79.6
19.8
24.0
14.2
9.8
5.3
6.7
6.2
100 year return period
estimated net loss
250 year return period
estimated net loss
$m
% of tangible
capital
$m
% of tangible
capital
176.7
156.1
87.0
69.0
48.7
48.6
27.6
12.9
11.4
6.3
5.0
3.5
3.5
2.0
259.0
326.1
145.8
115.7
67.3
114.3
65.7
18.8
23.7
10.6
8.4
4.9
8.3
4.8
Perils
Hurricane
Hurricane
Earthquake
Windstorm
Typhoon
Earthquake
Earthquake
Perils
Hurricane
Hurricane
Earthquake
Windstorm
Typhoon
Earthquake
Earthquake
There can be no guarantee that the modeled assumptions and techniques deployed in calculating these figures are accurate. There could also
be an unmodeled loss which exceeds these figures. In addition, any modeled loss scenario could cause a larger loss to capital than the
modeled expectation.
Details of annual gross premiums written by geographic area of risks insured are provided below:
U.S. and Canada
Worldwide offshore
Worldwide, including the U.S. and Canada1
Europe
Far East
Worldwide, excluding the U.S. and Canada2
Middle East
Rest of world
Total
2017
2016
$m
177.6
162.5
98.6
38.9
27.9
11.5
6.9
67.7
591.6
%
30.0
27.5
16.7
6.6
4.7
1.9
1.2
11.4
100.0
$m
179.7
161.1
115.6
46.9
29.2
15.4
13.5
72.5
633.9
%
28.4
25.5
18.2
7.4
4.6
2.4
2.1
11.4
100.0
(1) Worldwide, including the U.S. and Canada, comprises insurance and reinsurance contracts that insure or reinsure risks in more than one geographic area.
(2) Worldwide, excluding the U.S. and Canada, comprises insurance and reinsurance contracts that insure or reinsure risks in more than one geographic area, but that
specifically exclude the U.S. and Canada.
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Details of annual gross premiums written by business segment are provided below:
Lloyd’s
Property
Energy
Marine
Aviation
Total
2017
2016
$m
207.3
198.0
101.8
67.6
16.9
591.6
%
35.0
33.5
17.2
11.4
2.9
100.0
$m
215.0
219.5
126.0
37.2
36.2
633.9
%
33.9
34.6
19.9
5.9
5.7
100.0
Further details of the gross premiums written and the risks associated with each of these five principal business segments are described on the
following pages.
I. Lloyd’s
Gross premiums written, for the year:
Property reinsurance
Property direct and facultative
Aviation and satellite
Marine cargo
Energy
Terrorism
Other
Total
2017
$m
88.5
56.1
25.0
22.5
10.8
4.4
–
207.3
2016
$m
88.6
56.1
24.3
21.2
14.9
6.3
3.6
215.0
Property reinsurance predominantly includes property catastrophe excess of loss, property per risk excess of loss and property retrocession
lines of business. Property catastrophe excess of loss and property per risk excess of loss provide protection for elemental and non-elemental
risks and are written on an excess of loss treaty basis within the U.S. and internationally. The U.S. property catastrophe excess of loss book
is particularly focused on regional clients. Property retrocession is written on an excess of loss basis through treaty arrangements. It provides
coverage for elemental risks when sold on a catastrophe basis and both elemental and non-elemental risks when sold on a per risk retrocession
basis. Protection is generally given on a regional basis and may cover specific property risks or all catastrophe perils. It is also generally written
on an UNL basis, meaning loss payments are linked to the ceding company’s own loss.
Property direct and facultative is a worldwide book of largely commercial property business, written both in the open market and under
delegated authorities. The account spans small individual locations to Fortune 500 accounts but with a bias towards small to medium sized
risks. Policies are generally provided both for non-elemental and elemental perils, although not all risks include both elemental and non-
elemental coverage. Coverage is generally written on a full value, primary or excess of loss basis, although the very largest accounts are
currently seldom written at the primary level.
Aviation and satellite includes aviation reinsurance, aviation war, general aviation and aviation satellite lines of business. Aviation reinsurance
provides excess of loss catastrophe cover to the insurers of the world’s major airlines and aircraft and aircraft manufacturers. This includes
cover for the aircraft themselves as well as losses arising from passenger and third-party liability claims against airlines and/or manufacturers.
Aviation war covers loss or damage to aviation assets from war, terrorism and similar causes. General aviation covers fixed wing and rotor wing
aircraft, typically with 50 passenger seats or less, and covers both commercial and private clients. A significant part of the aviation satellite
account is written through SATEC, a specialist underwriting agency, to which underwriting authority is delegated. Satellite insurance is
purchased by launch operators, satellite manufacturers and satellite operators to protect against launch or deployment failure or subsequent
failure in orbit. Policies are typically written for launch plus one year in orbit. Thereafter, orbit cover is normally provided on an annual basis.
Marine cargo is an international account and is written either on a direct basis or by way of reinsurance. It covers the (re)insurance of
commodities or goods in transit. Typically, transit cover is provided on an all-risks basis for marine perils for the full value of the goods
concerned, although higher value or capacity business may be written on a layered basis. Static cover is also provided for losses to cargo,
from both elemental and non-elemental causes, whilst static at points along its route. In addition, the cargo account can include specie
and fine art, vault risks, artwork on exhibition and marine war business relating to cargo in transit.
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OverviewStrategyPerformanceGovernanceFinancial statements Risk disclosures continued
Energy risks are written mostly on a direct basis and may be ground-up or for primary or excess layers on either a first loss or full value basis.
Worldwide offshore energy policies are typically package policies which may include physical damage, well control, business interruption and
third party liability sections. Coverage can include fire and explosion and elemental risks. Individual assets covered can be high-value and are
therefore mostly written on a subscription basis, meaning that coverage is placed with multiple risk carriers. Construction energy contracts
generally cover all risks of platforms, FPSO and drilling units under construction at yard and offshore, during towing and installation.
Onshore construction contracts are generally not written.
Terrorism business can be written either ground-up or for primary or excess layers, with cover provided for U.S. and worldwide property risks,
but typically excluding nuclear, chemical, biological and cyber coverage in most territories. Cover is generally provided to medium to large
commercial and industrial enterprises. Policies are typically written for scheduled locations and exposure is controlled by setting limits on
aggregate exposure within a ‘blast zone’ radius. The term of these contracts may be multi-year, reflecting the term of the underlying
exposures. Reinsurance may be purchased on a facultative or treaty basis.
Reinsurance may be purchased to reduce the exposure to large risk losses and large natural catastrophe losses in the U.S., Canada and
worldwide with certain exclusions. Reinsurance may also be purchased to mitigate an accumulation of smaller, attritional losses. Reinsurance
may be purchased on a facultative, excess of loss treaty or proportional treaty basis.
II. Property
Gross premiums written, for the year:
Property catastrophe excess of loss
Terrorism
Property political risk
Property risk excess of loss
Property retrocession
Other property
Total
2017
$m
101.9
34.9
31.1
12.9
10.0
7.2
198.0
2016
$m
99.8
41.1
44.1
11.3
12.8
10.4
219.5
Property catastrophe excess of loss covers elemental risks and is written on an excess of loss treaty basis. The property catastrophe excess of loss
portfolio is written within the U.S. and also internationally. Cover is offered for specific perils and regions or countries.
Terrorism business can be written either ground-up or for primary or excess layers, with cover provided for U.S. and worldwide property risks,
but typically excluding nuclear, chemical, biological and cyber coverage in most territories. Cover is generally provided to medium to large
commercial and industrial enterprises. Policies are typically written for scheduled locations and exposure is controlled by setting limits on
aggregate exposure within a ‘blast zone’ radius. The term of these contracts is often multi-year reflecting the term of the underlying exposures.
Some national pools are also written, which may include nuclear, chemical and biological coverage and may have an element of life coverage.
Property political risk cover is written either ground-up or on an excess of loss basis. Coverage that the Group provides in the political risk
book is split between confiscation perils coverage and sovereign/quasi-sovereign obligor coverage. Confiscation perils coverage protects
against CEND and may be extended to include other perils. Sovereign/quasi-sovereign obligors coverage protects against the non-payment
or non-honouring of an obligation by a sovereign or quasi-sovereign entity. Cover is provided to medium to large commercial and industrial
clients as well as bank and commodity trading clients. The term of these contracts is often multi-year reflecting the term of the underlying
exposures. The Group does not provide cover against purely private obligor credit risk.
Property risk excess of loss is written on an excess of loss basis through UNL treaty arrangements, predominantly covering fire and allied perils
in addition to natural catastrophe exposure. The portfolio is written on a worldwide basis, with particular focus on the U.S. market.
Property retrocession is written on an excess of loss basis through treaty arrangements and covers elemental risks. Cover may be on a
worldwide or regional basis and may cover specific risks or all catastrophe perils. Coverage may be given on a UNL basis, meaning that loss
payments are linked directly to the ceding company’s own loss, or on an ILW basis, meaning that loss payments are linked to the overall
industry insured loss as measured by independent third-party loss index providers.
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The Group is exposed to large natural catastrophe losses, such as windstorm and earthquake losses, primarily from assuming property
catastrophe excess of loss and property retrocession portfolio risks. Exposure to such events is controlled and measured by setting limits on
aggregate exposures in certain classes per geographic zone and through loss modeling. The accuracy of the latter exposure analysis is limited
by the quality of data and the effectiveness of the modeling. It is possible that a catastrophic event significantly exceeds the expected modeled
event loss. The Group’s appetite and exposure guidelines for large losses are set out on pages 101 and 102.
Reinsurance may be purchased to mitigate exposures to large natural catastrophe losses in the U.S., Canada and worldwide with certain
exclusions. Reinsurance may also be purchased to reduce the Group’s worldwide exposure to large risk losses. Reinsurance is typically
purchased on an excess of loss basis, however ILWs or quota share arrangements may be entered into.
III. Energy
Gross premiums written, for the year:
Worldwide offshore energy
Gulf of Mexico offshore energy
Onshore energy
Energy liabilities
Construction energy
Other energy
Total
2017
$m
66.6
24.4
3.5
3.0
(1.1)
5.4
101.8
2016
$m
88.7
20.1
4.9
3.5
4.8
4.0
126.0
Energy risks are written mostly on a direct basis and may be ground-up or for primary or excess layers on either a first loss or full value basis.
Worldwide offshore energy policies are typically package policies which may include physical damage, business interruption and third-party
liability sections. Coverage can include fire and explosion and elemental risks. Individual assets covered can be high-value and are therefore
mostly written on a subscription basis, meaning that coverage is placed with multiple risk carriers.
Gulf of Mexico offshore energy programmes cover elemental and non-elemental risks. Most policies have sub-limits on coverage for elemental
losses. These programmes are exposed to Gulf of Mexico windstorms. Exposure to such events is controlled and measured through loss
modeling. The accuracy of this exposure analysis is limited by the quality of data and the effectiveness of the modeling. It is possible that a
catastrophic event significantly exceeds the expected modeled event loss. The Group’s appetite and exposure guidelines to large losses are
set out on pages 101 and 102.
Onshore energy risks can include onshore Gulf of Mexico and worldwide energy installations and are largely subject to the same loss events as
described above.
The Group writes energy liability business on a stand-alone basis. Unlike the liability contained within the energy packages that Lancashire
writes, stand-alone energy liability is written on an excess of loss basis only. Coverage is worldwide and provides coverage for all kinds of
damages and loss to third parties. Coverage is generally restricted to offshore assets.
Construction energy contracts generally cover all risks of platform and drilling units under construction at yards and offshore, during towing
and installation. Onshore construction contracts are generally not written.
Reinsurance protection may be purchased to protect a portion of loss from elemental and non-elemental energy claims, and from the
accumulation of smaller, attritional losses. Reinsurance is typically purchased on an excess of loss basis but, from time to time, quota share
arrangements may be entered into. Reinsurance may be purchased on a facultative or treaty basis.
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OverviewStrategyPerformanceGovernanceFinancial statements Risk disclosures continued
IV. Marine
Gross premiums written, for the year:
Marine hull and total loss
Marine builders’ risk
Marine excess of loss
Marine P&I clubs
Marine hull war
Other marine
Total
2017
$m
20.0
13.9
13.4
10.1
7.1
3.1
67.6
2016
$m
13.1
8.7
–
8.4
4.1
2.9
37.2
With the exception of the marine P&I clubs, where excess layers are written, most policies are written on a ground-up basis. Marine hull and
total loss is generally written on a direct basis and covers marine risks on a worldwide basis, primarily for physical damage. Marine builders’
risk covers the building of ocean-going vessels in specialised yards worldwide and their testing and commissioning. Marine excess of loss is
written on a treaty basis and covers ocean and inland marine risks. Marine P&I clubs is mostly the reinsurance of the International Group of
Protection and Indemnity Clubs and covers marine liabilities. Marine hull war is mostly direct insurance of loss of vessels from war, piracy or
terrorist attack, with a very limited amount of facultative reinsurance.
The largest expected exposure in the marine class is from physical loss rather than from elemental loss events, although there is exposure to
elemental perils and to the costs for removal of wreck.
Reinsurance may be purchased to reduce the Group’s exposure to both large risk losses and an accumulation of smaller, attritional losses.
Reinsurance is typically purchased on a treaty excess of loss basis.
V. Aviation
Gross premiums written, for the year:
AV52
Aviation satellite
Other aviation
Total
2017
$m
16.8
(0.2)
0.3
16.9
2016
$m
24.0
9.8
2.4
36.2
AV52 is written on a risk attaching excess of loss basis and provides coverage for third-party liability, excluding own passenger liability, resulting
from acts of war or hijack of aircraft. Cover excludes countries whose governments provide a backstop coverage, but does, since 2014, include
some U.S. commercial airlines.
Aviation satellite cover is written on a full value, primary or excess of loss basis and can provide cover for satellite launch, satellite in-orbit or
both satellite launch and in-orbit. The Lancashire companies stopped writing new satellite business in 2016.
Reinsurance may be purchased to mitigate exposures to an AV52 event loss. Reinsurance is typically purchased on a treaty excess of loss basis.
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Reinsurance
The Group, in the normal course of business and in accordance with its risk management practices, seeks to reduce certain types of loss
that may arise from events that could cause unfavourable underwriting results, and to improve the modeled risk-adjusted RoE by entering into
reinsurance arrangements. Reinsurance does not relieve the Group of its obligations to policyholders. Under the Group’s reinsurance security
policy, reinsurers are assessed and approved as appropriate security based on their financial strength ratings, amongst other factors. The RSC
considers reinsurers that are not rated or do not fall within the predefined rating categories on a case-by-case basis, and would usually require
collateral to be posted to support such obligations. There are specific guidelines for these collateralised contracts. The RSC monitors its
reinsurers on an ongoing basis and formally reviews the Group’s reinsurance arrangements at least quarterly.
Reinsurance protection is typically purchased on an excess of loss basis, however it may also include ILW covers or quota share arrangements.
The mix of reinsurance cover is dependent on the specific loss mitigation requirements, market conditions and available capacity. Reinsurance
may also be purchased to optimise the risk-adjusted return of the underwriting portfolio. The structure varies between types of peril and
sub-class. The Group regularly reviews its catastrophe and other exposures and may purchase reinsurance in order to reduce the Group’s
net exposure to a large natural catastrophe loss and/or to reduce net exposures to other large losses. The Group can purchase both facultative
and treaty reinsurance with varying cover and attachment points. The reinsurance coverage is not intended to be available to meet all potential
loss circumstances. The Group will retain some losses, as the cover purchased is unlikely to transfer the totality of the Group’s exposure.
Any loss amount which exceeds the programme would be retained by the Group. Some parts of the reinsurance programme have limited
reinstatements, therefore the number of claims which may be recovered from second or subsequent losses in those particular circumstances
is limited.
Insurance liabilities
For most insurance and reinsurance companies, the most significant judgement made by management is the estimation of losses and loss
adjustment expenses. The estimation of the ultimate liability arising from claims made under insurance and reinsurance contracts is a critical
estimate for the Group, particularly given the nature of the business written.
Under GAAP, loss reserves are not permitted until the occurrence of an event which may give rise to a claim. As a result, only loss reserves
applicable to losses incurred up to the reporting date are established, with no allowance for the provision of a contingency reserve to account
for expected future losses or for the emergence of new types of latent claims. Claims arising from future events can be expected to require the
establishment of substantial reserves from time to time. All reserves are reported on an undiscounted basis.
Losses and loss adjustment expenses are maintained to cover the Group’s estimated liability for both reported and unreported claims.
Reserving methodologies that calculate a point estimate for the ultimate losses are utilised, and then a range is developed around these
point estimates. The point estimate represents management’s best estimate of ultimate loss and loss adjustment expenses. The Group’s
internal actuaries review the reserving assumptions and methodologies on a quarterly basis with loss estimates being subject to a semi-annual
independent review by external actuaries. The results of the independent review is presented to the Group’s Audit Committee. The Group
has also established Reserve Committees at the operating entity level, which have responsibility for the review of large claims and IBNR levels,
their development and any changes in reserving methodology and assumptions.
The extent of reliance on management’s judgement in the reserving process differs as to whether the business is insurance or reinsurance,
whether it is short-tail or long-tail and whether the business is written on an excess of loss or on a pro-rata basis. Over a typical annual period,
the Group expects to write the large majority of programmes on a direct excess of loss basis. The Group does not currently write a significant
amount of long-tail business.
Insurance versus reinsurance
Loss reserve calculations for direct insurance business are not precise in that they deal with the inherent uncertainty of assumptions
regarding future reporting and development patterns, frequency and severity trends, claims settlement practices, potential changes in the
legal environment and other factors, such as inflation. These estimates and judgements are based on numerous factors and may be revised
as additional experience or other data becomes available or reviewed as new or improved methodologies are developed or as current laws
or regulations change.
Furthermore, as a broker market reinsurer, management must rely on loss information reported to brokers by other insurers and their
loss adjusters, who must estimate their own losses at the policy level, often based on incomplete and changing information. The information
management receives varies by cedant and may include paid losses, estimated case reserves and an estimated provision for IBNR reserves.
Additionally, reserving practices and the quality of data reporting may vary among ceding companies, which adds further uncertainty to
the estimation of the ultimate losses.
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OverviewStrategyPerformanceGovernanceFinancial statements Risk disclosures continued
Short-tail versus long-tail
In general, claims relating to short-tail risks, such as the majority of risks underwritten by the Group, are reported more promptly than those
relating to long-tail risks, including the majority of casualty risks. However, the timeliness of reporting can be affected by such factors as the
nature of the event causing the loss, the location of the loss, and whether the losses are from policies in force with insureds, primary insurers,
reinsurers or vendor binding authorities.
Excess of loss versus proportional
For excess of loss contracts, which make up the majority of the Group’s business, management are aided by the fact that each policy has
a defined limit of liability arising from one event. Once that limit has been reached, there is no further exposure to additional losses from
that policy for the same event. For proportional business, an initial estimated loss and loss expense ratio is generally used. This is based upon
information provided by the insured or ceding company and/or their broker and management’s historical experience of that treaty, if any,
and the estimate is adjusted as actual experience becomes known.
Time lags
There is a time lag inherent in reporting from the original claimant to the primary insurer or binding authority holder to the broker and then
to the reinsurer. Also, the combination of low claims frequency and high severity makes the available data more volatile and less useful for
predicting ultimate losses. In the case of proportional contracts, reliance is placed on an analysis of a contract’s historical experience, industry
information, and the professional judgement of underwriters in estimating reserves for these contracts. In addition, if available, reliance is
placed partially on ultimate loss ratio forecasts as reported by insureds or cedants, which are normally subject to a quarterly or six-month lag.
Uncertainty
As a result of the time lag described above, an estimation must be made of IBNR reserves, which consist of a provision for additional
development in excess of the case reserves reported by insureds or ceding companies, as well as a provision for claims which have occurred
but which have not yet been reported by insureds or ceding companies. Due to the degree of reliance that is necessarily placed on insureds or
ceding companies for claims reporting, the associated time lag, the low frequency/high severity nature of much of the business that the Group
underwrites, and the varying reserving practices among ceding companies, reserve estimates are highly dependent on management judgement
and are therefore uncertain. During the loss settlement period, which may be years in duration, additional facts regarding individual claims
and trends often will become known, and current laws and case law may change as well as regulatory directives, with a consequent impact
on reserving.
For certain catastrophic events there are greater uncertainties underlying the assumptions and associated estimated reserves for losses and
loss adjustment expenses. Complexity resulting from problems such as policy coverage issues, multiple events affecting one geographic area
and the resulting impact on claims adjusting (including the allocation of claims to the specific event and the effect of demand surge on the
cost of building materials and labour) by, and communications from, insureds or ceding companies, can cause delays to the timing with
which the Group is notified of changes to loss estimates.
As at 31 December 2017, management’s estimates for IBNR represented 44.8 per cent of total net loss reserves (31 December 2016 – 34.6 per
cent). The majority of the estimate relates to the recent catastrophe events during the latter part of 2017, in addition to potential claims on
non-elemental risks where timing delays in insured or cedant reporting may mean losses could have occurred of which the Group was not
made aware by the balance sheet date.
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Lancashire Holdings Limited | Annual Report & Accounts 2017
B. Market risk
The Group is at risk of loss due to movements in market factors. The main risks include:
i.
Insurance risk;
ii. Investment risk;
iii. Debt risk; and
iv. Currency risk.
These risks, and the management thereof, are described below.
I. Insurance risk
The Group is exposed to insurance market risk from several sources, including the following:
• the advent or continuation of a soft market, which may result in a stabilisation or decline in premium rates and/or terms and conditions
for certain lines, or across all lines;
• the actions and reactions of key competitors, which may directly result in volatility in premium volumes and rates, fee levels and other
input costs;
• market events, including unusual inflation in rates, may result in a limit in the availability of cover, causing political intervention or
national remedies;
• failure to maintain broker, binding authority and client relationships, leading to a limited or substandard choice of risks inconsistent with
the Group’s risk appetite;
• changes in regulation including capital, governance or licensing requirements;
• changes in the geopolitical environment including the UK’s impending exit from the EU and the implications for business passporting
within the EEA; and
• changes in U.S. tax legislation, which came into effect from 1 January 2018. The new rules introduce significant changes to the
corporate tax regime. The most significant change to impact the global (re)insurance sector is the base erosion and anti-abuse tax.
While the Lancashire Group has no U.S. affiliates, there may be wider implications as this provision will directly impact those foreign
reinsurers that have significant intra-group reinsurance arrangements between U.S. and overseas affiliates.
The most important method to mitigate insurance market risk is to maintain strict underwriting standards. The Group manages insurance
market risk in numerous ways, including the following:
• reviews and amends underwriting plans and outlook as necessary;
• reduces exposure to market sectors where conditions have reached unattractive levels;
• purchases appropriate, cost-effective reinsurance cover to mitigate exposures;
• closely monitors changes in rates and terms and conditions;
• ensures through continuous capital management that it does not allow surplus capital to drive underwriting appetite;
• holds a daily underwriting meeting for LICL and LUK to discuss, inter alia, market conditions and opportunities;
• reviews all new and renewal business post-underwriting for Cathedral;
• regularly reviews output from BLAST to assess up-to-date profitability of classes and sectors;
• holds a quarterly Underwriting and Underwriting Risk Committee meeting to review underwriting strategy;
• holds a fortnightly RRC meeting to monitor estimated exposures to peak zone elemental losses and RDSs; and
• holds regular meetings with regulators.
Insurance contract liabilities are not directly sensitive to the level of market interest rates, as they are undiscounted and contractually
non-interest bearing.
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OverviewStrategyPerformanceGovernanceFinancial statements Risk disclosures continued
II. Investment risk
Movements in investments resulting from changes in interest and inflation rates and currency exchange rates, amongst other factors, may lead
to an adverse impact on the value of the Group’s investment portfolio. Investment guidelines are established by the Investment Committee of
the Board of Directors to manage this risk. Investment guidelines set parameters within which the Group’s external investment managers must
operate. Important parameters include guidelines on permissible asset classes, duration ranges, credit quality, currency, maturity, sectors,
geographical, sovereign and issuer exposures. Compliance with guidelines is monitored on a monthly basis. Any adjustments to the investment
guidelines are approved by the Investment Committee and the Board of Directors.
The Group’s fixed maturity portfolios are managed by five external investment managers. The Group also has a diversified low volatility
multi-strategy portfolio of hedge funds, and a small equity portfolio. The performance of the managers is monitored on an ongoing basis.
Within the Group guidelines is a subset of guidelines for the portion of funds required to meet near-term obligations and cash flow needs
following an extreme event. The subset of guidelines adds a further degree of requirements, including fewer allowable asset classes, higher
credit quality, shorter duration and higher liquidity. The primary objectives for this portion of assets are capital preservation and providing
liquidity to meet insurance and other near-term obligations. In addition to cash managed internally, funds held in the investment portfolio
to cover this potential liability are designated as the ‘core’ portfolio and the portfolio duration is matched to the duration of the insurance
liabilities, within an agreed range. The core portfolio is invested in fixed maturity securities, fixed maturity funds and cash and cash
equivalents. The core portfolio may, at times, contain assets significantly in excess of those required to meet insurance liabilities or other
defined funding needs.
Assets in excess of those required to be held in the core portfolio are typically held in the ‘core plus’ or the ‘surplus’ portfolios. The core plus
portfolio is invested in fixed maturity securities and cash and cash equivalents. The surplus portfolio is invested in fixed maturity securities,
principal protected equity linked notes, derivative instruments, cash and cash equivalents, equity securities and hedge funds. In general,
the duration of the surplus portfolio is slightly longer than the core or core plus portfolio.
The Group reviews the composition, duration and asset allocation of its investment portfolio on a regular basis in order to respond to changes
in interest rates and other market conditions. If certain asset classes are anticipated to produce a higher return within management’s risk
tolerance, an adjustment in asset allocation may be made. Conversely, if the risk profile is expected to move outside of tolerance levels,
adjustments may be made to reduce the risks in the portfolio.
The investment portfolio is currently structured to perform better in a risk-on environment in order to mitigate the impact of a potential rise
in interest rates. The Group endeavours to limit losses in risk-on, risk-off and interest rate hike scenarios. The Group models various periods
of significant stress in order to better understand the investment portfolio’s risks and exposures. The scenarios represent what could, and most
likely will occur (albeit not in the exact form of the scenarios, which are based on historic periods of volatility). The Group also monitors the
portfolio impact of more severe disaster scenarios consisting of extreme shocks.
The IRRC meets quarterly to ensure that the Group’s strategic and tactical investment actions are consistent with investment risk preferences,
appetite, risk and return objectives and tolerances. The IRRC also helps further develop the risk tolerances to be incorporated into the
ERM framework.
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Lancashire Holdings Limited | Annual Report & Accounts 2017
The investment mix of the fixed maturity portfolios is as follows:
As at 31 December 2017
– Short-term investments
– Fixed maturity funds
– U.S. treasuries
– Other government bonds
– U.S. municipal bonds
– U.S. government agency debt
– Asset backed securities
– U.S. government agency mortgage
backed securities
– Non-agency mortgage backed securities
– Non-agency commercial mortgage
backed securities
– Bank loans
– Corporate bonds
Total fixed maturity securities – AFS
Fixed maturity securities – at FVTPL
Total fixed maturity securities
As at 31 December 2016
– Short-term investments
– Fixed maturity funds
– U.S. treasuries
– Other government bonds
– U.S. municipal bonds
– U.S. government agency debt
– Asset backed securities
– U.S. government agency mortgage
backed securities
– Non-agency mortgage backed securities
– Non-agency commercial mortgage
backed securities
– Bank loans
– Corporate bonds
Total fixed maturity securities – AFS
Fixed maturity securities – at FVTPL
Total fixed maturity securities
Core
Core plus
Surplus
Total
$m
8.8
31.0
100.7
16.4
1.9
17.1
15.9
8.4
2.2
–
–
168.7
371.1
–
371.1
%
0.6
2.1
6.8
1.1
0.1
1.2
1.1
0.6
0.1
–
–
11.4
25.1
–
25.1
$m
98.7
–
118.2
13.4
4.1
34.5
56.7
22.4
3.3
0.2
–
264.7
616.2
–
616.2
%
6.7
–
8.0
0.9
0.3
2.3
3.8
1.5
0.2
–
–
18.0
41.7
–
41.7
$m
3.6
–
16.8
41.6
–
18.9
71.4
110.2
7.7
–
106.7
88.0
464.9
25.7
490.6
%
0.2
–
1.1
2.8
–
1.3
4.8
7.6
0.5
$m
111.1
31.0
235.7
71.4
6.0
70.5
144.0
141.0
13.2
–
7.2
6.0
31.5
1.7
33.2
0.2
106.7
521.4
1,452.2
25.7
1,477.9
Core
Core plus
Surplus
Total
$m
–
14.5
120.6
15.6
0.6
17.1
13.4
10.3
4.5
3.0
–
151.6
351.2
–
351.2
%
–
1.0
8.1
1.0
–
1.2
0.9
0.7
0.3
0.2
–
10.1
23.5
–
23.5
$m
1.3
–
158.2
36.3
–
34.9
69.9
30.5
7.9
2.9
–
292.3
634.2
–
634.2
%
0.1
–
10.6
2.4
–
2.3
4.7
2.0
0.5
0.2
–
19.5
42.3
–
42.3
$m
4.0
–
26.7
14.7
0.5
29.9
26.9
77.5
1.9
3.7
121.6
153.4
460.8
51.6
512.4
%
0.3
–
1.8
1.0
–
2.0
1.8
5.2
0.1
0.2
8.1
10.2
30.7
3.5
34.2
$m
5.3
14.5
305.5
66.6
1.1
81.9
110.2
118.3
14.3
9.6
121.6
597.3
1,446.2
51.6
1,497.8
%
7.5
2.1
15.9
4.8
0.4
4.8
9.7
9.7
0.8
–
7.2
35.4
98.3
1.7
100.0
%
0.4
1.0
20.5
4.4
–
5.5
7.4
7.9
0.9
0.6
8.1
39.8
96.5
3.5
100.0
www.lancashiregroup.com
111
OverviewStrategyPerformanceGovernanceFinancial statements Risk disclosures continued
Bank loans, corporate bonds, fixed maturity securities at FVTPL and other government bonds by country are as follows:
Other
industries
$m
300.2
13.6
12.3
10.4
5.7
3.5
0.2
2.6
–
5.3
0.3
2.6
–
0.7
1.2
3.1
361.7
Other
industries
$m
388.2
10.3
13.2
17.7
8.3
4.0
9.3
0.5
–
7.1
–
4.8
1.5
–
–
4.2
469.1
Other
government
bonds
$m
–
19.3
2.0
6.3
13.9
5.1
1.0
–
5.1
–
3.9
–
4.2
–
2.7
7.9
71.4
Other
government
bonds
$m
–
2.0
15.5
7.4
12.9
–
4.2
4.2
–
–
5.3
–
–
2.8
2.4
9.9
66.6
Total1
$m
483.6
27.0
27.8
20.0
10.9
18.5
14.7
15.2
6.9
6.8
2.4
5.6
–
4.2
1.2
9.0
653.8
Total1
$m
557.1
51.8
27.1
34.1
17.0
27.4
14.3
7.1
9.6
8.9
1.0
4.8
4.3
–
–
6.0
770.5
Total2
$m
483.6
46.3
29.8
26.3
24.8
23.6
15.7
15.2
12.0
6.8
6.3
5.6
4.2
4.2
3.9
16.9
725.2
Total2
$m
557.1
53.8
42.6
41.5
29.9
27.4
18.5
11.3
9.6
8.9
6.3
4.8
4.3
2.8
2.4
15.9
837.1
As at 31 December 2017
United States
Canada
United Kingdom
Netherlands
Germany
France
Australia
Japan
Sweden
Luxembourg
Denmark
Switzerland
India
Spain
China
Other
Total
Financials
$m
183.4
13.4
15.5
9.6
5.2
15.0
14.5
12.6
6.9
1.5
2.1
3.0
–
3.5
–
5.9
292.1
(1) Includes bank loans, corporate bonds and fixed maturity securities at FVTPL.
(2) Includes bank loans, corporate bonds, fixed maturity securities at FVTPL and other government bonds.
As at 31 December 2016
United States
United Kingdom
Canada
Netherlands
Germany
Australia
France
Sweden
Japan
Luxembourg
Norway
Hong Kong
Switzerland
Russian Federation
Denmark
Other
Total
Financials
$m
168.9
41.5
13.9
16.4
8.7
23.4
5.0
6.6
9.6
1.8
1.0
–
2.8
–
–
1.8
301.4
(1) Includes bank loans, corporate bonds and fixed maturity securities at FVTPL.
(2) Includes bank loans, corporate bonds, fixed maturity securities at FVTPL and other government bonds.
112
Lancashire Holdings Limited | Annual Report & Accounts 2017
The sector allocation of bank loans, corporate bonds and fixed maturity securities at FVTPL is as follows:
As at 31 December
Industrial
Financial
Utility
Supranationals
Total
2017
2016
$m
329.1
289.5
32.6
2.6
653.8
%
50.3
44.3
5.0
0.4
100.0
$m
425.4
300.9
43.7
0.5
770.5
%
55.2
39.1
5.7
–
100.0
The Group’s net asset value is directly impacted by movements in the value of investments held. Values can be impacted by movements in
interest rates, credit ratings, exchange rates and economic environment and outlook.
The Group’s investment portfolio is mainly comprised of fixed maturity securities and cash and cash equivalents. The fixed maturity funds are
overseas deposits held by Syndicate 2010 and Syndicate 3010 in trust for the benefit of the policyholders in those overseas jurisdictions. They
consist of high quality, short duration fixed maturity securities. The Group also has small equity and hedge fund portfolios. The estimated fair
value of the Group’s fixed maturity portfolio is generally inversely correlated to movements in market interest rates. If market interest rates
fall, the fair value of the Group’s fixed maturity securities would tend to rise and vice versa.
The sensitivity of the price of fixed maturity securities, and certain derivatives, to movements in interest rates is indicated by their duration.
The greater a security’s duration, the greater its price volatility to movements in interest rates. The sensitivity of the Group’s fixed maturity
and derivative investment portfolio to interest rate movements is detailed below, assuming linear movements in interest rates:
As at 31 December
Immediate shift in yield (basis points)
100
75
50
25
(25)
(50)
(75)
(100)
2017
$m
(28.5)
(21.4)
(14.3)
(7.1)
7.2
14.4
21.6
28.8
%
(1.9)
(1.4)
(1.0)
(0.5)
0.5
1.0
1.5
1.9
2016
$m
(28.7)
(21.6)
(14.4)
(7.2)
7.8
15.6
23.4
31.2
%
(1.9)
(1.4)
(1.0)
(0.5)
0.5
1.0
1.6
2.1
The Group mitigates interest rate risk on the investment portfolio by establishing and monitoring duration ranges in its investment guidelines.
The Group may manage duration through the use of interest rate futures and swaptions from time to time. The duration of the core portfolio
is matched to the modeled duration of the insurance reserves, within a permitted range. The permitted duration range for the core plus
portfolio is between zero and four years and the surplus portfolio is between one and five years.
The total durations of the externally managed portfolios which are comprised of fixed maturity, cash and cash equivalents and certain
derivatives, are as follows:
As at 31 December
Core portfolio
Core plus portfolio
Surplus portfolio1
Overall external portfolio1
(1) Including duration overlay.
2017
years
1.7
1.7
2.0
1.8
2016
years
1.6
1.8
2.2
1.9
The overall duration for fixed maturity, managed cash and cash equivalents and certain derivatives is 1.7 years (2016 – 1.8 years).
www.lancashiregroup.com
113
OverviewStrategyPerformanceGovernanceFinancial statements Risk disclosures continued
In addition to duration management, the Group uses VaR on a monthly basis to measure potential losses in the estimated fair values of its
cash and invested assets and to understand and monitor risk. The VaR calculation is performed using variance/covariance risk modeling to
capture the cash flows and embedded optionality of the portfolio. Securities are valued individually using standard market pricing models.
These security valuations serve as the input to many risk analytics, including full valuation risk analyses, as well as parametric methods that
rely on option-adjusted risk sensitivities to approximate the risk and return profiles of the portfolio.
The principal VaR measure that is produced is an annual VaR at the 99th percentile confidence level. Under normal conditions, the portfolio
is not expected to lose more than the VaR metric listed in the table below, 99 per cent of the time over a one-year time horizon.
The Group’s annual VaR calculations are as follows:
As at 31 December
99th percentile confidence level1
(1) Including the impact of internal foreign exchange hedges.
2017
2016
% of
shareholders’
equity
2.4
$m
27.0
% of
shareholders’
equity
2.8
$m
33.3
Derivative financial instruments
The Group’s investment guidelines permit the investment managers to utilise exchange-traded futures and options contracts, and OTC
instruments including interest rate swaps, credit default swaps, interest rate swaptions and forward foreign currency contracts. Derivatives are
used for yield enhancement, duration management, interest rate and foreign currency exposure management or to obtain an exposure to a
particular financial market. These positions are monitored regularly. The Group may also use OTC or exchange-traded managed derivatives
to mitigate interest rate risk and foreign currency exposures. The Group principally has exposure to derivatives related to the following types
of risks: foreign currency risk, interest rate risk and credit risk.
The Group currently invests in the following derivative financial instruments:
a. Futures;
b. Options;
c. Forward foreign currency contracts; and
d. Swaps.
The net losses on the Group’s derivative financial instruments recognised in the consolidated statement of comprehensive (loss) income are
as follows:
Net realised
losses
$m
(0.7)
–
–
(0.7)
Net realised
losses
$m
(2.1)
–
–
(2.1)
Net foreign
exchange
losses
$m
–
(0.7)
–
(0.7)
Net foreign
exchange
losses
$m
–
(1.8)
–
(1.8)
Financing
losses
$m
–
–
–
–
Financing
losses
$m
–
–
(1.0)
(1.0)
As at 31 December 2017
Treasury futures
Forward foreign currency contracts
Interest rate swaps
Total
As at 31 December 2016
Treasury futures
Forward foreign currency contracts
Interest rate swaps
Total
114
Lancashire Holdings Limited | Annual Report & Accounts 2017
The estimated fair values of the Group’s derivative instruments are as follows:
As at 31 December
Forward foreign currency contracts
Interest rate swaps
Total
Other
investments
$m
(0.5)
–
(0.5)
2017
Other
receivables
$m
1.6
–
1.6
Other
payables
$m
(0.1)
–
(0.1)
Interest
rate swaps
$m
–
(2.0)
(2.0)
Other
receivables
$m
0.6
–
0.6
2016
Other
payables
$m
(0.6)
–
(0.6)
Interest
rate swaps
$m
–
(3.7)
(3.7)
A. Futures
The Group’s investment guidelines permit the use of futures which provide the Group with participation in market movements, determined
by the underlying instrument on which the futures contract is based, without holding the instrument itself or the individual securities. This
approach allows the Group more efficient and less costly access to the exposure than would be available by the exclusive use of individual
fixed maturity and money market securities. Exchange-traded futures contracts may also be used as substitutes for ownership of the
physical securities.
All futures contracts are held on a non-leveraged basis. An initial margin is provided, which is a deposit of cash and/or securities in an
amount equal to a prescribed percentage of the contract value. The fair value of futures contracts is estimated daily and the margin is
adjusted accordingly with unrealised gains and/or losses settled daily in cash and/or securities. A realised gain or loss is recognised when
the contract is closed.
Futures contracts expose the Group to market risk to the extent that adverse changes occur in the estimated fair values of the underlying
securities. Exchange-traded futures are, however, subject to a number of safeguards to ensure that obligations are met. These include the use
of clearing houses (thus reducing counterparty credit risk), the posting of margins and the daily settlement of unrealised gains and losses. The
amount of credit risk is therefore considered low. The investment guidelines restrict the maximum notional futures position as a percentage of
the investment portfolio’s estimated fair value.
As at 31 December, the Group had the following exposure to treasury futures:
As at 31 December
Treasury futures
Total
Notional
long
$m
100.1
100.1
2017
Notional
short
$m
103.5
103.5
Net notional
long (short)
$m
(3.4)
(3.4)
Notional
long
$m
76.4
76.4
2016
Notional
short
$m
104.1
104.1
Net notional
long (short)
$m
(27.7)
(27.7)
B. Options
The Group’s investment guidelines permit the use of exchange-traded options on U.S. treasury futures and Eurodollar futures, which are
used to manage exposure to interest rate risk and also to hedge duration. Exchange-traded options are held on a similar basis to futures and
are subject to similar safeguards. Options are contractual arrangements that give the purchaser the right, but not the obligation, to either buy
or sell an instrument at a specific set price at a predetermined future date. The Group may enter into option contracts that are secured by
holdings in the underlying securities or by other means which permit immediate satisfaction of the Group’s obligations. The notional
amount of options is $nil as at 31 December 2017 and 2016.
The investment guidelines also restrict the maximum notional options exposure as a percentage of the investment portfolio’s estimated
fair value.
www.lancashiregroup.com
115
OverviewStrategyPerformanceGovernanceFinancial statements Risk disclosures continued
C. Forward foreign currency contracts
A forward foreign currency contract is a commitment to purchase or sell a foreign currency at a future date, at a defined rate. The Group
may utilise forward foreign currency contracts to gain exposure to a certain currency or market rate or manage the impact of fluctuations
in foreign currencies on the value of its foreign currency denominated investments, debt and/or insurance related currency exposures.
Forward contracts expose the Group to credit, market and liquidity risks. Credit risk arises from the potential inability of counterparties
to perform under the terms of the contract. The Group is exposed to market risk to the extent that adverse changes occur in the exchange
rate of the underlying foreign currency. Liquidity risk represents the possibility that the Group may not be able to rapidly adjust the size of
its forward positions at a reasonable price in times of high volatility and financial stress. These risks are mitigated by requiring a minimum
counterparty credit quality, restricting the maximum notional exposure as a percentage of the investment portfolio’s estimated fair value and
restricting exposures to foreign currencies, individually and in aggregate, as a percentage of the investment portfolio’s estimated fair value.
The notional amount of a derivative contract is the underlying quantity upon which payment obligations are calculated. A long position is
equivalent to buying the underlying currency whereas a short position is equivalent to having sold the underlying currency.
The Group has the following open forward foreign currency contracts:
As at 31 December
Canadian Dollar
Euro
Australian Dollar
Japanese Yen
Swedish Krona
Mexican Peso
Malaysian Ringgit
British Pound
Total
2017
2016
Notional
long
$m
–
24.0
–
–
–
1.7
4.9
53.5
84.1
Notional
short
$m
26.9
44.6
7.2
3.9
3.0
–
–
4.0
89.6
Net notional
long (short)
$m
(26.9)
(20.6)
(7.2)
(3.9)
(3.0)
1.7
4.9
49.5
(5.5)
Notional
long
$m
–
–
–
–
–
–
2.7
13.4
16.1
Notional
short
$m
29.8
0.6
–
–
2.7
–
–
0.9
34.0
Net notional
long (short)
$m
(29.8)
(0.6)
–
–
(2.7)
–
2.7
12.5
(17.9)
D. Swaps
The Group’s investment guidelines permit the use of interest rate swaps and credit default swaps which are traded primarily OTC.
Interest rate swaps are used to manage interest rate exposure, portfolio duration or capitalise on anticipated changes in interest rate
volatility without investing directly in the underlying securities. Interest rate swap agreements entail the exchange of commitments to pay
or receive interest, such as an exchange of floating rate payments for fixed rate payments, with respect to a notional amount of principal.
These agreements involve elements of credit and market risk. Such risks include the possibility that there may not be a liquid market, that
the counterparty may default on its obligation to perform, or that there may be unfavourable movements in interest rates. These risks are
mitigated through defining a minimum counterparty credit quality and a maximum notional exposure to interest rate swaps as a percentage
of the investment portfolio’s estimated fair value. The notional amount of interest rate swaps held in the investment portfolio is not material
as at 31 December 2017 and 2016. Through the use of interest rate swaps, the Group has fixed the interest rate on Lancashire’s subordinated
loan notes until December 2020. As at 31 December 2017 the notional amount of interest rate swaps held for hedging purposes was $125.8
million (31 December 2016 – $122.3 million).
116
Lancashire Holdings Limited | Annual Report & Accounts 2017
III. Debt risk
The Group has issued long-term debt as described in note 17. The LHL subordinated loan notes due in 2035 bear interest at a floating rate
that is reset on a quarterly basis, plus a fixed margin of 3.70 per cent. The Group is subject to interest rate risk on the coupon payments of
these subordinated loan notes. The Group has mitigated the interest rate risk on the LHL debt by entering into interest rate swap contracts
on the following loan notes:
Subordinated loan notes $97.0 million
Subordinated loan notes €24.0 million
Maturity date
15 December 2035
15 June 2035
Interest hedged
100%
100%
The interest rate swaps expire on 15 December 2020, therefore until 2020 the Group has no cash flow interest rate risk on the LHL
subordinated loan notes due in 2035.
The senior unsecured notes maturing 1 October 2022 bear interest at a fixed rate of 5.70 per cent and therefore the Group is not exposed to
cash flow interest rate risk on this long-term debt.
On the acquisition of Cathedral, the Group assumed subordinated loan notes as described in note 17. The Group is subject to cash flow
interest rate risk on the coupon payment of this long-term debt. An increase of 100 basis points on the EURIBOR and LIBOR three-month
deposit rates would result in an increase in the interest expense on long-term debt for the Group of approximately $0.7 million on an
annual basis.
IV. Currency risk
The Group underwrites from two locations, Bermuda and London, although risks are assumed on a worldwide basis. Risks assumed are
predominantly denominated in U.S. dollars.
The Group is exposed to currency risk to the extent its assets are denominated in different currencies to its liabilities. The Group is also
exposed to non-retranslation risk on non-monetary assets such as unearned premiums and deferred acquisition costs. Exchange gains and
losses can impact profit or loss.
The Group hedges monetary non-U.S. dollar liabilities primarily with non-U.S. dollar assets, but may also use derivatives to mitigate foreign
currency exposures. The Group’s main foreign currency exposure relates to its insurance obligations, cash holdings, investments, premiums
receivable, dividends payable and the Euro denominated subordinated loan notes discussed in note 17. See page 116 for a listing of the
Group’s open forward foreign currency contracts.
www.lancashiregroup.com
117
OverviewStrategyPerformanceGovernanceFinancial statements Risk disclosures continued
The Group’s assets and liabilities, categorised by currency at their translated carrying amount, are as follows:
Assets
Cash and cash equivalents
Accrued interest receivable
Investments
Inwards premiums receivable from insureds
and cedants
Reinsurance assets
Other receivables
Investment in associate
Property, plant and equipment
Deferred acquisition costs
Intangible assets
Total assets as at 31 December 2017
Liabilities
Losses and loss adjustment expenses
Unearned premiums
Insurance contracts – other payables
Amounts payable to reinsurers
Deferred acquisition costs ceded
Other payables
Corporation tax payable
Deferred tax liability
Interest rate swap
Long-term debt
Total liabilities as at 31 December 2017
U.S. $
$m
158.1
6.1
1,538.2
252.1
331.9
39.3
59.4
0.3
55.2
153.8
2,594.4
U.S. $
$m
773.5
259.7
30.4
62.8
2.1
30.8
–
7.8
0.2
283.3
1,450.6
Sterling
$m
16.9
–
20.8
13.4
6.1
2.5
–
2.3
6.5
–
68.5
Sterling
$m
38.5
20.7
5.8
1.5
–
16.4
2.8
8.7
–
–
94.4
Euro
$m
33.6
–
82.1
19.7
6.1
–
–
–
9.4
–
150.9
Euro
$m
72.9
37.9
2.6
1.0
0.3
0.7
–
–
1.8
43.0
160.2
Japanese Yen
$m
11.7
–
–
2.3
–
–
–
–
0.9
–
14.9
Japanese Yen
$m
8.6
8.6
–
–
–
–
–
–
–
–
17.2
Other
$m
36.2
–
13.5
10.4
1.9
0.6
–
–
4.7
–
67.3
Other
$m
40.0
24.0
1.9
0.2
0.1
0.1
–
–
–
–
66.3
Total
$m
256.5
6.1
1,654.6
297.9
346.0
42.4
59.4
2.6
76.7
153.8
2,896.0
Total
$m
933.5
350.9
40.7
65.5
2.5
48.0
2.8
16.5
2.0
326.3
1,788.7
118
Lancashire Holdings Limited | Annual Report & Accounts 2017
Assets
Cash and cash equivalents
Accrued interest receivable
Investments
Inwards premiums receivable from insureds
and cedants
Reinsurance assets
Other receivables
Corporation tax receivable
Investment in associate
Property, plant and equipment
Deferred acquisition costs
Intangible assets
Total assets as at 31 December 2016
Liabilities
Losses and loss adjustment expenses
Unearned premiums
Insurance contracts – other payables
Amounts payable to reinsurers
Deferred acquisition costs ceded
Other payables
Deferred tax liability
Interest rate swap
Long-term debt
Total liabilities as at 31 December 2016
U.S. $
$m
201.0
6.6
1,593.9
235.4
177.3
41.1
–
49.7
0.6
60.8
153.8
2,520.2
U.S. $
$m
548.8
287.7
27.0
51.4
0.4
31.0
7.8
1.5
283.3
1,238.9
Sterling
$m
15.9
–
14.8
8.4
5.3
1.9
1.1
–
4.7
6.5
–
58.6
Sterling
$m
34.1
19.8
5.6
0.9
–
29.9
10.9
–
–
101.2
Euro
$m
25.0
–
27.4
17.1
3.5
–
–
–
–
7.4
–
80.4
Euro
$m
41.1
34.6
3.0
0.4
–
–
–
2.2
37.6
118.9
Japanese Yen
$m
14.0
–
–
2.7
0.3
–
–
–
–
0.7
–
17.7
Japanese Yen
$m
20.1
7.4
–
–
–
–
–
–
–
27.5
Other
$m
52.9
–
12.3
6.4
0.7
0.6
–
–
–
6.1
–
79.0
Other
$m
35.7
24.0
1.8
–
–
0.1
–
–
–
61.6
Total
$m
308.8
6.6
1,648.4
270.0
187.1
43.6
1.1
49.7
5.3
81.5
153.8
2,755.9
Total
$m
679.8
373.5
37.4
52.7
0.4
61.0
18.7
3.7
320.9
1,548.1
The impact on net income of a proportional foreign exchange movement of 10.0 per cent up and 10.0 per cent down against the U.S. dollar
at the year end spot rates would be an increase or decrease of $3.5 million (2016 – $1.5 million).
The Group uses forward foreign currency contracts for the purposes of managing currency exposures. See page 116 for details of the Group’s
open forward foreign currency contracts.
www.lancashiregroup.com
119
OverviewStrategyPerformanceGovernanceFinancial statements Risk disclosures continued
C. Liquidity risk
Liquidity risk is the risk that cash may not be available to pay obligations when they are due without incurring an unreasonable cost. The
Group’s main exposures to liquidity risk are with respect to its insurance and investment activities. The Group is exposed if proceeds from
financial assets are not sufficient to fund obligations arising from its insurance contracts. The Group can be exposed to daily calls on its
available investment assets, principally to settle insurance claims and to fund trust accounts following a large catastrophe loss.
Exposures in relation to insurance activities are as follows:
• large catastrophic events, or multiple medium-sized events in quick succession, resulting in a requirement to pay a large value of claims
within a relatively short time frame or fund trust accounts;
• failure of insureds or cedants to meet their contractual obligations with respect to the payment of premiums in a timely manner; and
• failure of reinsurers to meet their contractual obligations with respect to the payment of claims in a timely manner.
Exposures in relation to investment activities are as follows:
• adverse market movements and/or a duration mismatch to obligations, resulting in investments being disposed of at a significant realised
loss; and
• an inability to liquidate investments due to market conditions.
The maturity dates of the Group’s fixed maturity portfolio are as follows:
As at 31 December 2017
Less than one year
Between one and two years
Between two and three years
Between three and four years
Between four and five years
Over five years
Asset backed and mortgage backed securities
Total fixed maturity securities
As at 31 December 2016
Less than one year
Between one and two years
Between two and three years
Between three and four years
Between four and five years
Over five years
Asset backed and mortgage backed securities
Total fixed maturity securities
Core
$m
89.5
102.7
95.6
18.8
27.3
10.7
26.5
371.1
Core
$m
75.7
108.7
71.7
26.3
13.8
23.8
31.2
351.2
Core plus
$m
211.0
84.1
103.1
44.1
49.4
41.9
82.6
616.2
Core plus
$m
128.1
164.0
116.1
62.8
35.8
16.2
111.2
634.2
Surplus
$m
12.6
45.5
27.2
40.4
48.9
126.7
189.3
490.6
Surplus
$m
47.8
20.4
32.4
42.9
75.6
183.3
110.0
512.4
Total
$m
313.1
232.3
225.9
103.3
125.6
179.3
298.4
1,477.9
Total
$m
251.6
293.1
220.2
132.0
125.2
223.3
252.4
1,497.8
120
Lancashire Holdings Limited | Annual Report & Accounts 2017
The maturity profile of the insurance contracts and financial liabilities of the Group is as follows:
As at 31 December 2017
Losses and loss adjustment expenses
Insurance contracts – other payables
Amounts payable to reinsurers
Other payables
Interest rate swap
Long-term debt
Total
As at 31 December 2016
Losses and loss adjustment expenses
Insurance contracts – other payables
Amounts payable to reinsurers
Other payables
Interest rate swap
Long-term debt
Total
Balance sheet
$m
933.5
40.7
65.5
48.0
2.0
326.3
1,416.0
Balance sheet
$m
679.8
37.4
52.7
61.0
3.7
320.9
1,155.5
Years until liability becomes due – undiscounted values
Less than one
$m
524.3
37.5
65.5
48.0
0.9
15.1
691.3
One to three
$m
265.6
3.2
–
–
1.1
36.2
306.1
Three to five
$m
88.0
–
–
–
–
167.6
255.6
Years until liability becomes due – undiscounted values
Less than one
$m
269.0
34.4
52.7
61.0
1.6
14.0
432.7
One to three
$m
255.2
3.0
–
–
1.8
34.6
294.6
Three to five
$m
90.6
–
–
–
0.3
36.8
127.7
Over five
$m
55.6
–
–
–
–
354.8
410.4
Over five
$m
65.0
–
–
–
–
496.5
561.5
Total
$m
933.5
40.7
65.5
48.0
2.0
573.7
1,663.4
Total
$m
679.8
37.4
52.7
61.0
3.7
581.9
1,416.5
Actual maturities of the above may differ from contractual maturities because certain borrowers have the right to call or prepay certain
obligations with or without call or prepayment penalties. While the estimation of the ultimate liability for losses and loss adjustment expenses
is complex and incorporates a significant amount of judgement, the timing of payment of losses and loss adjustment expenses is also uncertain
and cannot be predicted as simply as for other financial liabilities. Actuarial and statistical techniques, past experience and management’s
judgement have been used to determine a likely settlement pattern.
The Group manages its liquidity risks via its investment strategy to hold high quality, highly liquid securities, sufficient to meet its insurance
liabilities and other near-term liquidity requirements. The creation of the core portfolio with its subset of guidelines aims to ensure funds are
readily available to meet potential insurance liabilities in an extreme event plus other near-term liquidity requirements. In addition, the Group
has established asset allocation and maturity parameters within the investment guidelines such that the majority of the investments are in high
quality assets which could be converted into cash promptly and at minimal expense. The Group monitors market changes and outlook and
reallocates assets as deemed necessary.
www.lancashiregroup.com
121
OverviewStrategyPerformanceGovernanceFinancial statements Risk disclosures continued
D. Credit risk
Credit risk is the risk that a counterparty may fail to pay, or repay, a debt or obligation. The Group is exposed to credit risk on its fixed
maturity investment portfolio and derivative instruments, its inwards premiums receivable from insureds and cedants, and on any amounts
recoverable from reinsurers.
Credit risk on the fixed maturity portfolio is mitigated through the Group’s policy to invest in instruments of high credit quality issuers and to
limit the amounts of credit exposure with respect to particular ratings categories and any one issuer. Securities rated below an S&P or equivalent
rating of BBB-/Baa3 may comprise no more than 10.0 per cent of shareholders’ equity. In addition, no one issuer, with the exception of U.S.
government and agency securities, other G10 government guaranteed securities (excluding Italy) and Australian sovereign debt should
exceed 5.0 per cent of shareholders’ equity. The Group is therefore not exposed to any significant credit concentration risk on its investment
portfolio, except for fixed maturity securities issued by the U.S. government and government agencies and other highly-rated governments.
Credit risk on exchange-traded derivative instruments is mitigated by the use of clearing houses to reduce counterparty credit risk,
requiring the posting of margins and settling of unrealised gains and losses daily. Credit risk on OTC derivatives is mitigated by monitoring
the creditworthiness of the counterparties and by requiring collateral amounts exceeding predetermined thresholds to be posted for
positions which have accrued gains.
Credit risk on inwards premiums receivable from insureds and cedants is managed by conducting business with reputable broking
organisations, with whom the Group has established relationships, and by rigorous cash collection procedures. The Group also has a broker
approval process in place. Binding authorities are subject to standard market controls including credit control. Credit risk from reinsurance
recoverables is primarily managed by the review and approval of reinsurer security, as discussed on page 107.
The table below presents an analysis of the Group’s major exposures to counterparty credit risk, based on their rating. The table includes
amounts due from policyholders and unsettled investment trades. The quality of these receivables is not graded but, based on management’s
historical experience, there is limited default risk associated with these amounts.
As at 31 December 2017
AAA
AA+, AA, AA-
A+, A, A-
BBB+, BBB, BBB-
Other1
Total
(1) Reinsurance recoveries classified as ‘other’ include $93.6 million of reserves that are fully collateralised.
As at 31 December 2016
AAA
AA+, AA, AA-
A+, A, A-
BBB+, BBB, BBB-
Other1
Total
(1) Reinsurance recoveries classified as ‘other’ include $5.6 million of reserves that are fully collateralised.
The counterparty to the Group’s long-term debt interest rate swaps is currently rated A by S&P.
Cash and
fixed maturity
securities
$m
368.0
621.8
403.7
237.3
103.6
1,734.4
Inwards premiums
receivable and
other receivables
$m
–
–
69.5
–
291.5
361.0
Cash and
fixed maturity
securities
$m
221.6
735.8
502.5
231.7
115.0
1,806.6
Inwards premiums
receivable and
other receivables
$m
–
–
84.5
–
245.6
330.1
Reinsurance
recoveries
$m
–
2.7
177.0
–
104.4
284.1
Reinsurance
recoveries
$m
–
2.6
126.4
–
7.7
136.7
122
Lancashire Holdings Limited | Annual Report & Accounts 2017
The following table shows inwards premiums receivable that are past due but not impaired:
Less than 90 days past due
Between 91 and 180 days past due
Over 180 days past due
Total
2017
$m
15.3
5.3
14.0
34.6
2016
$m
12.3
5.9
16.1
34.3
Provisions of $2.4 million (2016 – $1.0 million) have been made for impaired or irrecoverable balances and $1.4 million (2016 – $1.2 million
release) was charged to the consolidated statement of comprehensive (loss) income in respect of bad debts.
E. Operational risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes or systems. The Group and its subsidiaries
have identified and evaluated their key operational risks and these are incorporated in the risk registers and modeled directly within the
subsidiaries’ capital models. The Group has also established, and monitors compliance with, internal operational risk tolerances. The RRC
reviews operational risk on at least an annual basis and operational risk is covered in the Group CRO’s quarterly ORSA report to the LHL
Board and entity boards and in the Cathedral Risk, Capital and Compliance Committee reporting.
In order to manage operational risks, the Group has implemented a robust governance framework. Policies and procedures are documented
and identify the key risks and controls within processes. The Group’s internal audit function provides independent feedback with regard
to the accuracy and completeness of key risks and controls, and independently verifies the effective operation of these through substantive
testing. All higher risk areas are subject to an annual audit while compliance with tax operating guidelines is audited quarterly. Frequency
of audits for all other areas varies from quarterly at the most frequent to a minimum of once every four years, on a rotational basis.
F. Strategic risk
The Group has identified several strategic risks. These include:
• the risks that either the poor execution of the business plan or an inappropriate business plan in itself results in a strategy that fails to
adequately reflect the trading environment, resulting in an inability to optimise performance, including reputational risk;
• the risks of the failure to maintain adequate capital, accessing capital at an inflated cost or the inability to access capital. This includes
unanticipated changes in vendor, regulatory and/or rating agency models that could result in an increase in capital requirements or
a change in the type of capital required; and
• the risks of succession planning, staff retention and key man risks.
I. Business plan risk
The Group addresses the risks associated with the planning and execution of the business plan through a combination of the following:
• an iterative annual forward-looking business planning process with cross departmental involvement;
• evaluation and approval of the annual business plan by the Board of Directors;
• regular monitoring of actual versus planned results;
• periodic review and re-forecasting as market conditions change; and
• feedback to senior management via the daily UMCC and fortnightly RRC meetings.
www.lancashiregroup.com
123
OverviewStrategyPerformanceGovernanceFinancial statements Risk disclosures continued
II. Capital management risk
The total capital of the Group is as follows:
As at 31 December
Shareholders’ equity
Long-term debt
Total capital
Intangible assets
Total tangible capital
2017
$m
1,106.9
326.3
1,433.2
(153.8)
1,279.4
2016
$m
1,207.3
320.9
1,528.2
(153.8)
1,374.4
Risks associated with the effectiveness of the Group’s capital management, are mitigated as follows:
• regular monitoring of current and prospective regulatory and rating agency capital requirements;
• regular discussion with the Cathedral management team regarding Lloyd’s capital requirements;
• oversight of capital requirements by the Board of Directors;
• ability to purchase sufficient, cost effective reinsurance;
• maintaining contact with vendors, regulators and rating agencies in order to stay abreast of upcoming developments; and
• participation in industry groups such as the International Underwriting Association, the Association of Bermuda Insurers and Reinsurers
and the Lloyd’s Market Association.
The Group reviews the level and composition of capital on an ongoing basis with a view to:
• maintaining sufficient capital for underwriting opportunities and to meet obligations to policyholders;
• maximising the risk-adjusted return to shareholders within predetermined risk tolerances;
• maintaining adequate financial strength ratings; and
• meeting internal and regulatory capital requirements.
Capital is increased or returned as appropriate. The retention of earnings generated leads to an increase in capital. Capital raising can include
debt or equity and returns of capital may be made through dividends, share repurchases, a redemption of debt or any combination thereof.
Other capital management tools and products available to the Group may also be utilised. All capital actions require approval by the Board
of Directors.
Internal methods have been developed to review the profitability of classes of business and their estimated capital requirements plus the capital
requirements of the combination of a wide range of other risk categories. These approaches are used by management in decision making.
The Group’s aim is to provide its shareholders with an RoE of 13.0 per cent in excess of a risk-free rate over the longer term. The return
is generated within a broad framework of risk parameters. The return is measured by management in terms of the IRR of the increase in
FCBVS in the period adjusted for dividends accrued. This aim is a long-term goal, acknowledging that management expects both higher
and lower results in the shorter term. The cyclicality and volatility of the insurance market is expected to be the largest driver of this pattern.
Management monitors these peaks and troughs – adjusting the Group’s portfolio to make the most effective use of available capital and
seeking to maximise the risk-adjusted return.
124
Lancashire Holdings Limited | Annual Report & Accounts 2017
IRR achieved is as follows:
31 December 2016
31 December 2017
IRR achieved in excess of the three-month treasury yield is as follows:
31 December 2016
31 December 2017
Annual
return
%
13.5
(5.9)
Compound
annual return
%
18.4
17.7
Inception to
date return
%
541.1
608.2
Annual
return
%
13.2
(6.8)
Compound
annual return
%
17.4
16.7
Inception to
date return
%
529.2
595.2
The primary source of capital used by the Group is equity shareholders’ funds and borrowings (note 17). As a holding company, LHL relies on
dividends from its operating entities to provide the cash flow required for debt service and dividends to shareholders. The operating entities’
ability to pay dividends and make capital distributions is subject to the legal and regulatory restrictions of the jurisdictions in which they operate.
Under Solvency II the basis for assessing capital and solvency comprises a market-consistent economic balance sheet and an SCR, using
either an internal model or the standard formula. Both the Group and LUK calculate their SCR using the standard formula. As the Group’s
long-term debt is excluded from Solvency II capital (‘own funds’) both the Group’s and LUK’s Solvency II own funds are comprised entirely of
Tier 1 items for the years ended 31 December 2017 and 31 December 2016. Tier 1 capital is the highest quality capital under Solvency II with
the greatest loss absorbing capacity, comprising share capital and retained earnings. For the years ended 31 December 2017 and 2016 the
Group and LUK were more than adequately capitalised under the Solvency II regime.
LICL is regulated by the BMA and is required to monitor its solvency capital requirement under the BMA’s regulatory framework, which is
considered equivalent to the Solvency II regime. LICL’s capital requirement is calculated using the BSCR standard formula model. For the
years ended 31 December 2017 and 2016, LICL was more than adequately capitalised under the BMA regulatory regime.
The Group’s underwriting capacity in its Lloyd’s syndicates must be supported by providing a deposit in the form of cash, securities or LOCs,
which are referred to as FAL. The capital framework at Lloyd’s requires each managing agent to calculate the capital requirement for each
syndicate they manage. Solvency II internal models are used to determine capital requirements for Syndicate 2010 and Syndicate 3010 based
on the uSCR. Lloyd’s has the discretion to take into account other factors at syndicate or member level to uplift the calculated uSCR. This
may include perceived deficiencies in the internal model result as well as the need to maintain Lloyd’s overall security rating. Currently,
as a minimum, Lloyd’s applies a 35.0 per cent uplift to each syndicate’s uSCR to arrive at the Economic Capital Assessment (ECA).
Lloyd’s then uses each syndicate’s ECA as a basis for determining member level capital requirements, which is backed by FAL. For the
2018 calendar year the Group’s corporate member’s FAL requirement was set at 66.5 per cent (2017 – 75.6 per cent) of underwriting capacity
supported. The reduction was driven by a combination of factors including a change in categorisation of future reserves, improved reinsurance
planning and actively reducing exposures to less profitable business. Further solvency adjustments are made to allow for open year profits
and losses of the syndicates on which the corporate member participates. The Group has met its FAL requirement of £184.3 million as at
31 December 2017 (31 December 2016 – £209.4 million).
For the years ended 31 December 2017 and 2016 the capital requirements of all the Group’s regulatory jurisdictions were met.
III. Retention risk
Risks associated with succession planning, staff retention and key man risks are mitigated through a combination of resource planning
processes and controls, including:
• the identification of key personnel with appropriate succession plans;
• the identification of key team profit generators and function holders with targeted retention packages;
• documented recruitment procedures, position descriptions and employment contracts;
• resource monitoring and the provision of appropriate compensation, including equity based compensation which vests over a defined
time horizon; and
• training schemes.
www.lancashiregroup.com
125
OverviewStrategyPerformanceGovernanceFinancial statements Notes to the accounts
1. General information
The Group is a provider of global specialty insurance and reinsurance products with operations in London and Bermuda. LHL was
incorporated under the laws of Bermuda on 12 October 2005. On 16 March 2009, LHL was added to the Official List and its common shares
were admitted to trading on the main market of the LSE; previously LHL’s shares were listed on AIM, a subsidiary market of the LSE. Since
21 May 2007, LHL’s shares have had a secondary listing on the BSX. LHL’s registered office is Power House, 7 Par-la-Ville Road, Hamilton
HM 11, Bermuda. LHL’s head office is Level 29, 20 Fenchurch Street, London, EC3M 3BY, United Kingdom.
The consolidated financial statements for the year ended 31 December 2017 include the Company’s subsidiary companies, the Company’s
interest in associate, and the Group’s share of the Syndicates’ assets and liabilities and income and expenses. A full listing of the Group’s
related parties can be found in note 22.
2. Segmental reporting
Management and the Board of Directors review the Group’s business primarily by its five principal segments: Property, Energy, Marine,
Aviation and Lloyd’s. These segments are therefore deemed to be the Group’s operating segments for the purposes of segmental reporting.
Further sub-classes of business are underwritten within each operating segment. The nature of these individual sub-classes is discussed further
in the risk disclosures section on pages 103 to 106. Operating segment performance is measured by the net underwriting profit or loss and the
combined ratio.
All amounts reported are transactions with external parties and associates. There are no significant inter-segmental transactions and there are
no significant insurance or reinsurance contracts that insure or reinsure risks in Bermuda, the Group’s country of domicile.
126
Lancashire Holdings Limited | Annual Report & Accounts 2017
Revenue and expense by operating segment
For the year ended 31 December 2017
Gross premiums written by geographic area
U.S. and Canada
Worldwide offshore
Worldwide, including the U.S. and Canada1
Europe
Far East
Worldwide, excluding the U.S. and Canada2
Middle East
Rest of world
Total
Outwards reinsurance premiums
Change in unearned premiums
Change in unearned premiums on premiums ceded
Net premiums earned
Insurance losses and loss adjustment expenses
Insurance losses and loss adjustment expenses
recoverable
Insurance acquisition expenses
Insurance acquisition expenses ceded
Net underwriting (loss) profit
Net unallocated income and expenses
(Loss) before tax
Net loss ratio
Net acquisition cost ratio
Expense ratio
Combined ratio
Aviation
$m
Lloyd’s
$m
Total
$m
Property
$m
80.0
0.2
30.3
23.1
16.5
6.0
5.3
36.6
198.0
(66.3)
11.6
3.2
146.5
(254.9)
87.3
(30.2)
2.6
(48.7)
Energy
$m
4.7
94.8
2.5
–
–
0.1
–
(0.3)
101.8
(45.1)
7.5
6.2
70.4
(34.7)
23.6
(32.4)
1.4
28.3
Marine
$m
–
67.5
–
–
–
–
–
0.1
67.6
(11.3)
(5.6)
–
50.7
(17.3)
0.6
(19.0)
0.6
15.6
–
–
16.9
–
–
–
–
–
16.9
(7.2)
4.4
(2.5)
11.6
1.6
0.6
(3.3)
0.1
10.6
92.9
–
48.9
15.8
11.4
5.4
1.6
31.3
207.3
(63.7)
4.7
0.4
148.7
(232.7)
90.5
(35.8)
0.4
(28.9)
114.4%
18.8%
–
133.2%
15.8%
44.0%
–
59.8%
32.9%
36.3%
–
69.2%
(19.0%)
27.6%
–
8.6%
95.6%
23.8%
–
119.4%
177.6
162.5
98.6
38.9
27.9
11.5
6.9
67.7
591.6
(193.6)
22.6
7.3
427.9
(538.0)
202.6
(120.7)
5.1
(23.1)
(49.8)
(72.9)
78.4%
27.0%
19.5%
124.9%
(1) Worldwide, including the U.S. and Canada, comprises insurance and reinsurance contracts that insure or reinsure risks in more than one geographic area.
(2) Worldwide, excluding the U.S. and Canada, comprises insurance and reinsurance contracts that insure or reinsure risks in more than one geographic area, but that
specifically exclude the U.S. and Canada.
www.lancashiregroup.com
127
OverviewStrategyPerformanceGovernanceFinancial statements Notes to the accounts continued
2. Segmental reporting continued
Revenue and expense by operating segment
For the year ended 31 December 2016
Gross premiums written by geographic area
U.S. and Canada
Worldwide offshore
Worldwide, including the U.S. and Canada1
Europe
Far East
Worldwide, excluding the U.S. and Canada2
Middle East
Rest of world
Total
Outwards reinsurance premiums
Change in unearned premiums
Change in unearned premiums on premiums ceded
Net premiums earned
Insurance losses and loss adjustment expenses
Insurance losses and loss adjustment expenses
recoverable
Insurance acquisition expenses
Insurance acquisition expenses ceded
Net underwriting profit
Net unallocated income and expenses
Profit before tax
Net loss ratio
Net acquisition cost ratio
Expense ratio
Combined ratio
Property
$m
84.0
0.9
23.5
27.7
20.0
9.4
11.5
42.5
219.5
(62.2)
(15.0)
6.2
148.5
(14.6)
0.9
(29.4)
1.4
106.8
Energy
$m
0.4
123.4
2.0
–
–
0.1
–
0.1
126.0
(40.2)
20.9
(1.2)
105.5
(91.3)
49.8
(48.2)
0.6
16.4
Marine
$m
Aviation
$m
–
36.6
–
–
–
–
–
0.6
37.2
(8.3)
6.6
(0.1)
35.4
(15.1)
0.3
(10.2)
0.5
10.9
–
0.2
36.0
–
–
–
–
–
36.2
(9.5)
0.6
(1.8)
25.5
1.1
0.1
(8.1)
0.3
18.9
Lloyd’s
$m
95.3
–
54.1
19.2
9.2
5.9
2.0
29.3
215.0
(55.0)
12.6
0.6
173.2
(92.3)
18.6
(39.2)
0.2
60.5
9.2%
18.9%
–
28.1%
39.3%
45.1%
–
84.4%
41.8%
27.4%
–
69.2%
(4.7%)
30.6%
–
25.9%
42.6%
22.5%
–
65.1%
Total
$m
179.7
161.1
115.6
46.9
29.2
15.4
13.5
72.5
633.9
(175.2)
25.7
3.7
488.1
(212.2)
69.7
(135.1)
3.0
213.5
(63.1)
150.4
29.2%
27.1%
20.2%
76.5%
(1) Worldwide, including the U.S. and Canada, comprises insurance and reinsurance contracts that insure or reinsure risks in more than one geographic area.
(2) Worldwide, excluding the U.S. and Canada, comprises insurance and reinsurance contracts that insure or reinsure risks in more than one geographic area, but that
specifically exclude the U.S. and Canada.
128
Lancashire Holdings Limited | Annual Report & Accounts 2017
3. Investment return
The total investment return for the Group is as follows:
For the year ended 31 December 2017
Fixed maturity securities – AFS
Fixed maturity securities – at FVTPL
Equity securities – AFS
Hedge funds – at FVTPL
Other investments
Cash and cash equivalents
Total investment return
Net investment
income and net
other investment
income1
$m
28.6
(1.0)
–
1.1
1.1
1.9
31.7
Net realised
gains (losses)
and impairments
$m
(2.9)
2.4
0.8
9.5
(0.7)
–
9.1
Net change
in unrealised
gains/losses
on AFS
$m
2.1
–
2.8
–
–
–
4.9
Total investment
return excluding
foreign exchange
$m
27.8
1.4
3.6
10.6
0.4
1.9
45.7
Net foreign
exchange
gains (losses)
$m
9.8
–
–
–
(2.6)
0.5
7.7
Total investment
return including
foreign exchange
$m
37.6
1.4
3.6
10.6
(2.2)
2.4
53.4
(1) Net unrealised gains/(losses) on our FVTPL investments are included within net investment income and net other investment income.
For the year ended 31 December 2016
Fixed maturity securities – AFS
Fixed maturity securities – at FVTPL
Equity securities – AFS
Hedge funds – at FVTPL
Other investments
Cash and cash equivalents
Total investment return
Net investment
income and net
other investment
income1
$m
28.4
1.2
0.3
4.3
1.4
1.1
36.7
Net realised
gains (losses)
and impairments
$m
1.8
–
(1.3)
(0.8)
(2.1)
–
(2.4)
Net change
in unrealised
gains/losses
on AFS
$m
3.7
–
0.4
–
–
–
4.1
Total investment
return excluding
foreign exchange
$m
33.9
1.2
(0.6)
3.5
(0.7)
1.1
38.4
Net foreign
exchange
gains (losses)
$m
(0.5)
–
–
–
(0.2)
(0.9)
(1.6)
Total investment
return including
foreign exchange
$m
33.4
1.2
(0.6)
3.5
(0.9)
0.2
36.8
(1) Net unrealised gains/(losses) on our FVTPL investments are included within net investment income and net other investment income.
Net realised gains (losses) and impairments includes impairment losses of $1.3 million (2016 – $3.5 million) recognised on fixed maturity
securities and $nil (2016 – $0.4 million) recognised on equity securities held by the Group.
Refer to pages 114 to 115 in the risk disclosures section for the estimated fair values of the Group’s derivative instruments. Realised gains and
losses on futures and options contracts are included in net realised gains (losses) and impairments.
Included in net investment income and net other investment income is $4.6 million (2016 – $4.5 million) of investment management,
accounting and custodian fees.
4. Net insurance acquisition expenses
Insurance acquisition expenses
Changes in deferred insurance acquisition expenses
Insurance acquisition expenses ceded
Changes in deferred insurance acquisition expenses ceded
Total net insurance acquisition expenses
2017
$m
115.9
4.8
(7.2)
2.1
115.6
2016
$m
129.4
5.7
(3.1)
0.1
132.1
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129
OverviewStrategyPerformanceGovernanceFinancial statements
Notes to the accounts continued
5. Results of operating activities
Results of operating activities are stated after charging the following amounts:
Depreciation on owned assets
Operating lease charges
Auditors’ remuneration
– Group audit fees
– Other services
Total
2017
$m
1.8
3.4
1.8
–
7.0
2016
$m
2.3
2.3
1.8
0.1
6.5
During 2017, KPMG provided non-audit services in relation to specified work over the distributable reserves and pre-appointment procedures
on the first quarter 2017 earnings release. Fees for non-audit services provided in 2017 totalled twenty thousand dollars. During 2016, EY
provided non-audit services in relation to taxation services. All fees paid to the Group’s auditors for non-audit services are approved by the
Group’s Audit Committee.
6. Employee benefits
Wages and salaries
Pension costs
Bonus and other benefits
Total cash compensation
RSS – performance
RSS – ordinary
RSS – bonus deferral
RSS – Cathedral acquisition grant
Total equity based compensation
Total employee benefits
2017
$m
27.6
2.5
10.1
40.2
(1.9)
2.9
2.1
(3.5)
(0.4)
39.8
2016
$m
27.1
3.1
31.2
61.4
8.3
1.2
2.0
(0.8)
10.7
72.1
Equity based compensation
The Group’s equity based compensation scheme is its RSS. All outstanding and future RSS grants have an exercise period of ten years from
the grant date.
The fair value of any TSR component of the nil-cost options is estimated using a stochastic model. For all other components the Black-Scholes
model is used to estimate the fair value.
The following table lists the assumptions used in the stochastic model for the RSS awards granted during the years ended 31 December 2017
and 2016:
Assumptions
Dividend yield
Expected volatility1
Risk-free interest rate2
Expected average life of options
Share price
2017
–
25.1%
0.1%
3 years
$8.60
2016
–
22.2%
0.5%
3 years
$8.85
(1) The expected volatility of LHL and comparator companies’ share prices are calculated based on the movement in the share prices over a period prior to the grant date,
equal in length to the expected life of the award.
(2) The risk-free interest rate is consistent with three- year UK government bond yields on the date of grant.
The calculation of the equity based compensation expense assumes forfeitures due to employee turnover of 10.0 per cent per annum prior to
vesting, with subsequent adjustments to reflect actual experience.
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Lancashire Holdings Limited | Annual Report & Accounts 2017
RSS – Performance
The performance RSS options vest after a three-year period and are dependent on certain performance criteria. A maximum of 75.0 per cent
of the performance RSS options will vest only on the achievement of an RoE in excess of a required amount. A maximum of 25.0 per cent
of the performance RSS options will vest only on the achievement of a TSR in excess of the 75th percentile of the TSR of a predefined
comparator group. For all RSS options issued in 2012 and earlier the performance criteria was split as 50.0 per cent relating to RoE and
50.0 per cent relating to TSR. An amount equivalent to the dividends paid between the grant date and the exercise date accrues and is
paid at the time of exercise, pro-rata according to the number of RSS options that vest.
Outstanding as at 31 December 2015
Granted
Exercised
Forfeited
Lapsed
Outstanding as at 31 December 2016
Granted
Exercised
Forfeited
Lapsed
Outstanding as at 31 December 2017
Exercisable as at 31 December 2016
Exercisable as at 31 December 2017
Weighted average remaining contractual life
Weighted average fair value at date of grant during the year
Weighted average share price at date of exercise during the year
Total number of
restricted stock
3,272,137
886,916
(499,296)
(72,024)
(224,576)
3,363,157
1,018,933
(509,524)
(156,461)
(257,894)
3,458,211
226,863
249,112
2017
2016
Total
restricted stock
7.8 years
$7.56
$8.82
Total
restricted stock
8.0 years
$7.60
$8.27
RSS – Ordinary
The ordinary RSS options were issued for the first time in 2016 and vest three years from the date of grant and do not have associated
performance criteria for vesting. An amount equivalent to the dividends paid between the grant date and the exercise date accrues and is paid
at the time of exercise. These awards will become exercisable in the first open period following the release of the Company’s 2018 year-end
results after the Board meeting in February 2019.
Granted
Forfeited
Outstanding as at 31 December 2016
Granted
Forfeited
Outstanding as at 31 December 2017
Weighted average remaining contractual life
Weighted average fair value at date of grant during the year
Total number of
restricted stock
688,714
(91,194)
597,520
699,251
(10,025)
1,286,746
2017
2016
Total
restricted stock
8.7 years
$8.49
Total
restricted stock
9.1 years
$8.85
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131
OverviewStrategyPerformanceGovernanceFinancial statements Notes to the accounts continued
6. Employee benefits continued
RSS – Bonus deferral
The bonus deferral RSS options vesting periods range from one to three years from the date of grant and do not have associated performance
criteria for vesting. An amount equivalent to the dividends paid between the grant date and the exercise date accrues and is paid at the time
of exercise.
Outstanding as at 31 December 2015
Granted
Exercised
Forfeited
Outstanding as at 31 December 2016
Granted
Exercised
Forfeited
Outstanding as at 31 December 2017
Exercisable as at 31 December 2016
Exercisable as at 31 December 2017
Number of
employee
restricted stock
435,275
270,752
(180,737)
(1,727)
523,563
244,523
(220,448)
–
547,638
80,576
78,295
Number of
non-employee
restricted stock
2,555
–
–
–
2,555
–
–
(2,555)
–
2,555
–
Total number of
restricted stock
437,830
270,752
(180,737)
(1,727)
526,118
244,523
(220,448)
(2,555)
547,638
83,131
78,295
Weighted average remaining contractual life
Weighted average fair value at date of grant during
the year
Weighted average share price at date of exercise during
the year
2017
2016
Employee
restricted stock
8.3 years
Non-employee
restricted stock
–
Total
restricted stock
8.3 years
Employee
restricted stock
8.5 years
Non-employee
restricted stock
0.1 years
Total
restricted stock
8.5 years
$8.58
$8.73
–
–
$8.58
$8.73
$7.72
$8.24
–
–
$7.72
$8.24
RSS – Cathedral acquisition
The Cathedral acquisition RSS options vesting periods range from three to five years and are dependent on certain performance criteria.
A maximum of 75.0 per cent of the Cathedral acquisition RSS options will vest on the achievement of a Cathedral combined ratio below a
required amount. A maximum of 25.0 per cent of the Cathedral acquisition RSS options vest on the achievement of an LHL RoE in excess
of a required amount. An amount equivalent to the dividends paid between the grant date and the exercise date accrues and is paid at the
time of exercise. The first tranche of awards were exercisable in 2017.
Outstanding as at 31 December 2015
Forfeited
Outstanding as at 31 December 2016
Exercised
Forfeited
Lapsed
Outstanding as at 31 December 2017
Exercisable as at 31 December 2017
Weighted average remaining contractual life
Weighted average fair value at date of grant
132
Lancashire Holdings Limited | Annual Report & Accounts 2017
Total number of
restricted stock
2,307,157
(950,907)
1,356,250
(400,166)
(556,768)
(29,838)
369,478
205,955
2017
2016
Total
restricted stock
5.9 years
$13.01
Total
restricted stock
6.9 years
$13.01
7. Financing costs
Interest expense on long-term debt
Net losses on interest rate swaps
Other financing costs
Total
2017
$m
16.4
–
1.1
17.5
2016
$m
15.6
1.0
1.6
18.2
Refer to note 17 for details of long-term debt and financing arrangements.
8. Tax
Bermuda
LHL, LICL and LUK have received an undertaking from the Bermuda government exempting them from all Bermuda local income,
withholding and capital gains taxes until 31 March 2035. At the present time no such taxes are levied in Bermuda.
United Kingdom
LHL and its UK subsidiaries are subject to normal UK corporation tax on all their taxable profits.
Corporation tax charge for the period
Adjustments in respect of prior period corporation tax
Deferred tax credit for the period
Tax rate change adjustment
Adjustments in respect of prior period deferred tax
Total tax credit
Tax reconciliation1
(Loss) profit before tax
Corporation tax at 19.3% (2016 – 20.0%)
Non-taxable loss (income)
Adjustments in respect of prior period
Differences related to equity based compensation
Other expense permanent differences
Tax rate change adjustment
Unused tax losses not recognised for deferred tax
Utilisation of tax losses previously unrecognised for deferred tax
Total tax credit
(1) All tax reconciling balances have been classified as recurring items.
2017
$m
3.3
(2.3)
(4.1)
(0.6)
1.4
(2.3)
2017
$m
(72.9)
(14.1)
10.1
(0.9)
(0.6)
3.8
(0.6)
–
–
(2.3)
2016
$m
2.7
(2.4)
(4.0)
(0.8)
0.6
(3.9)
2016
$m
150.4
30.1
(34.4)
(1.8)
0.6
3.1
(0.8)
0.6
(1.3)
(3.9)
The current tax credit as a percentage of the Group’s loss (2016 – profit) before tax is negative 3.2 per cent (2016 – 2.6 per cent). Non-taxable
(loss) income relates to (losses) profits of companies within the Group that are non-tax resident in the UK and the share of (loss) profit
of associate.
Refer to note 10 for details of the tax expense related to the net change in unrealised gains/losses on investments that is included in
accumulated other comprehensive loss within shareholders’ equity.
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133
OverviewStrategyPerformanceGovernanceFinancial statements Notes to the accounts continued
9. Cash and cash equivalents
Cash at bank and in hand
Cash equivalents
Total cash and cash equivalents
2017
$m
107.0
149.5
256.5
2016
$m
122.4
186.4
308.8
Cash equivalents have an original maturity of three months or less. The carrying amount of these assets approximates their fair value. Refer to
note 17 for the cash and cash equivalent balances on deposit as collateral. Cash and cash equivalents includes managed cash of $188.1 million
(31 December 2016 – $192.1 million).
10. Investments
As at 31 December 2017
Fixed maturity securities – AFS
– Short-term investments
– Fixed maturity funds
– U.S. treasuries
– Other government bonds
– U.S. municipal bonds
– U.S. government agency debt
– Asset backed securities
– U.S. government agency mortgage backed securities
– Non-agency mortgage backed securities
– Non-agency commercial mortgage backed securities
– Bank loans
– Corporate bonds
Total fixed maturity securities – AFS
Fixed maturity securities – at FVTPL
Equity securities – AFS
Hedge funds – at FVTPL
Other investments
Total investments
Cost or
amortised cost
$m
Unrealised
gains
$m
Unrealised
losses
$m
Estimated
fair value
$m
111.2
31.2
237.4
71.2
6.0
71.2
139.5
142.4
13.2
0.2
106.5
520.1
1,450.1
25.7
20.0
144.6
–
1,640.4
–
–
0.1
0.8
–
–
4.9
0.4
0.2
–
0.8
3.6
10.8
–
3.2
9.8
–
23.8
(0.1)
(0.2)
(1.8)
(0.6)
–
(0.7)
(0.4)
(1.8)
(0.2)
–
(0.6)
(2.3)
(8.7)
–
–
(0.4)
(0.5)
(9.6)
111.1
31.0
235.7
71.4
6.0
70.5
144.0
141.0
13.2
0.2
106.7
521.4
1,452.2
25.7
23.2
154.0
(0.5)
1,654.6
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Lancashire Holdings Limited | Annual Report & Accounts 2017
As at 31 December 2016
Fixed maturity securities – AFS
– Short-term investments
– Fixed maturity funds
– U.S. treasuries
– Other government bonds
– U.S. municipal bonds
– U.S. government agency debt
– Asset backed securities
– U.S. government agency mortgage backed securities
– Non-agency mortgage backed securities
– Non-agency commercial mortgage backed securities
– Bank loans
– Corporate bonds
Total fixed maturity securities – AFS
Fixed maturity securities – at FVTPL
Equity securities – AFS
Hedge funds – at FVTPL
Total investments
Cost or
amortised cost
$m
Unrealised
gains
$m
Unrealised
losses
$m
Estimated
fair value
$m
5.3
14.5
307.8
67.6
1.0
83.2
111.1
119.8
14.6
9.7
120.8
600.2
1,455.6
50.5
20.8
122.5
1,649.4
–
–
0.1
0.1
0.1
–
0.3
0.7
0.1
–
1.4
1.7
4.5
1.1
0.8
7.4
13.8
–
–
(2.4)
(1.1)
–
(1.3)
(1.2)
(2.2)
(0.4)
(0.1)
(0.6)
(4.6)
(13.9)
–
(0.4)
(0.5)
(14.8)
5.3
14.5
305.5
66.6
1.1
81.9
110.2
118.3
14.3
9.6
121.6
597.3
1,446.2
51.6
21.2
129.4
1,648.4
Accumulated other comprehensive loss is in relation to the Group’s AFS fixed maturity and equity securities and is as follows:
Unrealised gains
Unrealised losses
Net unrealised foreign exchange (gains) losses on fixed maturity securities – AFS
Tax provision
Accumulated other comprehensive loss
2017
$m
14.0
(8.7)
(6.9)
0.1
(1.5)
2016
$m
5.3
(14.3)
2.5
0.1
(6.4)
Fixed maturity securities are presented in the risk disclosures section on page 120. Refer to note 17 for the investment balances in trusts in
favour of ceding companies and on deposit as collateral.
The Group determines the estimated fair value of each individual security utilising the highest level inputs available. Prices for the Group’s
investment portfolio are provided by a third-party investment accounting firm whose pricing processes and the controls thereon are subject
to an annual audit on both the operation and the effectiveness of those controls. The audit reports are available to clients of the firm and the
report is reviewed annually by management. In accordance with their pricing policy, various recognised reputable pricing sources are used
including broker-dealers and pricing vendors. The pricing sources use bid prices where available, otherwise indicative prices are quoted
based on observable market trade data. The prices provided are compared to the investment managers’ pricing. The Group has not made any
adjustments to any pricing provided by independent pricing services or its third-party investment managers for either year ending 31 December.
The fair value of securities in the Group’s investment portfolio is estimated using the following techniques:
Level (i)
Level (i) investments are securities with quoted prices in active markets. A financial instrument is regarded as quoted in an active market if
quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and
those prices represent actual and regularly occurring market transactions on an arm’s length basis. The Group determines securities classified
as Level (i) to include highly liquid U.S. treasuries, certain highly liquid short-term investments and quoted equity securities.
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135
OverviewStrategyPerformanceGovernanceFinancial statements Notes to the accounts continued
10. Investments continued
Level (ii)
Level (ii) investments are securities with quoted prices in active markets for similar assets or liabilities or securities valued using other valuation
techniques for which all significant inputs are based on observable market data. Instruments included in Level (ii) are valued via independent
external sources using modeled or other valuation methods. Such methods are typically industry accepted standard and include:
• broker-dealer quotes;
• pricing models or matrix pricing;
• present values;
• future cash flows;
• yield curves;
• interest rates;
• prepayment speeds; and
• default rates.
Other similar quoted instruments or market transactions may be used.
The Group determines securities classified as Level (ii) to include short-term and fixed maturity investments and certain derivatives such as:
• Short-term investments;
• Fixed maturity funds;
• Other government bonds;
• U.S. municipal bonds;
• U.S. government agency debt;
• Asset backed securities;
• U.S. government agency mortgage backed securities;
• Non-agency mortgage backed securities;
• Non-agency commercial mortgage backed securities;
• Bank loans;
• Corporate bonds; and
• OTC derivatives, such as options, forward foreign exchange contracts, interest rate swaps and credit default swaps.
136
Lancashire Holdings Limited | Annual Report & Accounts 2017
Level (iii)
Level (iii) investments are securities for which valuation techniques are not based on observable market data. The Group classifies hedge funds
as Level (iii) assets as the valuation technique incorporates both observable and unobservable inputs.
The estimated fair values of the Group’s hedge funds are determined using a combination of the most recent NAVs provided by each fund’s
independent administrator and the estimated performance provided by each hedge fund manager. Independent administrators provide
monthly reported NAVs with up to a one-month delay in valuation. The most recent NAV available for each hedge fund is adjusted for the
estimated performance, as provided by the fund manager, between the NAV date and the reporting date. Historically estimated fair values
incorporating these performance estimates have not been significantly different from subsequent NAVs. Given the Group’s knowledge of
the underlying investments and the size of the Group’s investment therein, we would not anticipate any material variance between estimated
valuations and the final NAVs reported by the administrators.
The Group determines whether transfers have occurred between levels of the fair value hierarchy by re-assessing the categorisation at the end
of each reporting period based on the lowest level input that is significant to the fair value measurement as a whole.
The fair value hierarchy of the Group’s investment holdings is as follows:
As at 31 December 2017
Fixed maturity securities – AFS
– Short-term investments
– Fixed maturity funds
– U.S. treasuries
– Other government bonds
– U.S. municipal bonds
– U.S. government agency debt
– Asset backed securities
– U.S. government agency mortgage backed securities
– Non-agency mortgage backed securities
– Non-agency commercial mortgage backed securities
– Bank loans
– Corporate bonds
Total fixed maturity securities – AFS
Fixed maturity securities – at FVTPL
Equity securities – AFS
Hedge funds – at FVTPL
Other investments
Total investments
Level (i)
$m
Level (ii)
$m
Level (iii)
$m
Total
$m
104.6
–
235.7
–
–
–
–
–
–
–
–
–
340.3
–
23.2
–
–
363.5
6.5
31.0
–
71.4
6.0
70.5
144.0
141.0
13.2
0.2
106.7
521.4
1,111.9
25.7
–
–
(0.5)
1,137.1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
154.0
–
154.0
111.1
31.0
235.7
71.4
6.0
70.5
144.0
141.0
13.2
0.2
106.7
521.4
1,452.2
25.7
23.2
154.0
(0.5)
1,654.6
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OverviewStrategyPerformanceGovernanceFinancial statements Notes to the accounts continued
10. Investments continued
As at 31 December 2016
Fixed maturity securities – AFS
– Short-term investments
– Fixed maturity funds
– U.S. treasuries
– Other government bonds
– U.S. municipal bonds
– U.S. government agency debt
– Asset backed securities
– U.S. government agency mortgage backed securities
– Non-agency mortgage backed securities
– Non-agency commercial mortgage backed securities
– Bank loans
– Corporate bonds
Total fixed maturity securities – AFS
Fixed maturity securities – at FVTPL
Equity securities – AFS
Hedge funds – at FVTPL
Total investments
Level (i)
$m
Level (ii)
$m
Level (iii)
$m
Total
$m
4.0
–
305.5
–
–
–
–
–
–
–
–
–
309.5
–
21.2
–
330.7
1.3
14.5
–
66.6
1.1
81.9
110.2
118.3
14.3
9.6
121.6
597.3
1,136.7
51.6
–
–
1,188.3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
129.4
129.4
5.3
14.5
305.5
66.6
1.1
81.9
110.2
118.3
14.3
9.6
121.6
597.3
1,446.2
51.6
21.2
129.4
1,648.4
Hedge funds
$m
156.0
(30.3)
3.7
129.4
149.7
(136.5)
11.4
154.0
There have been no transfers between Levels (i) and (ii), therefore no reconciliations have been presented.
The table below analyses the movements in hedge funds classified as Level (iii) investments:
As at 31 December 2015
Sales
Total net realised and unrealised gains recognised in profit or loss
As at 31 December 2016
Purchases
Sales
Total net realised and unrealised gains recognised in profit or loss
As at 31 December 2017
11. Interests in structured entities
A. Consolidated structured entities
The Group’s two consolidated structured entities are the EBT and the Orange Fund.
• The Group provides capital contributions to the EBT to enable it to meet its obligations to employees under the equity based compensation
plans. The Group has a contractual agreement which may require it to provide financial support to the EBT.
• The Orange Fund was opened during 2017 and holds short duration high-quality cash equivalents and fixed maturity securities, and
Lancashire Group companies are the only investors in the Orange Fund. The primary objectives of the fund are to preserve capital and
provide liquidity to support the Group’s operations.
B. Unconsolidated structured entities in which the Group has an interest
As part of its investment activities, the Group invests in unconsolidated structured entities. As at 31 December 2017, the Group’s total interest
in unconsolidated structured entities was $511.8 million (31 December 2016 – $431.5 million). The Group does not sponsor any of the
unconsolidated structured entities.
138
Lancashire Holdings Limited | Annual Report & Accounts 2017
A summary of the Group’s interest in consolidated and unconsolidated structured entities is as follows:
As at 31 December 2017
Fixed maturity securities
– Asset backed securities
– U.S. government agency mortgage backed securities
– Non-agency mortgage backed securities
– Non-agency commercial mortgage backed securities
Total fixed maturity securities
Investment funds
– Hedge funds
Total investment funds
Specialised investment vehicles
– KHL (note 15)
Total
As at 31 December 2016
Fixed maturity securities
– Asset backed securities
– U.S. government agency mortgage backed securities
– Non-agency mortgage backed securities
– Non-agency commercial mortgage backed securities
Total fixed maturity securities
Investment funds
– Hedge funds
Total investment funds
Specialised investment vehicles
– KHL (note 15)
Total
Orange
Fund
$m
8.1
3.1
–
–
11.2
–
–
–
11.2
Investments
$m
Interest in
associate
$m
135.9
137.9
13.2
0.2
287.2
154.0
154.0
–
441.2
–
–
–
–
–
–
–
59.4
59.4
Investments
$m
Interest in
associate
$m
110.2
118.3
14.3
9.6
252.4
129.4
129.4
–
381.8
–
–
–
–
–
–
–
49.7
49.7
Total
$m
144.0
141.0
13.2
0.2
298.4
154.0
154.0
59.4
511.8
Total
$m
110.2
118.3
14.3
9.6
252.4
129.4
129.4
49.7
431.5
The fixed maturity structured entities are created to meet specific investment needs of borrowers and investors which cannot be met from
standardised financial instruments available in the capital markets. As such, they provide liquidity to the borrowers in these markets and
provide investors with an opportunity to diversify risk away from standard fixed maturity securities. Whilst individual securities may differ
in structure, the principles of the instruments are broadly the same and it is appropriate to aggregate the investments into the categories
detailed above.
The risk that the Group faces in respect of the investments in structured entities is similar to the risk it faces in respect of other financial
investments held on the consolidated balance sheet in that fair value is determined by market supply and demand. This is in turn driven by
investor evaluation of the credit risk of the structure and changes in term structure of interest rates which change investors’ expectation of the
cash flows associated with the instrument and, therefore, its value in the market. Risk management disclosures for these financial instruments
and other investments is provided on pages 110 to 121. The total assets of these structured entities are not considered meaningful for the
purpose of understanding the related risks and therefore have not been presented.
The maximum exposure to loss in respect of these structured entities would be the carrying value of the instruments that the Group holds as
at 31 December 2017 and 31 December 2016. Generally, default rates would have to increase substantially from their current level before the
Group would suffer a loss and this assessment is made prior to investing and regularly through the holding period for the security. The Group
has not provided any other financial or other support in addition to that described above as at the reporting date, and there is no intention to
provide support in relation to any other unconsolidated structured entities in the foreseeable future.
www.lancashiregroup.com
139
OverviewStrategyPerformanceGovernanceFinancial statements Notes to the accounts continued
11. Interests in structured entities continued
As at 31 December 2017 the Group has a commitment of $100.0 million (31 December 2016 – $50.0 million) in respect of two credit facility
funds. The Group, via the funds, provides collateral for revolving credit facilities purchased at a discount from financial institutions and is
at risk for its portion of any defaults on those revolving credit facilities. The Group’s proportionate share of these revolving credit facilities
purchased by the funds as at 31 December 2017 is $64.4 million (31 December 2016 – $37.5 million), which currently remains unfunded.
The maximum exposure to the credit facility funds is $100.0 million and as at 31 December 2017 there have been no defaults under
these facilities.
12. Losses and loss adjustment expenses
As at 31 December 2015
Net incurred losses for:
Prior years
Current year
Exchange adjustments
Incurred losses and loss adjustment expenses
Net paid losses for:
Prior years
Current year
Paid losses and loss adjustment expenses
As at 31 December 2016
Net incurred losses for:
Prior years
Current year
Exchange adjustments
Incurred losses and loss adjustment expenses
Net paid losses for:
Prior years
Current year
Paid losses and loss adjustment expenses
As at 31 December 2017
Losses and
loss adjustment
expenses
$m
671.0
Reinsurance
recoveries
$m
(83.9)
Net losses and
loss adjustment
expenses
$m
587.1
(89.7)
301.9
(3.8)
208.4
139.4
60.2
199.6
679.8
(40.1)
578.1
18.8
556.8
231.1
72.0
303.1
933.5
3.9
(73.6)
1.4
(68.3)
(8.0)
(7.5)
(15.5)
(136.7)
(25.0)
(177.6)
(0.7)
(203.3)
(50.2)
(5.7)
(55.9)
(284.1)
(85.8)
228.3
(2.4)
140.1
131.4
52.7
184.1
543.1
(65.1)
400.5
18.1
353.5
180.9
66.3
247.2
649.4
Further information on the calculation of loss reserves and the risks associated with them is provided in the risk disclosures section from page
107. The risks associated with general insurance contracts are complex and do not readily lend themselves to meaningful sensitivity analysis.
The impact of an unreported event could lead to a significant increase in the Group’s loss reserves. The Group believes that the loss reserves
established are adequate, however a 20.0 per cent increase in estimated losses would lead to a $186.7 million (31 December 2016 – $136.0
million) increase in gross loss reserves. There was no change to the Group’s reserving methodology during the year. The split of losses and
loss adjustment expenses between notified outstanding losses, ACRs assessed by management and IBNR is shown below:
As at 31 December
Outstanding losses
Additional case reserves
Losses incurred but not reported
Total
2017
$m
300.4
186.5
446.6
933.5
%
32.2
20.0
47.8
100.0
2016
$m
328.1
144.5
207.2
679.8
%
48.3
21.3
30.4
100.0
The Group’s reserve for unpaid losses and loss adjustment expenses as at 31 December 2017 and 2016 had an estimated duration of
approximately two years.
140
Lancashire Holdings Limited | Annual Report & Accounts 2017
Claims development
The development of insurance liabilities is indicative of the Group’s ability to estimate the ultimate value of its insurance liabilities. The Group
began writing insurance and reinsurance business in December 2005. With the acquisition of Cathedral in 2013, the Group assumed
additional loss reserves relating to 2001 and subsequent years.
Accident year
Gross Group losses
Estimate of ultimate liability1
At end of accident year
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
2007
and prior
$m
228.6
163.2
131.1
122.0
107.9
105.0
148.2
146.4
143.1
142.4
140.6
2008
$m
2009
$m
2010
$m
2011
$m
2012
$m
2013
$m
2014
$m
2015
$m
2016
$m
2017
$m
Total
$m
580.1
298.5
310.7
276.0
214.6
196.2
274.8
226.7
206.0
196.5
280.0
259.8
224.0
224.4
222.1
250.3
350.4
338.8
326.9
313.3
308.7
397.0
371.9
447.0
450.4
460.0
450.7
452.6
297.4
209.4
204.2
235.8
229.4
231.4
229.8
229.6
163.3
107.8
73.1
66.0
89.1
81.7
72.9
90.8
89.6
444.6
417.4
377.5
345.1
340.8
355.6
350.9
353.6
352.5
353.1
Current estimate of cumulative
liability
Paid
Total Group gross liability
140.6
353.1
(113.1) (341.1)
12.0
27.5
229.6
452.6
89.6
310.7
(60.2) (215.9) (421.4) (267.3) (200.0) (167.5) (153.5) (134.3)
176.4
29.4
308.7
196.2
222.1
196.5
13.7
29.0
41.4
42.7
31.2
22.1
580.1 3,079.8
(72.0) (2,146.3)
933.5
508.1
(1) Adjusted for revaluation of foreign currencies at the exchange rate as at 31 December 2017.
Accident year
Reinsurance
Estimate of ultimate recovery1
At end of accident year
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Current estimate of cumulative
recovery
Paid
Total Group gross recovery
2007
and prior
$m
3.6
6.2
4.0
3.5
3.3
3.1
29.1
29.2
28.8
27.8
26.6
2008
$m
2009
$m
2010
$m
2011
$m
2012
$m
2013
$m
2014
$m
2015
$m
2016
$m
2017
$m
Total
$m
177.6
73.1
98.5
15.3
12.2
12.6
17.8
14.1
13.1
11.5
9.9
8.9
8.8
8.0
8.0
48.9
121.8
122.0
121.2
121.2
121.2
56.2
52.6
92.4
88.9
103.3
102.8
106.1
33.8
23.6
24.1
33.5
34.4
34.6
35.7
36.2
1.6
1.3
0.7
0.7
10.0
7.0
2.5
2.5
1.3
40.7
47.1
43.1
40.9
38.1
40.7
39.8
40.4
40.9
41.0
26.6
(7.3)
19.3
41.0
(39.0)
2.0
1.3
0.5
1.8
36.2
(34.4)
1.8
106.1
121.2
(99.2) (117.8)
3.4
6.9
8.0
(7.4)
0.6
11.5
(8.0)
3.5
12.6
(12.0)
0.6
98.5
(26.2)
72.3
177.6
(5.7)
171.9
640.6
(356.5)
284.1
(1) Adjusted for revaluation of foreign currencies at the exchange rate as at 31 December 2017.
www.lancashiregroup.com
141
OverviewStrategyPerformanceGovernanceFinancial statements Notes to the accounts continued
12. Losses and loss adjustment expenses continued
Accident year
Net Group losses
Estimate of ultimate liability1
At end of accident year
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
2007
and prior
$m
225.0
157.0
127.1
118.5
104.6
101.9
119.1
117.2
114.3
114.6
114.0
2008
$m
2009
$m
2010
$m
2011
$m
2012
$m
2013
$m
2014
$m
2015
$m
2016
$m
2017
$m
Total
$m
402.5
225.4
212.2
260.7
202.4
183.6
257.0
212.6
192.9
185.0
270.1
250.9
215.2
216.4
214.1
201.4
228.6
216.8
205.7
192.1
187.5
340.8
319.3
354.6
361.5
356.7
347.9
346.5
263.6
185.8
180.1
202.3
195.0
196.8
194.1
193.4
161.7
106.5
72.4
65.3
79.1
74.7
70.4
88.3
88.3
403.9
370.3
334.4
304.2
302.7
314.9
311.1
313.2
311.6
312.1
Current estimate of cumulative
liability
Paid
Total Group net liability
114.0
312.1
(105.8) (302.1)
10.0
8.2
193.4
346.5
88.3
212.2
(60.7) (181.5) (322.2) (149.5) (192.6) (159.5) (141.5) (108.1)
104.1
27.6
187.5
214.1
183.6
185.0
25.5
38.0
11.9
42.1
21.5
24.3
402.5 2,439.2
(66.3) (1,789.8)
649.4
336.2
(1) Adjusted for revaluation of foreign currencies at the exchange rate as at 31 December 2017.
The inherent uncertainty in reserving gives rise to favourable or adverse development on the established reserves. The total favourable
development on net losses and loss adjustment expenses, excluding the impact of foreign exchange revaluations, was as follows:
2007 accident year and prior
2008 accident year
2009 accident year
2010 accident year
2011 accident year
2012 accident year
2013 accident year
2014 accident year
2015 accident year
2016 accident year
Total favourable development
2017
$m
0.6
(0.5)
0.1
1.8
8.8
5.0
3.5
9.2
20.3
16.3
65.1
2016
$m
(0.4)
1.6
(18.0)
3.2
9.9
13.5
(1.6)
19.9
57.7
–
85.8
Despite some adverse development on prior accident year property and energy claims in 2017, the overall favourable development was
primarily due to general IBNR releases across most lines of business due to a lack of reported claims. Experience in 2016 was similar in terms
of releases, offset partially by some adverse development on prior accident year energy and marine claims.
In September 2017, hurricanes Harvey, Irma and Maria made landfall in the Caribbean and U.S., causing significant damage and destruction
to property. These events were followed by wildfires in California during October 2017 and December 2017. Management’s current best
estimates in relation to each of these events are shown in the table below.
The Group’s estimated ultimate net losses, after reinstatement premiums, for these significant events are as follows:
Change in insurance losses and loss adjustment expenses
Change in insurance losses and loss adjustment expenses recoverable
Change in reinstatement premiums
Net ultimate losses as at 31 December 2017
142
Lancashire Holdings Limited | Annual Report & Accounts 2017
Harvey
$m
66.3
(18.5)
(3.3)
44.5
Irma
$m
108.9
(55.1)
(1.7)
52.1
Maria
$m
78.5
(43.1)
(2.3)
33.1
Combined
California Wildfires
$m
75.9
(41.4)
(0.4)
34.1
13. Insurance, reinsurance and other receivables
All receivables are considered current other than $53.7 million (31 December 2016 – $58.4 million) of inwards premiums receivable related
to multi-year contracts. The carrying value approximates fair value due to the short-term nature of the receivables. There are no significant
concentrations of credit risk within the Group’s receivables.
14. Provision for deferred tax
Equity based compensation
Claims equalisation reserves
Syndicate underwriting profits
Syndicate participation rights
Other temporary differences
Tax losses carried forward
Net deferred tax liability
2017
$m
(2.9)
8.3
0.1
12.7
(1.2)
(0.5)
16.5
2016
$m
(3.8)
8.1
2.7
12.8
(0.9)
(0.2)
18.7
Deferred tax assets are recognised to the extent that realising the related tax benefit through future taxable profits is likely. It is anticipated
that sufficient taxable profits will be available within the Group in 2017 and subsequent years to utilise the deferred tax assets recognised when
the underlying temporary differences reverse.
A deferred tax asset of $10.9 million (31 December 2016 – $11.4 million) has not been recognised in relation to unused tax losses carried
forward in LHL, because at present the related tax benefit is not expected to be realised through future taxable profits. For the years ended
31 December 2017 and 2016, the Group had no uncertain tax positions.
Changes to the UK main rate of corporation tax have been enacted under the Finance Act 2015 and Finance Act 2016 reducing the rate to
19.0 per cent from 1 April 2017 and to 17.0 per cent from 1 April 2020.
All deferred tax assets and liabilities are classified as non-current.
15. Investment in associate
The Group holds a 10.0 per cent interest in the preference shares of each segregated account of KHL, a company incorporated in Bermuda.
KHL’s operating subsidiary, KRL, is authorised by the BMA as a Special Purpose Insurer. KRL commenced writing insurance business on
1 January 2014. As at 31 December 2017, the carrying value of the Group’s investment in KHL was $59.4 million (31 December 2016 – $49.7
million). The Group’s share of comprehensive loss for KHL for the period was $9.4 million (2016 – $5.1 million income). Key financial
information for KHL is as follows:
Assets
Liabilities
Shareholders’ equity
Gross premium earned
Comprehensive (loss) income
2017
$m
736.4
141.9
594.5
71.7
(94.3)
2016
$m
506.5
9.2
497.3
54.2
51.1
The Group has the power to participate in operational and financial policy decisions of KHL and KRL through the provision of essential
technical information by KCML and has therefore classified its investment in KHL as an investment in associate.
Refer to note 22 for details of transactions between the Group and its associate.
www.lancashiregroup.com
143
OverviewStrategyPerformanceGovernanceFinancial statements Notes to the accounts continued
16. Intangible assets
Net book value as at 31 December 2017 and 2016
Syndicate
participation
rights
$m
82.6
Goodwill
$m
71.2
Total
$m
153.8
Syndicate participation rights and goodwill are deemed to have an indefinite life as they are expected to have value in use that does not
diminish over the course of time. Consequently, the carrying value is not amortised but tested annually for impairment.
For the purpose of impairment testing, intangible assets are allocated to the Group’s CGUs, in accordance with the manner in which
management operates and monitors the business. The Syndicate participation rights and goodwill have therefore been allocated to
the Lloyd’s CGU.
When testing for impairment, the recoverable amount of the Lloyd’s CGU is determined based on value in use. Value in use is calculated
using projected cash flows based on the financial projections of the CGU. These are approved by management and cover a three year period.
The most significant assumptions used to derive the projected cash flows include an assessment of business prospects, projected loss ratios,
outwards reinsurance expenditure and investment returns. A pre-tax discount rate of 6.2 per cent (2016 – 6.9 per cent) has been used to
discount the projected cash flows, which reflects a combination of factors including the Group’s expected cost of equity and cost of borrowing.
The growth rate used to extrapolate the cash flows is 3.0 per cent (2016 – 3.0 per cent) based on historical growth rates and management’s
best estimate of future growth rates.
The results of this exercise indicate that the recoverable amount exceeds the intangible assets’ carrying value for both the syndicate
participation rights and the goodwill and would not be sensitive to any reasonably possible changes in assumptions. Therefore no impairment
has been recognised during the years ended 31 December 2017 and 2016.
17. Long-term debt and financing arrangements
Long-term debt
On 5 October 2012, the Group issued $130.0 million 5.70 per cent senior unsecured notes due 2022 pursuant to a private offering to U.S.
Qualified Institutional Buyers. Interest on the principal is payable semi-annually. The notes were listed and admitted to trading on the LSE
on 16 October 2012.
On 15 December 2005, the Group issued $97.0 million and €24.0 million in aggregate principal amount of floating rate subordinated loan
notes. The U.S. dollar subordinated loan notes are repayable on 15 December 2035. Interest on the principal is based on a set margin,
3.70 per cent, above the three-month LIBOR and is payable quarterly. The loan notes were issued via a trust company.
The Euro subordinated loan notes are repayable on 15 June 2035. Interest on the principal is based on a set margin, 3.70 per cent, above the
EURIBOR and is payable quarterly. On 21 October 2011, the CSX admitted to the official list the LHL U.S. dollar and Euro subordinated loan
notes due 2035.
In 2013, the Group assumed loan notes, issued by CCHL and listed on the ISE, as part of the Cathedral acquisition. The loan notes acquired
are set out as follows:
• €12.0 million floating rate subordinated loan note issued on 18 November 2004 and repayable in September 2034, paying interest quarterly
based on a set margin, 3.75 per cent, above the three-month EURIBOR;
• $10.0 million floating rate subordinated note loan issued on 26 November 2004 and repayable in September 2034, paying interest quarterly
based on a set margin, 3.75 per cent, above the three-month LIBOR;
• $25.0 million floating rate subordinated loan note issued on 13 May 2005 and repayable in June 2035, paying interest quarterly based on a
set margin, 3.25 per cent, above the three-month LIBOR; and
• $25.0 million floating rate subordinated loan note issued on 18 November 2005 and repayable in December 2035, paying interest quarterly
based on a set margin, 3.25 per cent, above the three-month LIBOR.
The Group has the option to redeem its senior unsecured notes and all of its subordinated loan notes, in whole or in part, prior to the
respective maturity dates.
The terms of the $130.0 million senior unsecured notes include standard default and cross-default provisions which require certain covenants
to be adhered to. These include the following:
• a maximum debt-to-capital ratio of 30.0 per cent, where the subordinated loan notes are included as both total consolidated debt and total
consolidated capital in this calculation.
144
Lancashire Holdings Limited | Annual Report & Accounts 2017
There are no such covenants for either the $97.0 million and €24.0 million in aggregate floating rate subordinated loan notes or the loan
notes issued by CCHL.
As at all reporting dates the Group was in compliance with all covenants under these facilities.
The carrying values of the notes are shown below:
As at 31 December
Long-term debt $130.0 million
Long-term debt $97.0 million
Long-term debt €24.0 million
Long-term debt €12.0 million
Long-term debt $10.0 million
Long-term debt $25.0 million
Long-term debt $25.0 million
Carrying value
2017
$m
130.0
97.0
28.8
13.1
10.0
23.7
23.7
326.3
2016
$m
130.0
97.0
25.3
11.2
10.0
23.7
23.7
320.9
The Group is exposed to cash flow interest rate risk and currency risk on its long-term debt. Further information is provided in the risk
disclosures section on page 117.
The fair value of the long-term debt is estimated as $369.3 million (31 December 2016 – $354.8 million). The fair value measurement is
classified within Level (ii) of the fair value hierarchy. The fair value is estimated by reference to similar financial instruments quoted in
active markets.
The interest accrued on the long-term debt was $2.3 million (31 December 2016 – $2.0 million) at the balance sheet date and is included in
other payables.
Refer to note 7 for details of the interest expense for the year included in financing costs.
Interest rate swaps
The Group hedges a portion of its floating rate borrowings using interest rate swaps to transfer floating to fixed rate. These instruments are
held at estimated fair value. Refer to the risk disclosures section from page 116 for further details. The Group has the right to net
settle these instruments.
The net fair value position owed by the Group on the swap agreements is $2.0 million (31 December 2016 – $3.7 million). Further information
is provided on pages 114 to 116. Cash settlements are completed on a quarterly basis and the total of the next cash settlements in the first
quarter of 2018 on these instruments is $0.3 million. The net impact from cash settlements and changes in estimated fair value are included
in financing costs.
The interest rate swaps are held at estimated fair value, priced using observable market inputs, and are therefore classified as Level (ii)
securities in the fair value hierarchy.
Refer to note 7 for the net impact from cash settlement and changes in estimated fair value included in financing costs.
Letters of credit
As both LICL and LUK are non-admitted insurers or reinsurers throughout the U.S., the terms of certain contracts require them to provide
LOCs to policyholders as collateral. The following LOCs have been issued:
As at 31 December
Issued to third parties
LOCs are required to be fully collateralised.
2017
$m
31.0
2016
$m
29.4
www.lancashiregroup.com
145
OverviewStrategyPerformanceGovernanceFinancial statements Notes to the accounts continued
17. Long-term debt and financing arrangements continued
LHL and LICL had the following facilities in place:
• a $300.0 million syndicated collateralised credit facility with a $75.0 million loan sub-limit that has been in place since 24 March 2016 and
will expire on 24 March 2021. There was no outstanding debt under this facility as at 31 December 2017 and 2016; and
• a $350.0 million syndicated collateralised credit facility with a $75.0 million loan sub-limit that had been in place since 5 April 2012 and was
replaced on 24 March 2016 by the $300.0 million syndicated collateralised credit facility.
The existing facility is available for the issue of LOCs to ceding companies. The facility is also available for LICL to issue LOCs to LUK to
collateralise certain insurance balances.
The terms of the $300.0 million syndicated collateralised credit facility include standard default and cross-default provisions that are broadly
consistent with the previous facility, which require certain covenants to be adhered to. These include the following:
• an A.M. Best financial strength rating of at least B++;
• a maximum debt-to-capital ratio of 30.0 per cent, where the subordinated loan notes are excluded from this calculation;
• a maximum indebtedness regarding the subordinated loan notes of $250.0 million; and
• a maximum indebtedness regarding the Syndicate 2010 and 3010 catastrophe facilities of $150.0 million.
A $130.0 million syndicated uncollateralised facility has been in place since 3 October 2017 and will expire on 31 December 2018. It is
available for utilisation by LICL and guaranteed by LHL for FAL purposes. As at 31 December 2017 $130.0 million of LOCs were issued
under this facility.
The terms of the $130.0 million syndicated uncollateralised facility includes standard default and cross-default provisions and require certain
covenants to be adhered to. These include the following:
• an A.M. Best financial strength rating of at least B++;
• a maximum debt-to-capital ratio of 30.0 per cent, where the subordinated loan notes are excluded from this calculation;
• a maximum indebtedness regarding the subordinated loan notes of $250.0 million; and
• maintenance of a minimum net worth requirement.
As at all reporting dates the Group was in compliance with all covenants under these facilities.
Syndicate bank facilities
As at 31 December 2017 and 2016, Syndicate 2010 had in place an $80.0 million catastrophe facility with Barclays Bank plc. The facility is
available to assist in paying claims and the gross funding of catastrophes for Syndicate 2010. Up to $40.0 million can be utilised by way of an
LOC and up to $40.0 million by way of an RCF to assist Syndicate 2010’s gross funding requirements. For 2018, up to $80.0 million can be
utilised by way of an LOC or an RCF to assist Syndicate 2010’s gross funding requirements.
As at 31 December 2016, Syndicate 3010 had in place a $40.0 million catastrophe facility with Barclays Bank plc. The facility was available to
assist in paying claims and the gross funding of catastrophes for Syndicate 3010. Up to $20.0 million could be utilised by way of an LOC and
up to $20.0 million by way of an RCF to assist Syndicate 3010’s gross funding requirements. This facility was not renewed for the 2017 year.
There are no balances outstanding under either of the Syndicates’ bank facilities as at 31 December 2017 or 2016. The Syndicates’ bank
facilities are not available to the Group other than through its participation on the Syndicates it supports.
Trusts and restricted balances
The Group has several trust arrangements in place in favour of policyholders and ceding companies in order to comply with the security
requirements of certain reinsurance contracts and/or the regulatory requirements of certain jurisdictions.
In 2012, LICL entered into an MBRT to collateralise its reinsurance liabilities associated with U.S. domiciled clients. As at and for the years
ended 31 December 2017 and 2016, LICL had been granted authorised or trusteed reinsurer status in all states. The MBRT is subject to the
rules and regulations of the aforementioned states and the respective deeds of trust. These rules and regulations include minimum capital
funding requirements, investment guidelines, capital distribution restrictions and regulatory reporting requirements.
As at and for the years ended 31 December 2017 and 2016, the Group was in compliance with all covenants under its trust facilities.
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The Group is required to hold a portion of its assets as FAL to support the underwriting capacities of Syndicate 2010 and Syndicate 3010.
FAL are restricted in their use and are only drawn down to pay cash calls to Syndicates supported by the Group. FAL requirements are
formally assessed twice a year and any funds surplus to requirements may be released at that time. See page 125 for more information
regarding FAL requirements.
In addition to the FAL, certain cash and investments held by Syndicate 2010 and Syndicate 3010 are only available for paying the Syndicates’
claims and expenses. See page 125 for more information regarding the capital requirements for Syndicate 2010 and Syndicate 3010.
The following cash and cash equivalents and investment balances were held in trust, other collateral accounts in favour of third parties, or are
otherwise restricted:
As at 31 December
MBRT accounts
FAL
Syndicate accounts
In favour of LOCs
In trust accounts for policyholders
In favour of derivative contracts
Total
18. Share capital
Authorised common shares of $0.50 each
As at 31 December 2017 and 2016
Allocated, called up and fully paid
As at 31 December 2017 and 2016
Own shares
As at 31 December 2015
Shares distributed
Shares donated to trust
As at 31 December 2016
Shares distributed
Shares donated to trust
As at 31 December 2017
2017
2016
Cash and cash
equivalents
$m
50.7
18.4
21.0
5.4
0.8
3.0
99.3
Fixed maturity
securities
$m
132.4
132.5
78.3
35.7
24.6
0.3
403.8
Equity
securities
$m
–
–
–
–
–
–
–
Total
$m
183.1
150.9
99.3
41.1
25.4
3.3
503.1
Cash and cash
equivalents
$m
5.6
13.5
26.8
6.2
3.7
3.8
59.6
Fixed maturity
securities
$m
35.1
254.1
75.9
29.4
21.4
0.3
416.2
Equity
securities
$m
–
1.4
–
–
–
–
1.4
Number
3,000,000,000
Number
201,341,918
Total number
of own shares
3,144,060
(680,033)
–
2,464,027
(1,130,800)
–
1,333,227
$m
12.3
(6.6)
3.5
9.2
(9.9)
12.8
12.1
Number held
in treasury
1,841,526
–
(426,468)
1,415,058
–
(1,415,058)
–
$m
18.1
–
(4.1)
14.0
–
(14.0)
–
Number held
in trust
1,302,534
(680,033)
426,468
1,048,969
(1,130,800)
1,415,058
1,333,227
Total
$m
40.7
269.0
102.7
35.6
25.1
4.1
477.2
$m
1,500
$m
100.7
$m
30.4
(6.6)
(0.6)
23.2
(9.9)
(1.2)
12.1
The number of common shares in issue with voting rights (allocated share capital less shares held in treasury) as at 31 December 2017 was
201,341,918 (31 December 2016 – 199,926,860).
Share repurchases
At the AGM held on 3 May 2017, LHL’s shareholders approved a renewal of the Repurchase Programme authorising the repurchase
of a maximum of 20,134,191 shares, with such authority to expire on the conclusion of the 2018 AGM or, if earlier, 15 months from
the date the resolution approving the Repurchase Programme was passed. There were no share repurchases during either 2017 or 2016.
During the year ended 31 December 2017, 1,415,058 shares (2016 – 426,468 shares) were donated to the EBT at a market value of
$12.8 million (2016 – $3.5 million).
In 2017, the trustees of the EBT distributed 1,130,800 shares (2016 – 680,033 shares). There were no unsettled balances in relation to EBT
purchases at either balance sheet date.
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OverviewStrategyPerformanceGovernanceFinancial statements Notes to the accounts continued
18. Share capital continued
Dividends
The Board of Directors have authorised the following dividends:
Type
Final
Interim
Special
Final
Interim
19. Other reserves
Other reserves consist of the following:
As at 31 December 2015
Shares donated to the trust
Distributed by trust
Equity based compensation – exercises
Equity based compensation – expense
As at 31 December 2016
Shares donated to the trust
Distributed by trust
Equity based compensation – exercises
Equity based compensation – expense
As at 31 December 2017
Per share amount
$0.10
$0.05
$0.75
$0.10
$0.05
Record date
26 Feb 2016
5 Aug 2016
18 Nov 2016
24 Feb 2017
11 Aug 2017
Payment date
23 Mar 2016
31 Aug 2016
14 Dec 2016
22 Mar 2017
6 Sep 2017
$m
19.8
10.0
149.1
19.9
10.0
Contributed
surplus
$m
839.6
(0.6)
(9.5)
10.0
–
839.5
(1.2)
(13.8)
14.6
–
839.1
Equity based
compensation
$m
41.2
–
–
(10.0)
10.9
42.1
–
–
(14.6)
(0.4)
27.1
Total other
reserves
$m
880.8
(0.6)
(9.5)
–
10.9
881.6
(1.2)
(13.8)
–
(0.4)
866.2
20. Commitments and contingencies
A. Lease commitments
The Group has payment obligations in respect of operating leases for certain items of office equipment and office space. Operating lease
expenses for the year were $3.4 million (2016 – $2.3 million).
Future minimum lease payments under non-cancellable operating leases are as follows:
Due in less than one year
Due between one and five years
Due in more than five years
Total
2017
$m
3.6
10.0
28.3
41.9
2016
$m
3.0
10.2
28.1
41.3
During 2014, the Group entered into a new lease agreement for larger office premises in the UK and assigned the leases in relation to the
existing office premises in the UK to a third party who assumed responsibility for payments. Under the terms of the lease assignment the
Group retains liability for lease payments in the event that the assignee and the assignee’s guarantor fail to meet their obligations under
the assignment agreements. The new lease agreement contains a break date of April 2029 and is guaranteed by LHL.
B. Credit facility fund
At as 31 December 2017 the Group has a commitment of $100.0 million (31 December 2016 – $50.0 million) relating to two credit facility
funds (refer to note 11).
C. Legal proceedings and regulations
The Group operates in the insurance industry and is subject to legal proceedings in the normal course of business. While it is not practicable
to estimate or determine the final results of all pending or threatened legal proceedings, management does not believe that such proceedings
(including litigation) will have a material effect on its results and financial position.
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21. Earnings per share
The following reflects the profit and share data used in the basic and diluted earnings per share computations:
(Loss) profit for the year attributable to equity shareholders of LHL
2017
$m
(71.1)
2016
$m
153.8
Basic weighted average number of shares
Dilutive effect of RSS
Diluted weighted average number of shares
(Loss) earnings per share
Basic
Diluted
2017
Number
of shares
2016
Number
of shares
199,723,434 198,565,378
2,901,049
201,503,802 201,466,427
1,780,368
2017
($0.36)
($0.36)
2016
$0.77
$0.76
Equity based compensation awards are only treated as dilutive when their conversion to common shares would decrease earnings per share
or increase loss per share from continuing operations. Unvested restricted shares without performance criteria are therefore included in the
number of potentially dilutive shares. Incremental shares from ordinary restricted share options where relevant performance criteria have not
been met are not included in the calculation of dilutive shares.
22. Related party disclosures
The consolidated financial statements include LHL and the entities listed below:
Name
Subsidiaries1
LICL
KCML2
ORANGE FUND
KCMMSL
LIHL
LIMSL
LISL
LUK
LMSCL
CCHL
CCL
CCL 1998
CCL 1999
CCSL
CUL
Associate
KHL
Other controlled entities
LHFT
EBT
Principal Business
Domicile
General insurance business
Insurance management services
Investment fund
Support services
Holding company
Insurance mediation activities
Support services
General insurance business
Support services
Investment company
Holding company
Lloyd’s corporate member
Non trading
Support services
Lloyd’s managing agent
Holding company
Trust
Trust
Bermuda
Bermuda
United States
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Canada
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Bermuda
United States
Jersey
(1) Unless otherwise stated, the Group owns 100 per cent of the ordinary share capital and voting rights in its subsidiaries listed below.
(2) 92.7 per cent owned by the Group.
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OverviewStrategyPerformanceGovernanceFinancial statements Notes to the accounts continued
22. Related party disclosures continued
The Group has issued subordinated loan notes via a trust vehicle – LHFT, refer to note 17. The Group effectively has 100.0 per cent of the
voting rights in LHFT. These rights are subject to the property trustee’s obligations to seek the approval of the holders of LHFT’s preferred
securities in case of default and other limited circumstances where the property trustee would enforce its rights. While the ability of the Group
to influence the actions of LHFT is limited by the trust agreement, LHFT was set up by the Group with the sole purpose of issuing the
subordinated loan notes, and is in essence controlled by the Group, and is therefore consolidated.
The EBT was established to assist in the administration of the Group’s employee equity based compensation schemes. While the Group does
not have legal ownership of the EBT and the ability of the Group to influence the actions of the EBT is limited by the trust deed, the EBT was
set up by the Group with the sole purpose of assisting in the administration of these schemes, and is in essence controlled by the Group, and is
therefore consolidated.
The Group has a Loan Facility Agreement (the ‘Facility’) with RBC Cees Trustee Limited, the trustee of the EBT. The Facility is an interest
free revolving credit facility under which the trustee can request advances on demand, within the terms of the Facility, up to a maximum
aggregate amount of $80.0 million. The Facility may only be used by the trustee for the purpose of achieving the objectives of the EBT. During
the year ended 31 December 2017, the Group had made advances of $6.0 million (2016 – $nil) to the EBT under the terms of the Facility.
During the year ended 31 December 2017, the Group donated 1,415,058 treasury shares (2016 – 426,468) to the EBT at the prevailing market
rate. The total value of the treasury share donation was $12.8 million (2016 – $3.5 million).
LICL holds $245.3 million (31 December 2016 – $290.8 million) of cash and cash equivalents, fixed maturity securities and accrued interest
in trust for the benefit of LUK relating to intra-group reinsurance agreements. In addition, LICL is required to provide 85.0 per cent of the
required FAL to support the underwriting activities of Syndicate 2010 and 3010 and holds $109.2 million (31 December 2016 – $230.0 million)
of cash and cash equivalents and fixed maturity securities in FAL in relation to intra-group reinsurance agreements.
The senior management team shareholding in KCML represents a minority interest of 7.3 per cent. This investment represents the non-
controlling interest listed in the Group’s consolidated balance sheet. During the year ended 31 December 2017 dividends of $0.6 million
(31 December 2016 – $0.5 million) were paid to minority interest holders.
As at 31 December 2017 and 2016, Mr Alex Maloney, a director of LHL, had a 1.2 per cent interest in KCML. During the year ended
31 December 2017 Mr Maloney received a dividend of $0.1 million (31 December 2016 – $0.1 million) in relation to his interest in KCML.
Mr Maloney and his spouse acquired 100.0 per cent of the shares in Nameco on 7 November 2016. Nameco provides capacity to a number of
Lloyd’s syndicates including Syndicate 2010 which is managed by CUL. Nameco has provided $0.2 million of capacity to Syndicate 2010 for the
2018 year of account (2017 year of account – $0.2 million). Mr Maloney receives a proportionate share of the underwriting results of Syndicate
2010 to which he is contractually entitled through his participation.
Key management compensation
Remuneration for key management, the Group’s Executive and Non-Executive Directors, was as follows:
For the year ended 31 December
Short-term compensation
Equity based compensation
Directors’ fees and expenses
Total
2017
$m
2.9
0.2
2.1
5.2
2016
$m
3.2
3.3
2.2
8.7
Non-Executive Directors do not receive any benefits in addition to their agreed fees and expenses and do not participate in any of the Group’s
incentive, performance or pension plans.
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Transactions with associate
In 2013, KCML entered into an underwriting services agreement with KRL and KHL to provide various services relating to underwriting,
actuarial, premium payments and relevant deductions, acquisition expenses and receipt of claims. For the year ended 31 December 2017, the
Group recognised $11.7 million (2016 – $10.6 million) of service fees and profit commissions in other income in relation to this agreement.
During 2017, the Group committed an additional $57.5 million (31 December 2016 – $25.8 million) of capital to KHL. During 2017, KHL
returned $38.4 million (31 December 2016 – $28.7 million) of capital to the Group.
Refer to note 15 for further details on the Group’s investment in associate.
Transactions with subsidiary of KHL
During 2017, the Group entered into a reinsurance agreement with KRL. The following balances are included in the Group’s consolidated
financial statements:
Consolidated balance sheet
Reinsurance recoveries
Consolidated statement of comprehensive (loss) income
Outwards reinsurance premiums
Insurance losses and loss adjustment expenses recoverable
Insurance acquisition expenses ceded
2017
$m
22.1
2017
$m
3.8
22.1
0.1
23. Subsequent events
Dividend
On 14 February 2018 the Board of Directors declared the payment of an ordinary dividend of $0.10 per common share to shareholders of
record on 23 February 2018, with a settlement date of 21 March 2018. The ordinary dividend payable will be approximately $20.0 million.
An amount equivalent to the dividend accrues on all RSS options and is paid at the time of exercise, pro-rata according to the number of
RSS options that vest.
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OverviewStrategyPerformanceGovernanceFinancial statements Shareholder information
Annual General Meeting
The Company’s AGM is scheduled for 2 May 2018. Notice of this
year’s AGM and forms of proxy and direction accompany this Annual
Report. If you have any queries regarding the notice or return of the
proxy please contact Chris Head, Company Secretary, at Lancashire
Holdings Limited, 29th Floor, 20 Fenchurch Street, London EC3M
3BY, United Kingdom, Tel: + 44 (0) 20 7264 4000 and email:
chris.head@lancashiregroup.com.
Further information
Lancashire Holdings Limited is registered in Bermuda under
company number EC 37415 and has its registered office at
Power House, 7 Par-la-Ville Road, Hamilton HM 11, Bermuda.
Further information about the Group including this Annual Report,
press releases and the Company’s share price is available on our
website at www.lancashiregroup.com. Please address any enquiries
to info@lancashiregroup.com.
Note regarding forward-looking statements
Some of the statements in this document include forward-looking
statements which reflect the Directors’ current views with respect
to financial performance, business strategy, plans and objectives of
management for future operations (including development plans
relating to the Group’s products and services). These statements
include forward-looking statements both with respect to the Group
and the sectors and industries in which the Group operates.
Statements containing the words “believes”, “anticipates”, “plans”,
“projects”, “forecasts”, “guidance”, “intends”, “expects”, “estimates”,
“predicts”, “may”, “can”, “likely”, “will”, “seeks”, “should” or, in each
case, their negative or comparable terminology and similar statements
are of a future or forward-looking nature. All forward-looking
statements address matters that involve known and unknown risks
and uncertainties. Accordingly, there are or will be important factors
that could cause the actual results, performance or achievements
of the Group to be materially different from future results,
performance or achievements expressed or implied by such
forward-looking statements.
These factors include, but are not limited to: the actual development
of losses and expenses impacting estimates for hurricanes Harvey,
Irma and Maria and the earthquakes in Mexico, that occurred in
the third quarter of 2017 and the wildfires which impacted parts of
California during 2017, the impact of complex and unique causation
and coverage issues associated with attribution of losses to wind or
flood damage or other perils such as fire or business interruption
relating to such events; potential uncertainties relating to reinsurance
recoveries, reinstatement premiums and other factors inherent in
loss estimations, the Group’s ability to integrate its business and
personnel, the successful retention and motivation of the Group’s
key management, the increased regulatory burden facing the Group,
the number and type of insurance and reinsurance contracts that
the Group writes or the Group may write; the Group’s ability to
successfully implement its business strategy during ‘soft’ as well as
‘hard’ markets; the premium rates which may be available at the time
of such renewals within its targeted business lines; the possible low
frequency of large events; potentially unusual loss frequency; the
impact that the Group’s future operating results, capital position
and rating agency and other considerations may have on the
execution of any capital management initiatives or dividends; the
possibility of greater frequency or severity of claims and loss activity
than the Group’s underwriting, reserving or investment practices
have anticipated; the reliability of, and changes in assumptions
to, catastrophe pricing, accumulation and estimated loss models;
increased competition from existing alternative capital providers and
insurance-linked funds and collateralised special purpose insurers and
the related demand and supply dynamics as contracts come up for
renewal; the effectiveness of its loss limitation methods; the potential
loss of key personnel; a decline in the Group’s operating subsidiaries’
rating with A.M.Best, S&P Global Ratings, Moody’s or other rating
agencies; increased competition on the basis of pricing, capacity,
coverage terms or other factors; cyclical downturns of the industry;
the impact of a deteriorating credit environment for issuers of fixed
maturity investments; the impact of swings in market interest rates,
currency exchange rates and securities prices; changes by central
banks regarding the level of interest rates; the impact of inflation or
deflation in relevant economies in which the Group operates; the
effect, timing and other uncertainties surrounding future business
combinations within the insurance and reinsurance industries; the
impact of terrorist activity in the countries in which the Group writes
risks; a rating downgrade of, or a market decline in, securities in its
investment portfolio; changes in governmental regulations or tax
laws in jurisdictions where the Group conducts business; Lancashire
or its Bermudian subsidiaries becoming subject to income taxes in
the United States or the Bermudian subsidiaries becoming subject
to income taxes in the United Kingdom; the inapplicability to the
Group of suitable exclusions from the UK CFC regime; any change
in UK government policy which impacts the CFC regime or other tax
changes; and the impact of ‘Brexit’ (following the UK’s notification
to the European Council under Article 50 of the Treaty on European
Union on 29 March 2017) and future negotiations regarding the
UK’s relationship with the European Union on the Group’s
business, regulatory relationships, underwriting platforms or
the industry generally.
Any estimates relating to loss events involve the exercise of
considerable judgement and reflect a combination of ground-up
evaluations, information available to date from brokers and insureds,
market intelligence, initial and/or tentative loss reports and other
sources. Judgements in relation to loss arising from natural catastrophe
and man-made events are influenced by complex factors. The Group
cautions as to the preliminary nature of the information used to
prepare such estimates as subsequently available information may
contribute to an increase in these types of losses.
These forward-looking statements speak only as at the date of
this document. The Company expressly disclaims any obligation or
undertaking (save as required to comply with any legal or regulatory
obligations including the rules of the LSE) to disseminate any updates
or revisions to any forward-looking statement to reflect any changes
in the Group’s expectations or circumstances on which any such
statement is based. All subsequent written and oral forward-looking
statements attributable to the Group or individuals acting on behalf of
the Group are expressly qualified in their entirety by this paragraph.
Prospective investors should specifically consider the factors identified
in this document which could cause actual results to differ before
making an investment decision.
152
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Lancashire Holdings Limited | Annual Report & Accounts 2017
Glossary
ABS
Asset backed securities
Accident year loss ratio
The accident year loss ratio is calculated using the accident year
ultimate liability revalued at the current balance sheet date,
divided by net premiums earned
Active Underwriter
The individual at a Lloyd’s syndicate with principal authority to
accept insurance and reinsurance risk on behalf of the syndicate
Additional case reserves (ACR)
Additional reserves deemed necessary by management
AFS
Available for sale
Aggregate
Accumulations of insurance loss exposures which result from
underwriting multiple risks that are exposed to common causes
of loss
AGM
Annual General Meeting
AIM
A sub-market of the LSE
AIR
AIR Worldwide
A.M. Best Company (A.M. Best)
A.M. Best is a full-service credit rating organisation dedicated
to serving the financial services industries, focusing on the
insurance sector
Best Lancashire Assessment of Solvency over Time (BLAST)
The Group’s economic internal capital model
BMA
Bermuda Monetary Authority
Board of Directors, Board
Unless otherwise stated refers to the LHL Board of Directors
Book value per share (BVS)
Calculated by dividing the value of the total shareholders’ equity by
the sum of all common voting shares outstanding
BREEAM
Building Research Establishment Environmental
Assessment Method
BSCR
Bermuda Solvency Capital Requirement
BSX
Bermuda Stock Exchange
CCSL
Cathedral Capital Services Limited
Ceded
To transfer insurance risk from a direct insurer to a reinsurer
and/or from a reinsurer to a retrocessionaire
CEND
Confiscation, Expropriation, Nationalisation and Deprivation
CEO
Chief Executive Officer
CFC
Controlled Foreign Company
CFO
Chief Financial Officer
CGU
Cash generating unit
CMBS
Commercial mortgage backed securities
The Code
UK Corporate Governance Code published by the UK FRC
Combined ratio
Ratio, in per cent, of the sum of net insurance losses, net
acquisition expenses and other operating expenses to net
premiums earned
Consolidated financial statements
Includes the independent auditors’ report, consolidated primary
statements, accounting policies, risk disclosures and related notes
Consolidated primary statements
Includes the consolidated statement of comprehensive income,
consolidated balance sheet, consolidated statement of changes in
shareholders’ equity and the statement of consolidated cash flows
Coverholder at Lloyd’s
A coverholder is a company or partnership authorised by a
managing agent to enter into a contract or contracts of insurance
to be underwritten by the members of a syndicate managed by it
in accordance with the terms of a binding authority
CRO
Chief Risk Officer
CSX
Cayman Islands Stock Exchange
CUL
Cathedral Underwriting Limited
CUO
Chief Underwriting Officer
Cathedral; Cathedral Group
Refers to CCL and all direct and indirect subsidiaries of CCL
D&F
Direct and facultative (re)insurance
CCHL
Cathedral Capital Holdings Limited
CCL
Cathedral Capital Limited
CCL 1998
Cathedral Capital (1998) Limited
CCL 1999
Cathedral Capital (1999) Limited
Deferred acquisition costs
Costs incurred for the acquisition or the renewal of insurance
policies (e.g. brokerage and premium taxes) which are deferred
and amortised over the term of the insurance contracts to which
they relate
DEFRA
Department for Environment, Food and Rural Affairs
www.lancashiregroup.com
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OverviewStrategyPerformanceGovernanceFinancial statements
Glossary continued
Delegated authorities
Arrangements under which a Managing Agent or (re)insurer
delegates its authority to another to enter into contracts of
insurance on its behalf
Facultative reinsurance
A reinsurance risk that is placed by means of a separately
negotiated contract as opposed to one that is ceded under
a reinsurance treaty
Diluted Earnings Per Share
Calculated by dividing the net profit for the year attributable to
shareholders by the weighted average number of common shares
outstanding during the year plus the weighted average number
of common shares that would be issued on the conversion of
all potentially dilutive equity based compensation awards into
common shares under the treasury stock method
Diluted Operating Earnings Per Share
Calculated by dividing the net operating (loss) income for the year
attributable to shareholders by the weighted average number of
common shares outstanding during the year plus the weighted
average number of common shares that would be issued on the
conversion of all potentially dilutive equity based compensation
awards into common shares under the treasury stock method
Directors’ fees and expenses
Unless otherwise stated includes fees and expenses of all Directors
across the Group
Dividend yield
Calculated by dividing the annual dividends per share by the share
price on the last day of the given year
Duration
Duration is the weighted average maturity of a security’s cash flows,
where the present values of the cash flows serve as the weights. The
effect of the convexity, or sensitivity, of the portfolio’s response to
changes in interest rates is also factored in to the calculation
Earnings per share (EPS)
Calculated by dividing net profit for the year attributable to
shareholders by the weighted average number of common shares
outstanding during the year, excluding treasury shares and shares
held by the EBT
EBT
Lancashire Holdings Employee Benefit Trust
ECA
Economic Capital Assessment
EEA
European Economic Area
ERM
Enterprise Risk Management
EURIBOR
The Euro Interbank Offered Rate
Excess of loss
Reinsurance or insurance that indemnifies the reinsured
or insured against all or a specified portion of losses on an
underlying insurance policy in excess of a specified amount
Expense ratio
Ratio, in per cent, of other operating expenses to net
premiums earned
EY
Ernst & Young LLP
FAL
Funds at Lloyd’s
FCA
Financial Conduct Authority
FPSO
Floating production storage and offloading
FRC
Financial Reporting Council
FSMA
The Financial Services and Markets Act 2000 (as amended from
time to time)
FTE
Full-Time Employee
Fully converted book value per share (FCBVS)
Calculated by dividing the value of the total shareholders’ equity
plus the proceeds that would be received from the exercise of
all dilutive equity compensation awards, by the sum of all shares,
including equity compensation awards assuming all are exercised
FVTPL
Fair value through profit or loss
G10
Belgium, Canada, Germany, France, Italy, Japan, the Netherlands,
Sweden, the United Kingdom, and the United States
GHG
Greenhouse Gas
Gross premiums written
Amounts payable by the insured, excluding any taxes or duties
levied on the premium, including any brokerage and commission
deducted by intermediaries
The Group or the Lancashire Group
LHL and its subsidiaries
ICM
International Care Ministries
IFRIC
International Financial Reporting Interpretations Committee
IFRS
International Financial Reporting Standard(s)
ILS
Insurance Linked Securities
Incurred but not reported (IBNR)
These are anticipated or likely losses that may result from insured
events which have taken place, but for which no losses have yet
been reported. IBNR also includes a reserve for possible adverse
development of previously reported losses
Industry loss warranty (ILW)
A type of reinsurance or derivative contract through which
one party will purchase protection based on the total loss arising
from an event to the entire insurance industry rather than their
own losses
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Internal Audit Charter
Is a formal written document that sets out the mission,
scope, responsibilities, authority, professional standards and
the relationship with the external auditors / regulatory bodies of
the internal audit function (“internal audit”) with the Company
and its subsidiaries
International Accounting Standard(s) (IAS)
Standards, created by the IASB, for the preparation and
presentation of financial statements
International Accounting Standards Board (IASB)
An international panel of accounting experts responsible for
developing IAS and IFRS
IRR
Internal rate of return
IRRC
Investment Risk and Return Committee
ISA
International Standards on Auditing (UK and Ireland)
ISE
Irish Stock Exchange
KCML
Kinesis Capital Management Limited
KCMMSL
KCM Marketing Services Limited
KHL
Kinesis Holdings I Limited
Kinesis
The Group’s third-party capital management division
encompassing KCML, KCMMSL and the management of KHL
and KRL
KPMG
KPMG LLP, a UK limited liability partnership
KRL (Kinesis Re)
Kinesis Reinsurance I Limited
Lancashire companies
Refers to the Group excluding Cathedral and Kinesis
Lancashire Foundation or Foundation
The Lancashire Foundation is a charity registered in England
and Wales
LHFT
Lancashire Holdings Financing Trust I Limited
LHL (The Company)
Lancashire Holdings Limited
LIBOR
London Interbank Offered Rate
LICL
Lancashire Insurance Company Limited
LIHL
Lancashire Insurance Holdings (UK) Limited
LIMSL
Lancashire Insurance Marketing Services Limited
LISL
Lancashire Insurance Services Limited
Listing Rules
The listing rules made by the FCA under part VI of FSMA
(as amended from time to time)
Lloyd’s
The Society of Lloyd’s
LMSCL
Lancashire Management Services (Canada) Limited
LOC
Letter of credit
Losses
Demand by an insured for indemnity under an insurance contract
LSE
London Stock Exchange
LUK
Lancashire Insurance Company (UK) Limited
M&A
Mergers and acquisitions
MBRT
Multi-beneficiary reinsurance trust
MBS
Mortgage backed securities
Moody’s investors services (Moody’s)
Moody’s Corporation is the parent company of Moody’s Investors
Service, which provides credit ratings and research covering debt
instruments and securities, and Moody’s Analytics, which offers
software, advisory services and research for credit and economic
analysis and financial risk management
MSF
Médecins Sans Frontières
Names
An individual member underwriting with unlimited liability.
Since 6 March 2003 no person has been admitted as a new
member to underwrite on an unlimited basis
Nameco
Nameco (No. 801) Ltd
NAV
Net asset value
NBS
New Bridge Street (a trading name of Aon Hewitt Limited)
Net acquisition cost ratio
Ratio, in per cent, of net acquisition expenses to net
premiums earned
Net loss ratio
Ratio, in per cent, of net insurance losses to net premiums earned
Net operating (loss)/ profit
(Loss)/profit after tax attributable to Lancashire excluding
realised gains and losses, net of impairments, foreign exchange
gains and losses and tax. Lancashire believes the reporting of an
adjusted net operating profit available helps the understanding of
results by highlighting the underlying profitability of the Group’s
core insurance and reinsurance business
www.lancashiregroup.com
www.lancashiregroup.com
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OverviewStrategyPerformanceGovernanceFinancial statements
Glossary continued
Net premiums written
Net premiums written is equal to gross premiums written less
outwards reinsurance premiums written
Orange Fund
A Series of Payden Active Cash Management, LLC
ORSA
Own Risk and Solvency Assessment
OTC
Over the counter
PML
Probable maximum loss. The Group’s exposure to certain peak
zone elemental losses
PRA
Prudential Regulation Authority
SATEC
SATEC Underwriting, a privately owned insurance underwriting
agency operating at national and international level in specialty
classes of business. SATEC Underwriting is a coverholder at Lloyd’s
SCR
Solvency Capital Requirement
SHARP
Lancashire’s in house aggregation system
Syndicate 2010
Lloyd’s Syndicate 2010, managed by CUL. The Group provides
capital to support 57.8 per cent of the stamp
Syndicate 3010
Lloyd’s Syndicate 3010, managed by CUL. The Group provides
capital to support 100.0 per cent of the stamp
Pro-rata/proportional
Reinsurance or insurance where the reinsurer or insurer shares
a proportional part of the original premiums and losses of the
reinsured or insured
The syndicates
Syndicate 2010 and 3010
TOBA
Terms of business agreements
RCF
Revolving credit facility
RDS
Realistic Disaster Scenarios
Retrocession
The reinsurance of a reinsurance account
Return on Equity (RoE)
The IRR of the change in FCBVS in the period plus
accrued dividends
Risk Free Rate of Return (RFRoR)
Being the 13 week U.S. Treasury bill rate, unless otherwise stated
RMBS
Residential mortgage backed securities
RMS
Risk Management Solutions
RPI
Renewal Price Index
RRC
Risk and Return Committee
RSC
Reinsurance Security Committee
RSS
Restricted share scheme
Total Investment Return
Total investment return measures investment income and net
realised and unrealised gains and losses produced by the Group’s
managed investment portfolio
Total Shareholder Return (TSR)
The IRR of the increase/(decrease) in share price in the period,
measured in U.S. dollars, adjusted for dividends
Treaty reinsurance
A reinsurance contract under which the reinsurer agrees to offer
and to accept all risks of a certain size within a defined class
UK
United Kingdom
UMCC
Underwriting and Marketing Conference Call
Unearned premiums
The portion of premium income that is attributable to periods
after the balance sheet date that is deferred and amortised to
future accounting periods
UNL
Ultimate net loss
USCR
Ultimate solvency capital requirement
U.S.
United States of America
S&P global ratings (S&P)
S&P Global Ratings is a worldwide insurance rating and
information agency whose ratings are recognised as an ideal
benchmark for assessing the financial strength of insurance
related organisations
U.S. GAAP
Accounting principles generally accepted in the United States
Value at Risk (VaR)
A measure of the risk of loss of a specific portfolio of
financial assets
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Contact information
Head office
Lancashire Holdings Limited
29th Floor
20 Fenchurch Street
London EC3M 3BY
United Kingdom
Phone: + 44 (0) 20 7264 4000
Fax: + 44 (0) 20 7264 4077
Registered office
Lancashire Holdings Limited
Power House
7 Par-la-Ville Road
Hamilton HM 11
Bermuda
Phone: + 1 441 278 8950
Fax: + 1 441 278 8951
Bermuda office
Lancashire Insurance Company Limited
Power House
7 Par-la-Ville Road
Hamilton HM 11
Bermuda
Phone: + 1 441 278 8950
Fax: + 1 441 278 8951
UK office
Lancashire Insurance Company
(UK) Limited
29th Floor
20 Fenchurch Street
London EC3M 3BY
United Kingdom
Phone: + 44 (0) 20 7264 4000
Fax: + 44 (0) 20 7264 4077
Cathedral
Cathedral Capital Limited
29th Floor
20 Fenchurch Street
London EC3M 3BY
United Kingdom
Phone: + 44 (0) 20 7170 9000
Fax: + 44 (0) 20 7170 9001
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Lancashire Holdings Limited | Annual Report & Accounts 2017
Kinesis
Kinesis Capital Management Limited
Power House
7 Par-la-Ville Road
Hamilton HM 11
Bermuda
Phone: + 1 441 278 8950
Fax: + 1 441 278 8951
Legal counsel to the Company
As to English and U.S. law:
Willkie Farr & Gallagher (UK) LLP
City Point
1 Ropemaker Street
London EC2Y 9AW
United Kingdom
As to Bermuda law:
Conyers Dill & Pearman Limited
Clarendon House
2 Church Street
Hamilton HM 11
Bermuda
Auditors
KPMG LLP
15 Canada Square
London E14 5GL
United Kingdom
Registrar
Link Market Services (Jersey) Limited
12 Castle Street
St Helier
Jersey JE2 3RT
Channel Islands
Depositary
Link Market Services Trustees Limited
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
United Kingdom
www.lancashiregroup.com