Annual Report & Accounts 2014
Adapting
to
advance
Economies wax and wane. Markets ebb
and flow. Opportunities emerge and
evolve. It’s the nature of our business:
we adapt to advance.
The challenges of changing markets
are not unique to Lancashire, but our
strategies and strengths are. Our business
is based upon managing the insurance
cycle and adapting to our environment,
so that today’s challenges become
tomorrow’s progress.
The market has undoubtedly been challenging this year, but thanks
to our foresight in 2013, when we broadened the operating base by
acquiring Cathedral and setting up a permanent third-party capital
management business in Kinesis, we enabled ourselves to adapt to
our environment.
Despite the softening market of 2014, our Group is progressing well and
has again enabled us to compete effectively in a challenging environment.
www.lancashiregroup.com
1
Highlights
RETURN ON EQUITY
13.9%
(2013: 18.9%)
COMBINED RATIO
68.7%
(2013: 70.2%)
PROFIT AFTER TAX
$229.3m
(2013: $222.5m)
DIVIDEND YIELD
17.8%
(2013: 12.3%)
TOTAL INVESTMENT RETURN
1.0%
(2013: 0.3%)
TOTAL SHAREHOLDER RETURN
-24.2%
(2013: 21.3%)
KPI
KPI
KPI
KPI
In this report
STRATEGIC REPORT
OVERVIEW
02 Lancashire Group at a glance
04 Chairman’s statement
06 Our business model
STRATEGY
10 Chief Executive’s review
14
Strategy
PERFORMANCE
18 Financial review
20 Key performance indicators
22 Underwriting review
24 Business review
31 Cathedral
32 Kinesis and third-party capital
33 Enterprise risk management
36 Principal risks
38 Corporate responsibility
GOVERNANCE
44 Chairman’s introduction
46 Board of Directors
49 Corporate governance report
52 Committee reports
61 Directors’ remuneration report
79 Directors’ report
83
Statement of Directors’ responsibilities
FINANCIAL STATEMENTS
86
Independent auditors’ report
90 Consolidated financial statements
94 Accounting policies
100 Risk disclosures
127 Notes to the accounts
ADDITIONAL INFORMATION
159 Shareholder information
160 Glossary
164 Contact information
Visit our corporate website for more information:
http://www.lancashiregroup.com
LANCASHIRE GROUP AT A GLANCE
A STRONG INVESTMENT PROPOSITION
Despite changes in market conditions, Lancashire has a consistent record
of out-performance, delivering sustainable returns. Our stated goal is
to provide an attractive risk-adjusted return to shareholders over the long
term. We do this by maintaining an unswerving focus on underwriting
and managing our capital to fit the opportunities in the market.
A
D
Gross
premiums
written
$623.3m
B
C
F
A
CATHEDRAL
KINESIS
B
Gross
premiums
written
$284.3m
E
D
C
Limits
deployed
$340.0m
LANCASHIRE
Two operating companies covering the London
and Bermuda markets with strong core business
portfolios, recognised leadership capability
and the ability to deploy capacity nimbly in
a changing market across four classes.
A: Aviation: 8.5%
B: Marine: 10.9%
C: Property: 42.2%
D: Energy: 38.4%
Page 24
Read about Lancashire
CATHEDRAL
Two Syndicates in Lloyd’s with mature
portfolios of short-tail business in the same
classes as Lancashire, but separate niches,
allowing further diversification of the business
and client base. Access to Lloyd’s unique
capital structure and world-wide licenses.
A: Aviation: 9.7%
B: Marine: 13.2%
D: Energy: 9.1%
E. Property D&F: 28.4%
C: Property Re: 36.7%
F. Other: 2.9%
Page 31
Read about Cathedral
KINESIS
A third-party capital and underwriting
manager in Bermuda, leveraging Lancashire’s
expertise and track record to offer unique
multi-class products to clients and investors,
with scope to develop more products as the
market evolves.
Page 32
Read about Kinesis
OPERATING HIGHLIGHTS
• The established portfolios of Lancashire Bermuda
and London, and Syndicate 2010, continued to
offer significant capacity and leadership expertise.
• Full year contribution from Cathedral with strong
underwriting performance.
• Continued integration of Cathedral and building
out of Syndicate 3010 with new terrorism, energy
and aviation lines.
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Lancashire Holdings Limited | Annual Report & Accounts 2014
• Hiring of new aviation teams for Syndicate 3010.
• Kinesis advanced its operations with an expansion of
its strong investor club and a blue-chip client roster.
• Continued development across all entities and the
Group for compliance with Solvency II.
LANCASHIREUNDERWRITING AND CAPITAL MANAGEMENT
LANCASHIRE GROUP
Lancashire has been a top-performing
specialty short-tail insurer and reinsurer since
its foundation in 2005. It has successfully
weathered significant tests such as Hurricane
Ike and Storm Sandy, earthquakes in Japan,
New Zealand and Chile, floods in Thailand
and the UK, and non-elemental losses like
Deepwater Horizon and Costa Concordia,
as well as the financial markets shock of 2008.
Through all these events, Lancashire has
consistently produced leading combined
ratios and return on equity through an
unremitting focus on profitable underwriting
and active capital management.
The ability to navigate hard and soft markets
has been demonstrated, and our strategy has
proved to be fit for purpose across all phases
of the market cycle.
Performance incentives for management
and staff are aligned to shareholders’ interests,
so Lancashire will continue to focus on
maintaining profitability and optimising
capital usage.
Lancashire’s commitment: to focus on the
drivers of profitability in the business, and
to ensure that the Company provides a
secure and stable counterparty for clients
and brokers, whilst generating strong returns
for shareholders.
FIVE YEAR COMPOUND ANNUAL ROE
17.7%
20
15
10
5
0
Lancashire
Beazley
Ren Re
Hiscox
M ontpelier
Axis
Validus
Catlin
A mlin
Endurance
Aspen
Argo
(1) Peer group as defined by the Board of Directors.
(2) RoE calculated as the internal rate of return of the change in FCBVS in the period plus dividends accrued. For Amlin, Argo, Beazley,
Catlin, Hiscox and Ren Re basic book value per share is used as FCBVS is not reported by these companies. Compound annual returns
for LHL and sector are from 1 January 2010 through 31 December 2014. Data source: Company records.
Lancashire’s commitment: to focus on the optimum capital levels in each of its three business
units to ensure the best returns for the shareholders, whilst providing meaningful capacity to
clients and brokers across the cycle.
FINANCIAL HIGHLIGHTS
• Combined ratio of 68.7 per cent, yet again one of the
leading combined ratios in the peer group, reflecting
solid underwriting and expense control.
• Loss ratio for 2014 of 31.7 per cent, another strong
performance in a year with a number of medium-sized
risk and catastrophe losses.
• Gross premiums written of $907.6 million with a
contribution of $284.3 million from Cathedral in its
first full year as part of the Group.
• Kinesis deployment of $340.0 million of limits with
capital raised on three occasions during the year.
• Investment return of 1.0 per cent reflecting emphasis
on limiting risk in volatile markets.
www.lancashiregroup.com
3
OVERVIEW
CHAIRMAN’S STATEMENT
ADAPTING TO ADVANCE
“This has been a year of
evolutionary change for our
Board and management team.
We enter 2015 with a business
which is fit to deliver our
strategic priorities. ”
at LUK. It is a tribute to the bench strength of our team,
and the work which had been put in place to ensure that
a longer term strategic succession plan was implemented,
that the transition to the new management team was
completed so smoothly. It has given me great pleasure
across the last year to see Alex grow into his new role
with such assurance and discretion. He has proven
himself to be the right man at the right time.
John Bishop, Neil McConachie and Ralf Oelssner also
stepped down from the Board at the 2014 AGM. I would
like to thank John, Neil and Richard for their contributions
to the success of Lancashire over many years. It is with
sadness that we mark the death of Ralf, shortly after his
departure from our Board.
Q | HOW HAS THE BOARD EVOLVED
DURING THE YEAR?
A | There comes a time in any organisation where
“the old order changeth, yielding place to new”: in my
introduction to last year’s Annual Report I talked about
the “generational change in Board membership” to be
implemented during 2014. We have been as good as our
word. Both William Spiegel and Bob Spass stepped down
from the Board with effect from 1 January 2015, each
having completed nine years’ service from the date
of their first election. They have stepped down from
the Board in keeping with governance good practice.
William and Bob leave us with our thanks for their many
years of insightful wisdom, leadership and service on our
Board and its Committees. Their departure marks the
passing of the baton from the original founders of our
business to a new generation, and I am delighted to
welcome Peter Clarke and Tom Milligan (see biographies
on pages 47 and 48) to our Board who, together with our
other Board members, bring an appropriate range and
depth of knowledge and skills to provide support,
challenge and strategic insights for the business.
Q&A
with Non-Executive Chairman,
Martin Thomas
Q | WHAT HAVE BEEN THE STRATEGIC
CHALLENGES DURING 2014 AND HOW
HAS THE BUSINESS ADAPTED TO THEM?
A | The Group faced the challenge of a year which was
marked both by change and continuity. During April
the Board had oversight of the most significant change
in the management team since Lancashire’s foundation
in 2005. In April, the prime founder of our business,
Richard Brindle, decided to retire from Lancashire.
Most shareholders have been with us long enough to
appreciate the high level of success the Company enjoyed
under his leadership. Fortunately, he left the business
in robustly good shape and with a body of staff whose
skills and experience allowed for a seamless transition.
Alex Maloney was appointed the Group Chief Executive
Officer with effect from 30 April 2014. Alex has been with
the Group since its earliest days when he joined to lead
and shape its Energy underwriting strategy – one of the
Group’s most profitable lines of business. Since 2010, Alex
has been a member of the Board and the Group’s Chief
Underwriting Officer. He has a detailed knowledge
of the Group’s business and has demonstrated a practical,
hands-on approach to management and cultivated a quiet
authority in his leadership of the senior management
team and as a member of our Board. The appointment
of Alex also saw the promotion of two other members
of the management team. Paul Gregory has assumed the
role of Group Chief Underwriting Officer and Hayley
Johnston has become the Chief Underwriting Officer
4
Lancashire Holdings Limited | Annual Report & Accounts 2014
Q | HAVE THE 2014 RESULTS
MET EXPECTATIONS?
A | Insurance is a cyclical business and surplus
underwriting capacity has meant that results for all
our peers in the sector have been subdued. Lancashire
delivered a solid performance during 2014, when the
strategic priorities were to maintain a core book of
business and to focus on the fundamentals of good
underwriting. RoE for 2014, was 13.9 per cent.
2014 was the first full year for the inclusion of the
Cathedral platform and the Group’s move into Lloyd’s
has expanded the premium base for the Group
as a whole and has performed in line with expectations.
The combined ratio of 68.7 per cent is an excellent
result, although slightly above our recent five year
average. This is in part a reflection of the softer market
in pricing and coverage terms and Cathedral’s higher
attritional loss ratio. Another bright spot for 2014 was
the rapid establishment and recognition of the Kinesis
underwriting platform. Kinesis has now completed its
first full year cycle and has made progress in establishing
relations with both investors and reinsured clients which
we expect will help position it well to expand if and
when improved underwriting conditions should arrive.
Q | HAS THE GROUP’S CAPITAL MANAGEMENT
STRATEGY CHANGED IN 2014?
A | As a business Lancashire has always tailored its
capital requirements to its underwriting and business
strategy and effective capital management remains at
the heart of that strategy. At what is considered to be
a low point in the insurance cycle, the Board was pleased
to declare ordinary and special dividends in respect
of 2014 amounting in total to $1.85 per common share
(see page 79 for further details). This equated
to a return of $381.2 million, more than the Group’s
profit after tax for the year of $229.3 million.
Once again I would like to thank our shareholders
for affording the Company flexibility in its capital
management capabilities. At the AGM held on 30 April
2014 we asked for and received shareholder support
to issue up to 15 per cent of shares on a non pre-emptive
basis. In an insurance market that rewards the fastest to
react, following a market moving loss event, those who
can deploy capital quickly, so as to play a leading role
in establishing an adjusted pricing regime and meeting
brokers’ and clients’ needs for immediate capacity,
will have the advantage. The first movers make the
new market. For this reason a nimble capital management
strategy remains at the heart of Lancashire’s business
model and the Company is seeking shareholder
support for a similar resolution at the 2015 AGM.
NEW TALENT ADDED TO THE BOARD
We welcome Peter Clarke (left) and Tom Milligan
(right) as new members of our Board
Page 47
Read about our Board of Directors
Q | HOW HAS THE GOVERNANCE OF THE
BUSINESS EVOLVED DURING 2014?
A | In the 2012 Annual Report I stated that the business
placed great importance on good governance, not
for its own sake, but because when it is done well it
can enhance the effective oversight of the Group and
the accomplishment of its strategic objectives. This last
year has illustrated the importance of the work carried
out by the Board and the management of the Group
in ensuring a smooth transition to a new Group CEO
and management regime. A fuller account of our
governance arrangements and the work of the Board
and its Committees can be found at page 44.
Q | WHAT IS THE OUTLOOK FOR 2015?
A | 2015 will see the 10th anniversary of the foundation
of the Company. Although market conditions are
likely to remain challenging the Board expects to see
the Group maintain its core book of business across
all of our current classes and to see progress in the
build-out of Syndicate 3010 and Kinesis.
I would like to thank all employees for the hard work
performed in 2014, which has positioned us well to
meet the challenges of 2015.
MARTIN THOMAS
NON-EXECUTIVE CHAIRMAN
www.lancashiregroup.com
5
OVERVIEW
OUR BUSINESS MODEL
THREE PLATFORMS, ONE ETHOS
We leverage top-tier underwriting
expertise with efficient management
of capital and resources across three
balance sheet options to provide our
clients and brokers with excellent
solutions for their insurance and
reinsurance needs. We always focus
on the risk-adjusted return.
Key Strengths
LANCASHIRE
• Strong brand with clients and brokers. Recognised
for significant capacity and strong leadership ability
in well-defined business sectors
• Proven track record of supplying capacity across the cycle
with sector-leading profitable results
• Excellent culture of co-operation with collegiate
underwriting, risk selection, multi-disciplinary business
review and cross-selling to clients
• Strong record of capital management actions to right-size
capital and navigate market cycles
• Experienced and cohesive management team
with proven ability
LANCASHIRE
CATHEDRAL
• Strong brand with core clients and brokers recognised for
very long-term consistency of relationships and leadership
• Efficient Lloyd’s capital model allowing greater premium
leverage than for rated companies
• Worldwide licensing maintained by Lloyd’s allows Cathedral
to write business worldwide with limited regulatory overhead
• Use of world’s oldest insurance third-party capital –
the Names – who pay underwriting fees, costs and
profit commission
• Experienced management team that built the business
together over 14 years with a great track record
KINESIS
• Ability to leverage Lancashire data, relationships
and reputation with investors and clients
• Experienced management with strong relationships
amongst clients, brokers and investors
• Highly specialised multi-class product with strong barriers
to entry in terms of data and modeling expertise
• Ability to raise capital very quickly, as demonstrated
in 2014, to respond to market dislocation
UNDERWRITING
AND CAPITAL
MANAGEMENT
CATHEDRAL
KINESIS
Clients and ma r k e t s
OUR RESPONSIBILITY
We 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 our Foundation,
we make concrete financial contributions and provide human
support to a number of causes in the places we operate and
around the world (for further details see pages 38 to 41).
Visit our corporate website for more information:
http://www.lancashiregroup.com
6
Lancashire Holdings Limited | Annual Report & Accounts 2014
RESPONSIBILITYRETURNRISK Goals
Risk
Return
• Maintain key client, broker and reinsurer
relationships to ensure continued flow
of business and maintenance of capabilities
• Continue to improve use of reinsurance and
retrocession to uphold risk-adjusted balance
in softening markets
• Continued influx of new capacity from naïve
or inexperienced capital and development
of broker facilities without proper
underwriting controls
• Depressed oil price leading to weakening
demand for key energy products
• Retain “underwriting comes first” culture
and discipline without being tempted into
innovation or diversification for its own sake
• Widening terms and conditions being
accepted by the markets without adequate
pricing or exclusions
• Failure to attain Solvency II equivalence
by Bermuda to allow smooth continuation
of quota share arrangements for the Group
5 YEAR COMPOUND ROE
17.7%
Page 24 to 30
To find out more information
COMBINED RATIO
• Maintain core portfolios in Syndicate 2010
in climate of increased competition
• Develop new lines including energy, terrorism,
aviation war and general aviation in Syndicate
3010 and continue to look for new opportunities
for bolt on business lines
• Leverage Lancashire’s balance sheet and
cross sell where opportunities arise
• Pressure on signings and participation given
relatively small line sizes counterbalanced
by strength of broker and client relationships
85.1%
• Expanded burden of regulatory oversight
or overlapping regulation from Lloyd’s,
PRA and FCA
• Ensure product is correctly calibrated to meet
client need in terms of responding to events
and capital relief
• Deliver returns in line with expectations for
• Increased competition from traditional and
collateralised markets, being displaced from
property retrocession, with attempts to replicate
the Kinesis product
modeled ranges given market losses and pricing
• Waning of investor interest in insurance
• Increase investor club members
• Increase limits deployed
allocations if interest rates begin to increase
and yield returns to capital markets
• Client resistance to complex products, given
cheap availability of traditional products
Page 31
To find out more information
LIMITS DEPLOYED
$340.0m
Page 32
To find out more information
www.lancashiregroup.com
7
OVERVIEW
STRATEGY
Economies
wax & wane
but here at Lancashire, our core strategic
focus on underwriting comes first, effectively
balancing risk and return and operating
nimbly through the cycle, ensuring that we
have the right strategy to fit the different
micro- and macro-economic conditions.
8
aLancashire Holdings Limited | Annual Report & Accounts 2014
Economies
STRATEGY
COMBINED RATIO
As a Company that focuses on
underwriting and underwriting
profitability, the combined ratio
is a key performance indicator.
Over time, there is a strong correlation
between combined ratio and the
growth in fully converted book value
plus dividends. So combined ratio
is a good metric to monitor the
underlying health of our portfolio.
68.7%
80
60
40
20
0
2010
2011
2012
2013
2014
5 Year average
64.2%
www.lancashiregroup.com
9
CHIEF EXECUTIVE’S REVIEW
Q&A
with Group Chief
Executive Officer,
Alex Maloney
WE HAVE NOT CHANGED FUNDAMENTALLY…
we’ve simply adapted
to today’s market
In 2013, we laid the foundations
to make Lancashire a more durable
cross-cycle vehicle; and in 2014,
we have executed by adapting
our business to a soft market
and continuing our capital
management discipline.
10
Lancashire Holdings Limited | Annual Report & Accounts 2014
Q | HOW WOULD YOU SUM UP THE MARKET IN 2014?
A | In some ways 2014 has seen significant changes at Lancashire, but if you look at what we’ve
done it has actually been a case of applying our business philosophy to the world in which
we find ourselves. From the beginning, Lancashire, as a group, has emphasised the need to
be nimble. And what that means is making sure our resources, our structures and our people
are fit for all possible market scenarios. We then engage in a constant process of challenging
our assumptions and fine-tuning our tactics, but our strategy and our goals remain the same.
The key element driving our market at present is capital. Although we have seen some
significant risk losses, we haven’t seen any devastating catastrophe losses in the last two years.
Without the galvanising effect of capital-eroding losses, many insurers have been building
capital through retained earnings. As always, this leads to attempts to build market share
or enter new business lines. That is a cyclical change and one that has been well understood,
and well managed by Lancashire during its history.
COMBINED RATIO
68.7%
LOSS RATIO
31.7%
RETURN ON EQUITY
13.9%
But in addition to this cyclical change we are now seeing a secular change, which is the
decision by capital markets to treat insurance risk as an investable asset class like any other.
We can debate how much of the allocation by some participants reflects a permanent decision
versus a short-term reaction to a prolonged period of low interest rates. But in our judgement,
if we’re seeing the current levels of capital coming in to a soft market, we expect there to
be plenty more capital ready for a post-loss market. At present most of the capital markets’
money is being attracted to catastrophe risk, where the use of industry-standard stochastic
models like RMS and AIR allows investors to see a scientifically-based projected range
of outcomes. Again, we can debate how accurate those
modeled outcomes are, but investors are used to this
method of assessing a return.
Q | HOW HAS LANCASHIRE ADAPTED TO CHANGES
IN THE MARKET IN 2014?
A | We have to adapt on two levels; at a cyclical level and
at a secular level.
“
I have a clear vision of how I want
Lancashire to develop and continue
“
to advance.
At the cyclical level, Lancashire has long shown its ability to maintain discipline in softening
markets. And we are reacting nimbly by taking advantage of some attractive catastrophe and
risk reinsurance pricing to buy more coverage and reduce our retentions, both at Lancashire
UK and Bermuda and at Cathedral. This allows us to focus on the risk-adjusted return for our
business, weighing the retained net risk against the retained net premium. But we recognise
that more reinsurance cannot always be the answer to declining pricing or broadening terms
and conditions. So we are prepared to walk away from business if it is no longer economic.
The low attritional component of our loss ratio means that Lancashire is less susceptible
to pricing pressures than some of our peers, and our consistently strong combined ratio,
including 68.7 per cent in the calendar year 2014, bears this out.
At a secular level, Lancashire is executing on the strategic plans laid in 2013. We recognised
the need for Lancashire to develop a broader business base and to get closer to its clients,
to maintain its “relevance” in a more competitive market with more options for the insurance
and reinsurance buyer. We’ve done this in several ways, but a good example is the development
of more capacity for our energy and terrorism clients through building out these lines of
business at Syndicate 3010. By cross-selling from both our rated-paper and Lloyd’s capital
bases, we are able to offer our clients and brokers significant capacity. Similarly, we have
continued to build out our excess energy liability product with key clients to enhance our
client offering, whilst remaining within our area of expertise. Within Syndicate 3010, we have
added market-leading teams for Aviation War and General Aviation, with encouraging
early support. Again, these niche lines broaden our base whilst remaining within classes
we already know.
www.lancashiregroup.com
11
STRATEGY
Paul Gregory,
Group Chief Underwriting Officer
Chief Executive Officer, LUK
Elaine Whelan,
Group Chief Financial Officer
Chief Executive Officer, LICL
Peter Scales,
Chief Executive Officer, Cathedral
Darren Redhead,
Chief Executive Officer, Kinesis
CHIEF EXECUTIVE’S REVIEW CONTINUED
Q | HOW IS THE WIDER GROUP
INTEGRATION PROGRESSING?
A | We continue to work on optimising the integration
of Cathedral on the underwriting side, with cross-
selling and, for example, leveraging the expertise
of Mark Wilson of Cathedral as a reinsurance buyer,
working for the whole Group. So Cathedral is meeting
our expectations, and not just in a financial sense.
And at Kinesis we’ve seen solid development of the
client and investor base, as Kinesis has leveraged the
Lancashire risk expertise and data to create highly
specialised products. The take up, in terms of both
investors and limits sold, has met our expectations
for 2014; and subject to market conditions, we will
build on this in 2015.
On the investment side 2014 has seen continuing
short-term volatility in markets, and an expectation
that the low interest rate environment may start to
turn in 2015. Lancashire has always felt its first task
on the asset side is to protect the liquidity required
for our clients and to preserve the balance sheet
to be able to engage in market opportunities when
they arise. As such we focus on trying to stay market
neutral in the current environment, and given our
heavy weighting to short duration fixed income
instruments to match our liabilities, we have increased
our allocation to certain risk assets in 2014 to mitigate
some of our interest rate risk. We currently have
more of a risk-on bias and this is likely to continue
for the immediate future.
Q | HOW ARE YOU ADAPTING TO
YOUR NEW ROLE AS CEO?
A | I took on the role of Group CEO in 2014 after more
than nine years with Lancashire. I’d like to pay tribute
to Richard Brindle who handed the reins on to me
following the 2014 AGM, and who created a company
with a keen understanding of its role and a real depth of
management talent. It’s a great help to me to have people
like Elaine Whelan and Paul Gregory, who have been with
Lancashire since the early days, Peter Scales and John
Hamblin who started Cathedral and Darren Redhead who
is building Kinesis. They all have many years of experience,
and know how to weather all phases of the cycle.
I have a clear vision of how I want Lancashire to develop,
and continue to advance. This encompasses continued
focus on underwriting profitability as the engine of our
success, combined with adherence to right-sizing capital
on the most efficient balance sheet for the opportunities
in front of us. We cannot control the market, no
(re)insurer can, but we can ensure that we are the
most nimble at reacting to, and preparing for, it.
12
Lancashire Holdings Limited | Annual Report & Accounts 2014
As such I will continue to focus on the combined ratio
as a measure both of our underwriting success and
our control of overheads, and on the RoE as a
yardstick of both our profitability and right-sizing
of capital. During my time with Lancashire I have seen
us become a key partner to our clients and brokers –
to whom we are very thankful – and deliver market
leading returns to our shareholders. We have achieved
this on the back of great people, great structures
and systems and great focus on the fundamentals.
We all at Lancashire UK and Bermuda, Cathedral
and Kinesis and at the Group level, intend to build
on this for the future by continuing to adapt, but not
forsaking our principles.
“Lancashire was established with a clear strategy
that recognises the cyclical nature of the insurance
and reinsurance markets and enshrines underwriting
and capital discipline at the heart of our strategic
approach to our business.”
Q | HOW HAS THE STRATEGY
DELIVERED IN 2014?
A | We can see the Lancashire strategy in action right
across the Group in 2014. To take a key example,
we can look at how Lancashire deploys property
reinsurance capacity across the Group. In 2013,
Lancashire wrote most of its catastrophe exposures
through LICL, writing both property retrocession
and property catastrophe excess of loss, and used
the Accordion and the Saltire sidecars to distribute
risk it had underwritten to third-party capital. In 2014,
with the additions of Cathedral and Kinesis, and the
availability of additional outwards retrocession, the
shape of the Group’s property reinsurance portfolio
has undergone significant change.
The amount of property retrocession written has been
significantly reduced from $80.8 million in 2013 to
$18.1 million in 2014. This reflects Lancashire’s
judgement that as the most commoditised product we
sell, and with a secular change from the commitment
of third-party capital to this space, that the risk-adjusted
return was declining steeply. We have maintained core
relationships in property retrocession in LICL, but
with much less capital allocated than in previous years.
Instead LICL has continued to develop its previously
underweight property catastrophe excess of loss book.
Cathedral’s own property catastrophe excess of loss
portfolio of small U.S. regional business, which is very
stable due to the buying habits of the clients, now forms
23.3 per cent of the Group’s property reinsurance
income. In addition, on the non-U.S. side, LICL has
been able to cross-sell its larger capacity on higher
layers with Cathedral, who have a more mature
portfolio of smaller capacity on lower layers.
At the same time Kinesis has leveraged Lancashire’s
expertise in risk lines and modeling to sell retrocession
products to address a real need for multi-class protection,
including property, that affords excellent balance sheet
relief to clients. So Lancashire’s reinsurance profile
has adapted to the cycle, protecting and developing a
strong core portfolio, by using multiple balance sheets
to match the client’s needs. As we look forward, we can
see additional opportunities to increase the amount
of retrocession cover that we buy to protect these
exposures, again strategically using the cyclical glut
of capacity to optimise risk-adjusted returns.
That additional flexibility on our outwards reinsurance
and retrocession purchases has helped in our capital
management for 2014 and beyond. Whilst we originally
planned on making a single special dividend payment
in December 2014 to right-size capital for 2015, we
actually made some very capital-efficient changes to our
outwards programmes using both reinstatements and
quota share capacity. These have allowed us to make
a further special distribution with the final dividend
for 2014, whilst maintaining our prudent surplus
capital position which will allow us to take advantage
of any opportunities.
Q | SO DESPITE THE SOFT MARKET
THE STRATEGY IS UNCHANGED?
A | The original Lancashire strategy was specifically
designed to be durable across the cycle, so there is no
need for a strategic change. The whole point of having
a lean operating structure, with exposures concentrated
in short-tail markets, is to be able to right-size our
underwriting and capital to the market in front of us.
We added Kinesis and Cathedral to the Lancashire
Group to improve our ability to trade across the cycle
with both core and opportunistic portfolios.
ALEX MALONEY
CHIEF EXECUTIVE OFFICER
www.lancashiregroup.com
13
STRATEGY
STRATEGY
CONSISTENCY IN STRATEGIC DIRECTION
Our strategy
We have three strategic aims that enable us to meet our goal of providing an attractive risk-
adjusted return to our shareholders. We put underwriting at the forefront of all we do, we focus
on getting the right balance between risk and return and we ensure that we can react nimbly
to an ever-changing market. This enables us to serve our clients and brokers with significant
capacity across the cycle, not just in the core business we aim to renew every year, but also in
times or in areas where capacity is scarce: the opportunistic part of our portfolio. We keep our
structure lean and overheads under strict control so that we can refocus our resources quickly.
And we test our assumptions and performance constantly through our structure using daily
underwriting calls or exception reporting to management, a fortnightly Risk and Return
Committee meeting with all disciplines within the Group represented, and a series of supporting
underwriting, operational, compliance, investment and finance committees. Around this
our risk function and internal audit supply challenge and assurance to management and
the Boards through a simple and continuous reporting process.
Description
UNDERWRITING ALWAYS
COMES FIRST
We employ 33 underwriters
across the Group, many of them
with decades of experience,
and supply them with analytical
tools to assess which business
best fits our portfolios. We look
for new opportunities that will
improve our overall returns and
ensure that we remain relevant
to our brokers and clients.
Shareholder
return
Cross-cycle return of risk-free plus 13%
Profitable 4 years out of 5
Peak-zone PML limits of 25% of capital
Effectively balance
risk and return
Operate nimbly
through the cycle
Underwriting always
comes first
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 call where senior and junior
underwriters debate the risks they want to write and their fit to the portfolio and market.
It also characterises the Group-wide Risk and Return Committee which brings together
underwriting, actuarial, finance and investments, operations and risk to challenge the
assumptions used in all areas of our planning and measuring the business.
EFFECTIVELY BALANCE
RISK AND RETURN
By bringing together all our
disciplines – underwriting,
actuarial, modeling, finance,
investment, risk and
operational – 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.
OPERATE NIMBLY
THROUGH THE CYCLE
As capital continues to surge
into 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.
14
Lancashire Holdings Limited | Annual Report & Accounts 2014
Achievements in 2014
Performance
We have added energy and
terrorism lines to our Lloyd’s
offering in Syndicate 3010,
expanding the Group’s capacity,
licensing and balance sheet
options for these classes. We have
also added new Aviation classes
with two new teams for
Syndicate 3010, both with long
experience and good track
records. We have built out
Kinesis deploying $340.0 million
of limits with seven investors.
Combined Ratio
68.7%
KPI
Gross premiums written
$907.6m
Still a leading combined ratio,
even in difficult markets,
evidencing the continued
focus on underwriting and
portfolio construction.
Significant contribution
from Cathedral in 2014 as we
focused on protecting our
core portfolios, but maintained
the discipline to decline or
re-structure our participation
on under-priced or poorly
performing business.
Associated strategic risks
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 Lancashire that is found
in its mixture of capacity,
leadership capability, significant
reinsurance expenditure and
multiple balance sheet options.
New business lines and additional
reinsurance purchases help
us in this respect.
We have had to reduce income
in some areas of our business
in response to market weakening.
But we have been able to find
substantial outwards reinsurance
opportunities that allow 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.
Return on Equity
13.9%
KPI
Probable Maximum Loss
$235.2m*
A solid result despite a difficult
market and the incidence
of risk losses, helped by
our improved outwards
reinsurance programme.
We continued to reduce our
exposure to key catastrophe
perils as the market has
become more competitive,
demonstrating our discipline
and nimbleness.
The key issue is for Lancashire
to continue to serve its clients
and brokers with significant
capacity, whilst ensuring
that the portfolio is not
unbalanced. This means
constantly re-assessing our
business mix, and testing
key risk assumptions.
Kinesis demonstrated its speed
in identifying an opportunity
outside its usual bi-annual
capital raising and then
deploying $37.5 million
of limits within one week.
In addition, Lancashire
renewed its 15 per cent
disapplication of pre-emption
rights to smooth potential
future capital raises.
* 1 in 100 year Gulf of Mexico Hurricane
expected net loss at 1 January 2015.
KPI
Dividend Yield
17.8%
Whilst buying back shares
can be a part of right-sizing
capital, special dividends
allow Lancashire to make
substantial capital returns
quickly when justified.
Percentage of profit
returned to shareholders
152.3%
Lancashire continues to
exercise the discipline of giving
back capital it cannot profitably
deploy, but remains open to
new opportunities such as those
in developing Syndicate 3010.
Page 20
KPIs
Lancashire has developed
an expectation among its
stakeholders that it will produce
a consistent return and pay
ordinary and special dividends.
Lancashire has to ensure that
all stakeholders understand that
in hard markets Lancashire
will want to retain and even raise
capital to take full advantage
of underwriting opportunities.
Page 33
Enterprise Risk Management
www.lancashiregroup.com
15
STRATEGY
PERFORMANCE
Markets
ebb & flow
but here at Lancashire, we remain nimble
so as to respond to challenges whilst
maintaining a strong balance sheet.
Being agile to seize upon opportunities
as they arise is a cornerstone
of our business.
16
Lancashire Holdings Limited | Annual Report & Accounts 2014
PERFORMANCE
RETURN ON EQUITY
We set a cross-cycle target for return
on equity because we recognise
that in a cyclical market the returns
we earn can be impacted by available
capacity, premium rating and losses
amongst other factors. So even
though the cycle is currently
depressed, we expect to meet
our targets over time.
13.9%
25
20
15
10
5
0
2010
2011
2012
2013
2014
5 Year compound annual
17.7%
www.lancashiregroup.com
17
FINANCIAL REVIEW
MAINTAINING STRONG FINANCIALS
“Despite a challenging market, Lancashire
has remained committed to doing what
we’ve always said we’d do: we have
continued to demonstrate both discipline
in our underwriting and an unrelenting
focus on capital management in order
to produce the best risk-adjusted return
we can for our shareholders.”
Q&A
with Group Chief Financial
Officer, Elaine Whelan
Q | HOW WOULD YOU SUM UP 2014
GROUP FINANCIAL PERFORMANCE?
A | In a year where there has been much doom and
gloom in discussions around market conditions, it’s not
all bad. Lancashire produced an RoE of 13.9 per cent and
a combined ratio of 68.7 per cent for the year. With our
first full year of incorporating Cathedral into our results,
they added 1.6 per cent to our RoE, after acquisition
adjustments. While there were no major loss events
impacting the industry, we did see an increased frequency
of attritional losses. To put that in context, our loss ratio
for the year was 31.7 per cent. We produced a profit
after tax of $229.3 million and comprehensive income
of $227.2 million. Our inception-to-date compound
annual RoE is 18.9 per cent.
Q | HOW HAS THE SOFT MARKET AFFECTED
PREMIUMS AND WHAT HAS CATHEDRAL’S
CONTRIBUTION BEEN?
A | Our gross premiums written were $907.6 million,
an increase of $227.9 million or 33.5 per cent compared
to 2013. The increase in premiums is derived primarily
from the new Lloyd’s segment following the acquisition
of Cathedral in the fourth quarter of 2013. Cathedral
contributed $284.3 million of premiums for the year.
Otherwise, in the original Lancashire lines of business,
we saw a further reduction in property retrocession as
terms and conditions and pricing continued to worsen.
This was offset to a degree by redeploying capital to
the property catastrophe excess of loss book, including
some business on a multi-year basis. We also wrote
a number of new and renewing multi-year deals in
the energy Gulf of Mexico book.
Q | WITH NO MAJOR LOSSES IN 2014 WHAT EFFECT
HAS THIS HAD ON LANCASHIRE’S LOSS RATIO?
A | The Group’s loss ratio for the year was 31.7 per cent
with an accident year ratio of 35.9 per cent. As noted
above, there were no major insured loss events this year,
although we did see a higher number of smaller losses.
The most notable impact was in Lancashire’s satellite book
and Cathedral’s aviation book with a total of $42.4 million
reported across a number of losses. Prior year losses
developed favourably, albeit modestly so.
Q | HOW HAS THE EVOLVING INVESTMENT
MARKET AFFECTED LANCASHIRE?
A | We produced a total return for the year of 1.0 per cent.
Investment markets remained challenging – although
somewhat less so than in 2013 – with global growth
still slow and geopolitical risk heightened. We increased
duration during the year, increased our allocation to
floating rate securities and added a small hedge fund
portfolio. While that helped us generate a better return
on our portfolio, the additional asset allocations were
primarily with a view to managing our interest rate
exposure in anticipation of Federal Reserve rate increases
in 2015. The hedge fund portfolio has returned 1.8 per
cent since our initial investment in April 2014.
18
Lancashire Holdings Limited | Annual Report & Accounts 2014
2014 FINANCIAL PERFORMANCE
FINANCIAL HIGHLIGHTS
Gross premiums written
Net premiums written
Net premiums earned
Net insurance losses
Net underwriting income
Net investment income
Net realised gains (losses) and impairments
Net operating profit
Profit after tax
Change in net unrealised gains/losses on investments
Comprehensive income
Dividends
Diluted earnings per share
Diluted operating earnings per share
Fully converted book value per share
Return on equity
Net loss ratio
Net acquisition cost ratio
Expense ratio
Combined ratio
Accident year loss ratio
Net total return on investments1
Note: Dividends included in the financial statement year in which they were recorded.
(1) Net return on investments includes internal foreign exchange hedges.
2010
$m
689.1
649.9
614.2
165.7
342.2
53.4
33.2
306.5
330.8
(2.2)
328.6
294.2
$1.86
$1.73
$7.57
23.3%
27.0%
17.3%
10.1%
54.4%
42.9%
4.2%
2011
$m
632.3
565.1
574.5
182.3
208.8
43.2
8.6
219.0
212.2
(10.6)
201.6
180.4
$1.20
$1.23
$7.62
13.4%
31.7%
19.6%
12.4%
63.7%
59.3%
1.8%
2012
$m
724.3
576.1
582.6
174.1
289.1
32.5
11.8
220.3
234.9
17.8
252.7
201.4
$1.29
$1.21
$7.83
16.7%
29.9%
20.5%
13.5%
63.9%
34.6%
3.1%
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%
33.1%
22.1%
15.0%
70.2%
36.1%
0.3%
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%
31.7%
21.4%
15.6%
68.7%
35.9%
1.0%
Q | HOW HAS KCML FINANCIALLY
CONTRIBUTED TO 2014 RESULTS?
A | We earned $6.2 million in underwriting fees for
the year against an expense base of approximately
$4.6 million. We also recorded a $4.7 million share
of profits in associates on our 10 per cent equity
interest in KHL. During 2014 we received $9.7 million
in total profit commissions on previous vehicles and
we should receive $5.8 million in profit commission
from the Kinesis vehicle in the first quarter of 2015.
Q | WHAT IS THE VALUE OF WARRANTS
EXERCISED AND REMAINING AT YEAR END?
A | Warrant exercises during the year reduced RoE
by 0.8 per cent. With 18.7 million warrants remaining
outstanding at the end of the year, and due to expire
on 16 December 2015, we anticipate the imminent
exercise of these outstanding instruments.
Q | HOW HAS CAPITAL BEEN MANAGED IN 2014?
A | During the year we returned $346.0 million of
capital, or 152.3 per cent of comprehensive income,
by way of dividends and share repurchases paid in
the year. Including dividends declared on 11 February
2015, our capital return from inception now stands
at $2.3 billion. Our total capital at the end of the
year was $1.4 billion. As ever, we will adjust our
capital position to match business opportunities
and to generate a superior risk-adjusted return
for our shareholders.
ELAINE WHELAN
GROUP CHIEF FINANCIAL OFFICER
www.lancashiregroup.com
19
PERFORMANCE
KEY PERFORMANCE INDICATORS
RETURN ON EQUITY
COMBINED RATIO
TOTAL INVESTMENT RETURN
13.9%
DR
68.7%
1.0%
30
20
10
80
60
40
20
Aim
0
2010
2011
2012
2013
2014
0
2010
2011
2012
2013
2014
The Group’s aim is to provide
shareholders with a risk-adjusted return
on equity of 13 per cent in excess of
a risk-free rate over the insurance cycle.
The Group aims to price its business
to ensure that the combined ratio
in any year is less than 100 per cent.
5
4
3
2
1
0
2010
2011
2012
2013
2014
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.
The Group’s aim is to provide an
The Group aims to carry the right
The Lancashire Foundation was
attractive risk-adjusted return to
level of capital to match attractive
established in 2007 with the aim
shareholders over the insurance cycle.
underwriting opportunities, utilising
of creating a charitable trust for
This is a long-term goal, recognising
an optimal mix of capital tools.
the benefit of charitable causes in
that the cyclicality and volatility of
Over time, through pro-active and
Bermuda, the UK and worldwide.
Measurement
The return on equity is measured by
management as the internal rate of
return of the increase in fully converted
book value per share in the period,
adjusted for dividends.
2014 Performance Our market in 2014 was almost
universally in a soft phase. We recognise
that whilst we have attained very high
RoE in the recent past, at this stage of
the cycle we cannot expect to earn such
high returns. But we continue to focus
on getting the best risk-adjusted return
for our shareholders. In 2014 this
led us to buy more reinsurance and
retrocession protection to reduce
our exposures.
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 interest
by having an RoE component in this.
Risk Management
The combined ratio is the ratio of total
costs to total net earned premium 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.
Whilst the combined ratio in 2014 was above
the five-year average, it was still an excellent
result. In the context of a softening market
we would expect the loss ratio to increase
and have increased our attritional loss ratio
to take account of this and Cathedral’s more
frequency-oriented portfolio.
Total investment return measures
investment income and net realised
and unrealised gains and losses
produced by the Group’s managed
investment portfolio.
In 2014 Lancashire continued to monitor
risk-on/risk-off volatility and increased
the allocation to risk assets as a hedge
against the interest rate risk inherent in
the significant fixed-income portfolio.
However, given the liquidity and duration
needs of the portfolio, the composition
of the core portfolio is unchanged.
The Group’s underwriters assess likely
losses, using tools such as BLAST and
BAM and catastrophe models, and 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.
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.
20
Lancashire Holdings Limited | Annual Report & Accounts 2014
both the insurance market and the
flexible capital management across
financial markets in general will impact
the cycle, we aim to generate
management’s ability to maximise the
optimum returns for shareholders.
share multiple in the immediate term.
Total shareholder return is measured
The percentage of profit returned to
Money is donated by the Group to
in terms of the internal rate of return
shareholders equals the total capital
the Lancashire Foundation through
of the increase/decrease in share price
returned to shareholders through
an annual cash donation and by
in the period, measured in U.S. dollars
dividends and share repurchases paid
dividends on Lancashire warrants
and adjusted for dividends.
in a given year, divided by the Group’s
that were donated to the Foundation
comprehensive income.
on its inception.
The performance of the share price
In 2014, Lancashire maintained it’s
Charities supported in 2014 include
in 2014 was disappointing, but we
A rating. In view of the current market
charities proposed by staff and by
continue to communicate regularly
outlook Lancashire took the decision
clients and brokers. Over 40 charities
and transparently to our investors,
to return surplus capital to shareholders
in total were supported financially
and to tell the Lancashire story around
due to the lack of opportunities which
in Bermuda, the UK and around the
the world. The combination of change,
met internal hurdles. With significant
world. All staff had the opportunity
including the acquisition of Cathedral
and long-term new market capital to
to take part in volunteering days.
and a new CEO, a difficult market,
support our reinsurance needs, we were
and Lancashire’s previous history
able to improve the capital efficiency
of out performance meant that it was
on our outwards purchases.
a challenging year for the share price.
The Lancashire remuneration structure
Risk tolerances are set at a level that
The Lancashire Foundation is a
and share scheme ensure that staff are
aim to prevent the Group incurring
charity registered in England and
highly motivated and closely aligned
losses that would impair its ability
Wales (registration number 1149184).
to the Group’s goals, and therefore
to operate. The Group’s key capital
The charity’s trustees are Group
with shareholders. Permanent staff
measure is it’s A.M. Best rating, and
employees and non-executive Board
are eligible to receive RSS awards for
a minimum rating of A- is considered
members. The day-to-day operations
which TSR is an element of the vesting
necessary to attract business.
criteria. The participation of employees
in the RSS ensures that there is a
strong focus on sustainable long-term
shareholder value.
are administered by a Foundation
Donations Committee made up of
employees from across the Group
which operates within the specific
criteria set for the Foundation’s
charitable giving.
Aim
The Group’s aim is to provide
The Group aims to price its business
The Group’s primary investment
shareholders with a risk-adjusted return
to ensure that the combined ratio
objectives are to preserve capital and
on equity of 13 per cent in excess of
in any year is less than 100 per cent.
provide adequate liquidity to support
a risk-free rate over the insurance cycle.
the Group’s payment of claims and
other obligations.
Measurement
The return on equity is measured by
The combined ratio is the ratio of total
Total investment return measures
management as the internal rate of
costs to total net earned premium and
investment income and net realised
return of the increase in fully converted
is a measure of an insurance company’s
and unrealised gains and losses
book value per share in the period,
operating performance. It is calculated
produced by the Group’s managed
adjusted for dividends.
as the sum of the loss ratio, the acquisition
investment portfolio.
cost ratio and the expense ratio.
2014 Performance Our market in 2014 was almost
Whilst the combined ratio in 2014 was above
In 2014 Lancashire continued to monitor
universally in a soft phase. We recognise
the five-year average, it was still an excellent
risk-on/risk-off volatility and increased
that whilst we have attained very high
result. In the context of a softening market
the allocation to risk assets as a hedge
RoE in the recent past, at this stage of
we would expect the loss ratio to increase
against the interest rate risk inherent in
the cycle we cannot expect to earn such
and have increased our attritional loss ratio
the significant fixed-income portfolio.
high returns. But we continue to focus
to take account of this and Cathedral’s more
However, given the liquidity and duration
on getting the best risk-adjusted return
frequency-oriented portfolio.
needs of the portfolio, the composition
of the core portfolio is unchanged.
for our shareholders. In 2014 this
led us to buy more reinsurance and
retrocession protection to reduce
our exposures.
Risk Management
The stated aim is a long-term goal,
The Group’s underwriters assess likely
The investment strategy places an
acknowledging that management
losses, using tools such as BLAST and
emphasis on the preservation of invested
expects both higher and lower results
BAM and catastrophe models, and their
assets and provision of sufficient liquidity
in the shorter term. The cyclicality and
experience and knowledge of past loss
for the prompt payment of claims, in
volatility of the insurance market is
experience, industry trends and current
conjunction with providing a reasonably
expected to be the largest driver of this
circumstances. This allows them to
stable income stream. These objectives
pattern. We seek to align our variable
estimate the premiums sufficient to meet
are reflected in the Group’s investment
remuneration to shareholders interest
likely losses and expenses. Peer reviews
guidelines and its conservative asset
by having an RoE component in this.
of risks are conducted through the daily
allocation. Management reviews the
underwriting call or peer review,
composition, duration and asset
depending on risk impact, enabling the
allocation of the investment portfolio
Group to ensure careful risk selection,
on a regular basis in order to respond
limits on concentration and appropriate
to changes in interest rates and other
portfolio diversification. The RRC then
market conditions.
monitors performance at a portfolio level.
5 Year Average
DR
KPI linked to Executive
Directors’ remuneration.
For more information
see pages 61 to 78.
TOTAL SHAREHOLDER RETURN
PERCENTAGE OF PROFIT
RETURNED TO SHAREHOLDERS
DONATIONS MADE TO THE
LANCASHIRE FOUNDATION
-24.2%
DR
152.3%
$3.0m
50
37.5
25
12.5
0
-12.5
200
150
100
50
3
2
1
-25
2010
2011
2012
2013
2014
0
2010
2011
2012
2013
2014
0
2010
2011
2012
2013
2014
The Group’s aim is to provide an
attractive risk-adjusted return to
shareholders over the insurance cycle.
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.
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.
The performance of the share price
in 2014 was disappointing, but we
continue to communicate regularly
and transparently to our investors,
and to tell the Lancashire story around
the world. The combination of change,
including the acquisition of Cathedral
and a new CEO, a difficult market,
and Lancashire’s previous history
of out performance meant that it was
a challenging year for the share price.
The Lancashire remuneration structure
and share scheme ensure that staff are
highly motivated and closely aligned
to the Group’s goals, and therefore
with shareholders. Permanent staff
are eligible to receive RSS awards for
which TSR is an element of the vesting
criteria. The participation of employees
in the RSS ensures that there is a
strong focus on sustainable long-term
shareholder value.
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 pro-active and
flexible capital management across
the cycle, we aim to generate
optimum returns for shareholders.
The Lancashire Foundation was
established in 2007 with the aim
of creating a charitable trust for
the benefit of charitable causes in
Bermuda, the UK and worldwide.
The percentage of profit 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.
Money is donated by the Group to
the Lancashire Foundation through
an annual cash donation and by
dividends on Lancashire warrants
that were donated to the Foundation
on its inception.
In 2014, Lancashire maintained it’s
A rating. In view of the current market
outlook Lancashire took the decision
to return surplus capital to shareholders
due to the lack of opportunities which
met internal hurdles. With significant
and long-term new market capital to
support our reinsurance needs, we were
able to improve the capital efficiency
on our outwards purchases.
Risk tolerances are set at a level that
aim to prevent the Group incurring
losses that would impair its ability
to operate. The Group’s key capital
measure is it’s A.M. Best rating, and
a minimum rating of A- is considered
necessary to attract business.
Charities supported in 2014 include
charities proposed by staff and by
clients and brokers. Over 40 charities
in total were supported financially
in Bermuda, the UK and around the
world. All staff had the opportunity
to take part in volunteering days.
The Lancashire Foundation is a
charity registered in England and
Wales (registration number 1149184).
The charity’s trustees are Group
employees and non-executive Board
members. The day-to-day operations
are administered by a Foundation
Donations Committee made up of
employees from across the Group
which operates within the specific
criteria set for the Foundation’s
charitable giving.
www.lancashiregroup.com
21
PERFORMANCE
UNDERWRITING REVIEW
STRONG PERFORMANCE
IN TOUGH MARKETS
John Hamblin
Active Underwriter,
Cathedral Syndicates 2010 and 3010
Sylvain Perrier
Chief Underwriting Officer, LICL
Q&A
Bruce Carman, Hayley Johnston,
John Spence
Aviation War, AV52 and General Aviation
Simon King
Direct and Facultative Property
A roundtable discussion on
the state of the market with the
Group’s underwriters
Q | THERE HAS BEEN A LOT OF DISCUSSION ABOUT
NEW CAPACITY IN THE MARKET. HOW DOES
THAT AFFECT YOUR LINE OF BUSINESS?
A | J Hamblin: For our part at Syndicate 2010, our core
U.S. catastrophe book is made up of some 300 small to
mid-size companies who have almost completely shunned
the capital markets to date, mostly because of the basis risk
which still exists between capital fund offerings and the
underlying risks our customer base writes. A combination
of the relatively small reinsurance premiums on offer with
the conservatism of our customer base has seen less than
2 per cent of deals being completed with new markets to
date with no change in their overall buying habits.
A | S Perrier: At LICL, the property reinsurance portfolio
has seen a significant decline in retrocession business and
this does directly reflect the introduction of new capital
with a hunger for the commoditised, model-dependent
part of the market. But as John indicates, the traditional
market has a superior product in many respects, with
features like reinstatements which are very difficult for
the capital markets sector to reproduce.
A | J Flude: For much of the remainder of the Group’s
business it isn’t the direct impact of new capital that is
being felt, as capital markets cannot satisfactorily rate
or underwrite our products in the absence of a model.
Rather it is surplus capital and retained earnings in the
traditional sector, resulting from benign loss experience
and the displacement effect of new capital in catastrophe
reinsurance, that is driving competition. But again, we’re
used to competition and we have a very experienced
group of underwriters to navigate all kinds of markets.
Q | SO HOW IMPORTANT ARE RELATIONSHIPS
IN A SOFTENING MARKET?
A | J Hamblin: Both Cathedral’s U.S. and international
books are made up of strong relationships which have
lasted decades during which time we’ve been tested by
softer markets than this one. As in most years, we are
seeing some organic growth from within our existing
client base which will, to some extent, offset lower pricing.
But client retention on our book is strong.
A | J Flude: For the Energy and Marine portfolios, we have
strong relationships based on our clients’ need to have
insurance counterparties who understand their exposures
and operations in detail. We can provide bespoke coverage
for unique exposures such as ultra-deep-water units,
and we always aim to adjust claims fairly and quickly,
22
Lancashire Holdings Limited | Annual Report & Accounts 2014
Simon Thurgood, Mark Wilson
Terror and Property Reinsurance
James Flude, Alasdair Butler
Energy & Cargo
even when they are complex. We’ve been very pleased
by the support those clients have shown by giving
orders to both LUK and the new energy capacity in
Syndicate 3010.
A | A Butler: In Marine Cargo, Cathedral’s emphasis
has always been to concentrate on our core accounts.
We have been working with many of our clients for
up to 25 years, and offer them cover right around the
world. These clients are more immune to the fickle
rate-chasing that can be seen elsewhere and we consider
them to be the foundation on which we can build in
more favourable market conditions.
Q | ARE THERE OPPORTUNITIES EVEN IN A SOFT
MARKET TO DEVELOP THE BUSINESS?
A | B Carman: There are always opportunities, and
the development of the Aviation accounts at Syndicate
3010 in 2014 are a good illustration of this. John Spence
and I were able to bring teams with both a track record
and experience to Cathedral, and we’ve already seen
the support of brokers and clients.
A | J Spence: Even in General Aviation, which has not
been affected by the headline losses, we have been able
to lay firm foundations for the account, based on our
long experience and relationships in the market.
A | S Thurgood: Lancashire has been able to build out
its terrorism and energy lines in Syndicate 3010 as well,
often with additional lines on existing Group business
thanks to the support of our clients and brokers.
Q | SO HOW CAN YOU UNDERWRITE YOUR
WAY THROUGH THIS PHASE OF THE CYCLE?
A | M Wilson: For a start it’s important to have the
experience to know what to look for. Changes to terms
and conditions, like expanding the number of hours
in which flood losses can accumulate, can have significant
potential impacts on profit margin, depending on the
region and attachment point. If you understand these
impacts, you can assess whether there is a viable price
for the coverage, or whether you need to exclude it.
A | H Johnston: To be fair, the softening of the
reinsurance market can actually be a benefit for a Group
like ours where around 70 per cent of our income is
direct insurance. We’re able to buy more and cheaper
reinsurance to protect our primary portfolios, and that
means we can limit exposure and volatility. As Alex has
said, we aim to retain the most risk when markets are
hardest, and the least when they are softest, so finding
the right balance for the stage of the cycle is key.
A | S King: We can also look at the balance of our
business mix. For 2015, the Cathedral D&F portfolio
will be about 45 per cent binder business, the small
commercial business written through MGAs, which is
much less susceptible to violent rate swings. That’s the
highest that it has ever been. And as Hayley says, we’ve
been able to reduce our retentions by buying more
reinsurance at better prices.
www.lancashiregroup.com
23
PERFORMANCE
BUSINESS REVIEW
SOLID PERFORMANCE
In a difficult year for
underwriting, Lancashire
still achieved a combined
ratio of 68.7 per cent.
Hayley Johnston
Chief Underwriting Officer, LUK
Sylvain Perrier
Chief Underwriting Officer, LICL
BUSINESS ENVIRONMENT AND OUTLOOK
2014 has been a challenging year for the specialty insurance
market as we are firmly in the soft phase of the underwriting cycle.
But managing the cycle is one of the key skills of the Lancashire
Group. As a long-standing leader in the specialty insurance and
reinsurance lines, the silver lining of the highly competitive market
is the ability for Lancashire to maintain its core inwards portfolio
while managing net exposures through greatly improved pricing,
and terms and conditions on the outward placements.
The market is not without challenges, but the Lancashire business
model was always designed in the knowledge that we have to cater
for all phases of the cycle. Solid return on equity and an excellent
combined ratio have been achieved in difficult trading conditions
and allowed us to maintain our excellent dividend record, based on
our continued commitment to focusing first on our underwriting
and our capital management. With market-leading underwriters
across all three of our business platforms we have defended our core
portfolio, built our lines where we had true growth opportunities,
reduced exposures where competition made returns unacceptable,
and maintained our relevance to brokers and clients. The work we
have done over the last couple of years in widening the base of our
income, and adding to our underwriting resources, reinforces
our ability to trade successfully through all conditions.
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 comparability of contracts
and the assessment noted above. To enhance the RPI tool,
the management of 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 it does not reflect every contract in Lancashire’s portfolio.
The future profitability of the portfolio of contracts within
the RPI is dependent upon many factors besides the trends
in premium rates.
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
2006
100
100
100
100
100
100
100
2007
80
80
80
88
97
86
86
2008
69
64
68
80
86
71
76
2009
68
137
84
82
127
66
83
2010
62
139
88
80
121
60
81
2011
59
140
97
79
131
57
83
2012
55
140
100
86
157
55
84
2013
49
136
97
89
152
52
81
2014
44
125
91
91
132
48
76
24
Lancashire Holdings Limited | Annual Report & Accounts 2014
UNDERWRITING RESULTS
2014
2013
Gross premiums written
Net premiums earned
Net loss ratio
Net acquisition cost ratio
Expense ratio
Combined ratio
Marine
$m
67.7
57.7
Energy
$m
239.4
169.7
Aviation
$m
53.2
52.6
Property
Total
$m
$m
263.0
679.7
221.5
568.1
9.8% 24.7% 47.8% 62.5% 47.9% 31.7% 13.8% 26.5% 105.3% 44.7% 47.7% 33.1%
11.8% 30.9% 30.7% 18.3% 22.2% 21.4% 13.4% 27.7% 34.8% 22.6% 21.6% 22.1%
15.0%
21.6% 55.6% 78.5% 80.8% 70.1% 68.7% 27.2% 54.2% 140.1% 67.3% 69.3% 70.2%
Property
$m
333.4
218.8
Aviation
$m
48.9
44.7
Lloyd’s
$m
284.3
214.1
Total
$m
907.6
715.6
Energy
$m
209.9
203.1
Marine
$m
63.0
61.7
Lloyd’s
$m
24.5
39.8
15.6%
–
–
–
–
–
–
–
–
–
–
PREMIUMS
Gross premiums written increased by 33.5 per cent compared
to 2013. The increase in premiums is derived primarily from the
new Lloyd’s segment following the acquisition of Cathedral in
the fourth quarter of 2013. The Group’s five principal segments,
and the key market factors impacting them, are discussed below.
PROPERTY
Property gross premiums written decreased by 21.1 per cent for
the year ended 31 December 2014 compared to the year ended
31 December 2013. The decrease is driven primarily by reductions
in the property retrocession book at the 1 January 2014 renewals,
offset in part by the expansion of our property catastrophe excess
of loss book. As property retrocession rates, terms and conditions
continued to worsen, we redeployed capital to property catastrophe
excess of loss, adding some new business and restructuring some
existing programmes for core clients, including writing some
business on a multi-year basis. Otherwise we saw a reduction in
both the terrorism and political and sovereign risks books due
to the impact of timing from long-term contract renewals.
ENERGY
Energy gross premiums written increased by 14.1 per cent for
the year ended 31 December 2014 compared to the year ended
31 December 2013. The increase for the year is driven primarily
by the Gulf of Mexico book where a number of both new and
renewing deals were written on a multi-year basis. Volumes across
other energy lines are fairly flat year on year.
MARINE
Marine gross premiums written increased by 7.5 per cent for
the year ended 31 December 2014 compared to the year ended
31 December 2013. The increase is largely due to non-annual contract
renewals in the marine hull sub-class in the second quarter of 2014.
AVIATION
Aviation gross premiums written increased by 8.8 per cent for
the year ended 31 December 2014 compared to the year ended
31 December 2013 driven by increases in the aviation satellite
sub-classes, due to new satellite business plus additional satellite
launches on contracts written in previous years.
LLOYD’S
2014 reflects the first full year of gross premiums written
attributable to the Lloyd’s segment since the Cathedral acquisition
in the fourth quarter of 2013. Two months of gross premiums
written, from the date of acquisition, were included in the fourth
quarter of 2013. The Lloyd’s segment gross premiums written
for the year ended 31 December 2014 were $284.3 million,
$3.9 million or 1.4 per cent lower than the year ended 31 December
2013 (including premiums written prior to the acquisition).
For the year ended 31 December 2014, while there have been
decreases across the existing book of business due to declining
rates, these have been offset by the new energy, terrorism and
aviation classes being written by Syndicate 3010.
CEDED
Ceded premiums increased by $42.7 million, or 35.0 per cent for
the year ended 31 December 2014 compared to the year ended
31 December 2013. The overall increase for the year is predominantly
due to the new Lloyd’s segment. Cessions to the Accordion sidecar
were $47.9 million in 2013. The Accordion quota share contract
was commuted in the first quarter of 2014 and, other than standard
premium adjustments, no premiums were ceded to the facility this
year. This reduction was more than offset by $64.9 million of ceded
premiums in relation to the Lloyd’s segment. Lancashire also took
advantage of lower reinsurance rates to purchase some new
non-marine retrocession aggregate cover and to restructure and
increase limits for the marine, energy and terror programmes.
EARNED
Net premiums earned as a proportion of net premiums written
were 96.3 per cent for the year ended 31 December 2014,
compared to 101.9 per cent for the year ended 31 December 2013.
The decreased percentage in premiums earned for the year ended
31 December 2014 compared to the same period in 2013 reflects
the impact of increased multi-year premiums written in the
property catastrophe and energy Gulf of Mexico classes in 2014.
www.lancashiregroup.com
25
PERFORMANCE
BUSINESS REVIEW CONTINUED
LOSSES
The Group’s net loss ratio was 31.7 per cent for the year ended
31 December 2014 compared to 33.1 per cent for 2013. For the
year ended 31 December 2014, there were relatively low reported
losses across all lines, although there was some negative development
on prior accident year mid-sized marine and energy claims.
In 2013, attritional losses were exceptionally low, offset by prior
year adverse development on the Costa Concordia marine loss
of $37.9 million, after reinsurance and reinstatement premiums.
Prior year favourable development was $34.4 million for the year
ended 31 December 2014, compared to $15.9 million for the same
period in 2013, which included the adverse development on Costa
Concordia above. Both years otherwise experienced releases due
to lower than expected reported losses.
The 2014 accident year loss ratio, including the impact of foreign
exchange revaluations, was 35.9 per cent compared to 36.1 per
cent for the year ended 31 December 2013. The 2014 accident year
loss ratio for the year ended 31 December 2014 did not include
any significant large losses. The corresponding period of 2013
also included low levels of current accident year losses.
The following tables show the impact of prior year development
and large losses on the Group’s loss ratio:
FOR THE YEAR ENDED 31 DECEMBER 2014
At 31 December 2014
Absent prior year development
Adjusted losses and ratio
Losses
$m
226.5
260.9
260.9
Loss ratio
%
31.7
36.5
36.5
Note: Adjusted loss ratio excludes large losses and prior year development. The table does not sum to
a total due to the impact of reinstatement premiums.
FOR THE YEAR ENDED 31 DECEMBER 2013
At 31 December 2013
Absent Europe hail and flood
Absent Costa Concordia
Absent remaining prior
year development
Adjusted losses and ratio
Losses
$m
188.1
167.2
154.6
237.5
183.1
Loss ratio
%
33.1
29.4
27.0
41.8
32.0
Note: Adjusted loss ratio excludes large losses and prior year development. The table does not sum to
a total due to the impact of reinstatement premiums.
The table below provides further detail of the prior year’s loss development by class, excluding the impact of foreign
exchange revaluations:
LOSS DEVELOPMENT BY CLASS
Property
Energy
Marine
Aviation
Lloyd’s
Total
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
Note: Adjusted for revaluation of foreign currencies at the exchange rate as at 31 December 2014.
2010
$m
28.8
47.6
17.7
6.0
n/a
100.1
2010
28.1%
42.9%
14.8%
2011
$m
63.5
57.3
28.6
5.9
n/a
155.3
2011
56.5%
59.3%
2.8%
2012
$m
(36.0)
37.4
25.9
0.1
n/a
27.4
2012
31.2%
34.6%
3.4%
2013
$m
13.2
18.4
(23.4)
(1.4)
9.1
15.9
2013
32.7%
36.1%
3.4%
2014
$m
19.8
5.4
(9.7)
0.9
18.0
34.4
2014
35.9%
n/a
n/a
26
Lancashire Holdings Limited | Annual Report & Accounts 2014
Excluding the impact of foreign exchange revaluations, previous
accident years’ ultimate losses developed as follows during 2014
and 2013:
ULTIMATE LOSS DEVELOPMENT BY ACCIDENT YEAR
2006 and prior accident years
2007 accident year
2008 accident year
2009 accident year
2010 accident year
2011 accident year
2012 accident year
2013 accident year
Total
2013
$m
(0.7)
(0.9)
(4.1)
2.0
1.4
(4.1)
22.3
n/a
15.9
2014
$m
1.8
(0.3)
3.6
4.3
5.7
(6.1)
11.1
14.3
34.4
Note: Positive numbers denote favourable development.
The ratio of IBNR to total net loss reserves was 31.6 per cent at
31 December 2014 compared to 31.8 per cent at 31 December 2013.
ACQUISITION COSTS
The accident acquisition cost ratio was 21.4 per cent compared
to 22.1 per cent for the 12 months to 31 December 2013. The
decrease was largely due to profit commission received on
Accordion (see page 32).
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,
MANAGED INVESTMENT PORTFOLIO ALLOCATIONS
Cash
Short-term investments
Fixed income funds
Government debt
Agency debt
Agency MBS, CMBS
Non-agency RMBS, ABS, CMBS
FDIC corporate bonds
Corporate bonds
Bank loans
Fixed income – at FVTPL
Equity securities
Hedge Funds – at FVTPL
Other investments
Total
we position our portfolio to limit downside risk in market shocks.
In 2014, our focus has been on managing our interest rate risk,
the largest risk to our predominantly fixed income portfolio.
We continue to maintain a short duration fixed income portfolio
and have been using our risk budget to add products to our
portfolio to help mitigate a rise in rates. We produced a total
investment return of 1.0 per cent (2013 – 0.3 per cent) for the year.
Our average annual total investment return since inception
is 3.3 per cent, and we have made a positive investment return
in every year since inception, including 2008.
Our portfolio mix illustrates our philosophy, as shown in the
table on page 112. 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 portfolio categories, which are
discussed further on page 111. As at 31 December 2014 and 2013
the managed portfolio was as follows:
Fixed income securities
Cash and cash equivalents
Equity securities
Hedge funds
Other investments
Total
2010
%
21.9
0.5
–
22.4
1.6
15.3
2.9
4.3
31.1
–
–
–
–
–
100.0
2011
%
13.2
4.0
–
27.2
4.2
13.2
5.8
2.5
29.9
–
–
–
–
–
100.0
2012
%
11.1
5.4
–
18.8
6.2
19.2
5.3
–
32.2
1.8
–
–
–
–
100.0
2013
%
84.4
14.7
0.7
–
0.2
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
2014
%
81.9
10.6
0.7
6.8
–
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
www.lancashiregroup.com
27
PERFORMANCE
BUSINESS REVIEW CONTINUED
The corporate bond allocation represented 31.7 per cent
of managed invested assets at 31 December 2014 compared
to 29.7 per cent at 31 December 2013. At 31 December 2014
the Group’s allocation to bank loans represented 5.8 per cent
of the portfolio compared to 4.5 per cent at 31 December 2013.
The Group’s portfolio at 31 December 2014 also included
a 6.8 per cent allocation to a diversified portfolio of low
volatility hedge funds. There was no allocation to hedge funds
at 31 December 2013.
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 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 $28.6 million for the year ended 31 December 2014,
an increase of 12.6 per cent compared to 2013. The increase for
the year ended 31 December 2014 compared to 2013 is mainly
due to the increased size of the investment portfolio resulting
from the acquisition of Cathedral during 2013.
Total investment return, including net investment income,
net realised gains and losses, impairments and net change in
unrealised gains and losses was $22.0 million for the year ended
31 December 2014 compared to $6.9 million for 2013. For the
year ended 31 December 2014, returns were generated primarily
by a reduction in treasury yields, which offset the slight widening
of investment grade credit spreads. This was in contrast to 2013
which saw a significant increase in treasury yields, offset somewhat
by notable investment grade credit spread narrowing. In addition,
in 2013, our EMD portfolio was detrimentally impacted by rising
treasury yields and wider EMD credit spreads which led to negative
performance in this asset class.
LIQUIDITY
Lancashire is a short-tail insurance and reinsurance group. As such,
the investment portfolio must be liquid, short duration, and highly
credit-worthy. As noted earlier, Lancashire’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.
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. Given the current global outlook and incessant volatility
in the markets, this is unlikely to occur in the near future.
CASH FLOW
Lancashire’s cash inflows are primarily derived from net premiums
received, from losses recovered from reinsurers, from net
investment income, including dividends and other returns from
associates, and any capital raising activities performed in a given
year including the issuance of debt. Excess funds are invested in
the investment portfolio, which consists of high-quality, highly
liquid fixed income 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 reinsurance cover, payment of general and
administrative expenses, the servicing of debt, the purchase
of investment products, the distribution of dividends and the
repurchasing of shares.
In 2014, operating cash flow was again strong, driven by the
Group’s robust underwriting performance. A net positive cash
inflow arose from operations during the year of $212.5 million
(2013 – $167.7 million). We have generated positive operating
cash flows in each year of operation since inception.
KEY INVESTMENT PORTFOLIO STATISTICS
Duration
Credit quality
Market yield
Book yield
2010
2.2 years
AA
1.9%
2.4%
2011
1.8 years
AA–
1.5%
1.9%
2012
1.8 years
AA–
1.1%
1.8%
2013
1.0 years
AA-
1.2%
1.4%
2014
1.5 years
AA-
1.5%
1.5%
28
Lancashire Holdings Limited | Annual Report & Accounts 2014
ASSOCIATES
The $5.9 million share of profit of associates for the year ended
31 December 2014, mostly reflects Lancashire’s 10 per cent equity
interest in KHL. The share of profit of associates was $9.2 million
for the year ended 31 December 2013 and related to the Accordion
and Saltire vehicles. Kinesis and third-party capital are discussed
on page 32.
OTHER OPERATING EXPENSES
Employee salaries and benefits
Employment taxes
on equity compensation
Other operating expenses
Total Lancashire,
excluding Lloyd’s segment
Lloyd’s segment
Total
2013
$m
37.3
4.2
36.2
77.7
7.3
85.0
2014
$m
36.0
(2.0)
36.8
70.8
40.5
111.3
Excluding the Lloyd’s segment, employee remuneration costs
were $1.3 million lower for the year ended 31 December 2014
compared to the same period in 2013 largely due to the retirement
of the Company’s previous CEO earlier in the year. The year
ended 31 December 2014 included reversals of employee national
insurance accruals in relation to equity compensation exercises
driven by both the timing of exercises and fluctuations in the
share price.
The Lloyd’s segment for the year ended 31 December 2014
includes $20.1 million of employee remuneration costs and
$12.0 million of other operating expenses and $8.4 million relating
to the amortisation of intangible assets arising on acquisition.
For comparison, for the full year 2013, including the period
pre-acquisition, the Lloyd’s segment included $17.2 million,
$14.1 million and $4.7 million respectively.
Equity based compensation was $23.3 million for the year
ended 31 December 2014 and $16.7 million for the year ended
31 December 2013. Included in the 2014 charge is $4.4 million
for awards made to Cathedral employees.
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 pro-active and flexible
capital management is crucial in helping to generate a superior
risk-adjusted return over time. With our focus on maximising
shareholder return we will return capital where this offers
the best returns for our shareholders. Including dividends
declared in February 2015, we have returned 101.9 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.
The subsidiary operating entities also conduct capital requirement
assessments under internal measures and in compliance with
local regulatory 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
At 31 December 2014, total capital available to the Group was
$1.683 billion, comprising shareholders’ equity of $1.357 billion and
$326 million of long-term debt. Tangible capital was $1.530 billion.
Leverage was 19.4 per cent on total capital and 21.4 per cent on
total tangible capital. Total capital and total tangible capital at
31 December 2013 was $1.792 billion and $1.615 billion respectively.
www.lancashiregroup.com
29
PERFORMANCE
BUSINESS REVIEW CONTINUED
DIVIDENDS
During 2014, the Lancashire Board declared an interim dividend
of $0.05, special dividends of $0.20 and $1.20, and a final dividend
in respect of 2013 of $0.10 per common share. With the final
dividend in respect of 2014 of $0.10 per common share plus the
additional special dividend of $0.50 per share, total capital returns
since inception amount to $2.3 billion, or 234.6 per cent of initial
capital raised. The final dividend of $0.10 per common share
and special dividend of $0.50 per share have been declared
and will be paid on 15 April 2015 to the shareholders of record
on 20 March 2015.
NON PRE-EMPTIVE ISSUE OF SHARES
As part of Lancashire’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
which it underwrites. The Board proposes to put a similar request
for authority to shareholders in a resolution at the 2015 AGM
to be held on 29 April 2015.
REPURCHASE PROGRAMME
During 2014, under the current Repurchase Programme
ratified at the AGM on 30 April 2014, the Group commenced
the repurchase of its own shares. The total shares repurchased
during the year ended 31 December 2014 was $25.0 million
compared to $nil in the year ended 31 December 2013.
WARRANTS
The outstanding warrants to purchase the Company’s common
shares were issued on 16 December 2005 and expire on
16 December 2015. We saw a higher volume of warrants
exercised during 2014, relative to the prior year, and would
expect this trend to continue until expiry. Warrants exercised
during the year are shown below.
LETTERS OF CREDIT
Lancashire has standard LOC facilities which in total amount
to $400.0 million, with a $75.0 million loan sub-limit available for
general corporate purposes. Syndicate 2010 and Syndicate 3010
each have a catastrophe facility in place to assist in paying claims
and gross funding of catastrophes. These facilities amount to
a combined $100.0 million with a total of $60.0 million available
by way of LOCs.
There was no outstanding debt under the above facilities at any
reporting date. There are no off-balance sheet forms of capital.
WARRANTS
Outstanding and exercisable
as at 31 December 2013
Exercised during the year
Outstanding and exercisable
as at 31 December 2014
Number of
Management Team
Performance
warrants
Number of
Management Team
Ordinary warrants
Number of
Founder warrants
Number of
Lancashire
Foundation
warrants
Number of
ordinary warrants
Total Number
of warrants
859,445
(741,965)
6,184,399
(5,625,217)
19,074,787
(4,042,108)
648,143
–
2,350,000
–
29,116,774
(10,409,290)
117,480
559,182
15,032,679
648,143
2,350,000
18,707,484
30
Lancashire Holdings Limited | Annual Report & Accounts 2014
CATHEDRAL
2014 reflects the first full-year of contribution from Cathedral
to the Lancashire Group’s results, following the completion of the
acquisition in November 2013. The trading conditions were tough,
but this was as expected. There was competition on all fronts, but
Cathedral’s long-standing client and broker relationships served
to mitigate the worst effects of this.
Syndicate 2010, for which Lancashire owns 57.8 per cent of the
capacity, had a good year with the emphasis on protecting the core
portfolio. The reinsurance and primary lines saw pricing pressure
across the board, but in general our signings, the proportion of the
business that we subscribe to that we actually get, remained strong.
The Aviation Reinsurance account suffered a number of losses
including two Malaysian Airlines aircraft and the violence in Tripoli
airport. This led to an all too brief up tick of the market, but was
quickly overwhelmed by continued overcapacity. Cathedral has
renewed the majority of its core book and reduced exposures where
appropriate. For the Direct and Facultative Property line, the Binding
Authorities segment remained generally stable with small increases
in the first half of 2014 balanced with small reductions in the second
half. The Open Market segment, however, did see continued rate
pressure, which we expect to build. Our Property Reinsurance book
came under some rating pressure, but the terms and conditions
held up better than was feared at one point and we have been able
to deliver a book largely where we expected it to be.
Syndicate 3010 continued its build out to four new lines in 2014,
which has seen us increase our stamp from £30.0 million to
£60.0 million during the year with a further increase to £100.0 million
for 2015. The core Cargo portfolio is now supported by new Energy
and Terrorism accounts written by the LUK teams in conjunction
with the existing Lancashire portfolios and benefiting from their
relationship and expertise, and by two new aviation portfolios.
“Cathedral has demonstrated
the ability to adapt to the market,
and to attract new talent and
develop new product lines,
even in a very difficult market.”
Peter Scales,
Chief Executive Officer, Cathedral
Cathedral was fortunate to secure the services of two teams
of underwriters specialising in Direct Aviation Hull and Liabilities
with an emphasis on General Aviation and Rotorwing, and Aviation
War including three consortia which the team leads on behalf
of a number of Syndicates in Lloyd’s.
Cathedral has demonstrated the ability to trade through a difficult
market, to attract new talent and develop new product lines.
As a significant buyer of reinsurance, the silver lining to the soft
market cloud has been the ability to buy a greater depth of cover,
reduce retentions and make savings to mitigate the effect of
reductions on inwards business, as was the case for 2014.
Key financial information for Cathedral is as follows:
Gross premiums written
Net premiums written
Net premiums earned
Net insurance losses
Net underwriting profit
Other income
Profit after tax
Comprehensive income
For the period
7 November 2013 to
31 December 2013
$m
24.5
22.8
39.8
19.0
12.2
2.9
6.4
6.7
Full year 20131
$m
288.2
222.3
224.6
90.3
82.3
8.9
33.0
33.3
Net loss ratio
Net acquisition cost ratio
Expense ratio2
Combined ratio2
47.7%
21.6%
15.8%
85.1%
40.2%
23.2%
13.9%
77.3%
2014
$m
284.3
219.4
214.1
102.5
64.1
10.2
25.7
25.4
47.9%
22.2%
15.0%
85.1%
(1) Full 2013 year financial information is presented for informational purposes only.
(2) In accordance with standard Lloyd’s practice the expense ratio in CCL’s financial statements is
presented net of fees, commissions and other non-investment income. On this basis the combined
ratio for 2014 is 81.5 per cent compared to 78.7 per cent for the full year 2013 and 77.8 per cent for
the period 7 November 2013 to 31 December 2013.
www.lancashiregroup.com
31
PERFORMANCE
BUSINESS REVIEW CONTINUED
KINESIS AND THIRD-PARTY CAPITAL
“Kinesis bound its first deals
in 2014, representing a further
development of Lancashire’s
strategy to build partnerships
with capital market participants.”
Darren Redhead,
Chief Executive Officer, Kinesis
Following the success of the Accordion and Saltire sidecars,
Kinesis was launched in 2013 and represents a further development
of Lancashire’s strategy to build partnerships with capital market
participants. It gives the Group the opportunity to leverage
its underwriting expertise, whilst affording flexibility in the
management and deployment of its own capital. In early 2014,
Kinesis underwrote its first tranche of multi-class reinsurance
agreements with further business written during the year.
All contracts are fully collateralised with combined aggregate
limits of $252.5 million, including net premiums written
of $56.2 million. Two further offerings were completed during
2014, where an additional $87.5 million of limits were written
for $21.6 million of net written premiums.
Lancashire’s subsidiary KCML receives underwriting fees on
all net premiums written by Kinesis Re, generating a stable
stream of fee income, in addition to potential profit commissions.
LHL also holds a 10 per cent equity stake in KHL, which is treated
as an associate for accounting purposes. Lancashire’s share of
KHL’s results is reflected as an equity pick up in the consolidated
financial statements.
During the year ended 31 December 2014, Accordion and Saltire
were placed in members’ voluntary liquidation. A final profit
commission of $6.7 million was paid by Accordion following a
commutation of our quota share agreement and this was recorded
in net insurance acquisition cost. The Saltire vehicle ran loss free
in 2013. During the first half of 2014 the Group received a payment
of $3.0 million of profit commission from the Saltire vehicle.
Financial information for the year ended 31 December is as follows:
For the year ended 31 December
Profit commission
Underwriting fees
Equity pick up
Note: LHL owns 92.7% of KCML at 31 December 2014.
Kinesis
Accordion
Saltire
Total
2014
$m
–
6.2
4.7
2013
$m
–
–
–
2014
$m
6.7
–
1.1
2013
$m
–
1.8
6.6
2014
$m
3.0
–
0.1
2013
$m
–
1.2
2.6
2014
$m
9.7
6.2
5.9
2013
$m
–
3.0
9.2
32
Lancashire Holdings Limited | Annual Report & Accounts 2014
ENTERPRISE RISK MANAGEMENT
ENTERPRISE RISK MANAGEMENT
“The fundamental principle
of the Group’s approach to ERM
is that risk management should
be embedded in the processes
and procedures that we use
to run our business every day. ”
Charles Mathias,
Chief Risk Officer
In 2014 the Group has:
• Developed and approved ERM and ORSA policies and procedures
that were reviewed and agreed by the Board.
• Performed and documented a Risk Taxonomy Review to validate
the completeness of the risk registers and the relation of risk
assessment to Internal Audit activity.
• Performed and documented a Risk Appetite review leading to
a Risk Appetite Process document to test and provide an overview
of how we set and measure risk appetites.
• Integrated the CUL exposures to the Group exposure monitoring
suite to allow stochastic modeling of Group PMLs and aggregation
of overlapping RDS events.
• Submitted a Group ORSA point-in-time report to the PRA
including an assessment of the appropriateness of the Standard
Formula using a best efforts approach prior to finalisation
of the guidelines.
Cathedral has maintained its ‘Green’ rating by Lloyd’s in relation to
the Lloyd’s Solvency II regime. This has included submissions and
procedural and process documentation for the internal model,
submission of an ORSA and overall compliance with the Lloyd’s
risk framework.
KCML has instituted its own risk register, with input from the CRO,
which reflects its unique role within the Group as an underwriting
manager. It has also been the subject of review by Internal Audit.
www.lancashiregroup.com
33
The fundamental principle of the Group’s approach to ERM is
that risk management should be embedded in the processes and
procedures that we use to run our business every day. This has
not changed. However in 2014 we have had a busy year, preparing
for the advent of Solvency II and ensuring that, whilst we recognise
the different operating models and environments of our different
platforms, we have a clear view of our risks and their management
right across the Group.
ERM DEVELOPMENTS
With Solvency II now slated to apply from 1 January 2016, and
the first supervisory reporting to the PRA due in mid-2015 there
has been a lot of activity in 2014. Currently the Group Supervisor
is the BMA, but both LUK and Cathedral (via Lloyd’s) are subject
to the supervision of the PRA and FCA in the UK. Bermuda is
in the process of being assessed for Solvency II equivalence and
is in the first wave of countries for consideration. The PRA has
confirmed that it will be the Group Supervisor under the
provisions of Solvency II.
At the Group level Lancashire created an ORSA Working Group.
The concept of the ORSA is one that is gaining currency in many
jurisdictions including the U.S. We believe that Lancashire has
a good story to tell as we continually review our levels of risk
and capital through established procedures such as the daily
underwriting call, underwriting exception reports, weekly LICL
and LUK PML updates and the fortnightly RRC meetings, as well
as quarterly at the entity and Group Boards. The ORSA Working
Group consists of the CRO and two Non-Executive Directors
from the LHL Board who will rotate every two years. The ORSA
Working Group allows Non-Executive Directors to make a more
detailed review of the ORSA process and procedure, to raise
challenges throughout the ORSA development and to contribute
directly to the point-in-time report given to our regulators.
PERFORMANCE
ENTERPRISE RISK MANAGEMENT CONTINUED
ERM STRUCTURE
Capital Optimisation
Continuous monitoring of current and projected solvency
against a suite of rating agency, regulatory and internal
tolerances using proprietary and external models.
Active capital optimisation across the cycle, maintaining
appropriate buffers and contingency arrangements.
...maintaining the focus and flexibility to optimise
capital in line with underwriting opportunity...
(not the other way around)
Risk Optimisation
Timely and appropriate integration of strategic and
business planning, stress and scenario testing and
capital and risk management to maximise shareholder
returns across the cycle whilst maintaining exposures
within appetite.
...targeting RoE of 13 per cent over the risk free rate across
the cycle whilst exposing a maximum of 25 per cent
of capital to a single peak zone return period loss
in any one period...
ORSA & ERM
People
Collegiate underwriting approach across entities
supported by the UMCC, daily exception reports,
fortnightly management RRC covering the entire
ERM and ORSA scope with core risk themes embedded
in the work of key management and Board committees
rather than being stand-alone.
...fostering and rewarding a culture of risk challenge,
questioning and understanding throughout all our
business – a ‘way of working’ not a ‘function’...
Process
Clear Group and Entity Risk Appetites spanning
the entirety of the Risk Universe.
Significant investment in risk modeling and analytics
tools and associated processes enabling virtually continuous
monitoring and management of key risk metrics and their
associated capital implications.
...clearly defined risk appetite and tolerances with effective
processes for the identification, selection, assessment
and optimisation of intrinsic and operational risk...
RRC
The Risk and Return Committee, now under the Chairmanship
of the Group CEO, is the key management tool for monitoring and
challenging the assessment of risk on a continual basis. The RRC
agenda has seen a number of amendments in 2014 as part of
a programme to ensure that we clearly embed the ownership
of core ORSA elements in the RRC, and to schedule appropriate
review activities across the business cycle. In particular, this has
led to a more formal review of business planning, stress testing
and reinsurance purchasing.
BLAST
We continue to challenge the assumptions used in BLAST and
make changes where appropriate. In 2014, we have for example
revised our assumptions about the frequency and severity of major
energy losses, based on recent experience. We also developed
BLAST to provide a more forward-looking assessment of underwriting
risk through the use of synthetic portfolios for inwards property
catastrophe reinsurance and retrocession business (i.e. the business
that has most impact on our catastrophe exposures). The Kinesis
catastrophe exposures were included alongside those of Cathedral,
LICL and LUK.
EMERGING RISK
As ever, the Group tried in 2014 to foresee potential areas
of new risk, or developments in existing risk that could threaten
the Group. The continued emergence of new capital into the
reinsurance arena and the subsequent displacement of traditional
capacity into primary insurance may stretch the definition
of an ‘emerging’ risk but it is an area that we monitor carefully.
The Group CEO and CUO are uniquely well placed to see the
trends through participation in the LICL and LUK daily UMCC.
We also monitor cyber risk carefully, both in our operating
exposure; where through our lack of retail clients and limited
holding of our own employees personal data we present a low risk
profile; and our insurance risk where we have conducted a careful
review of our energy and marine hull accounts to determine
what exposures there could be under our policies, and the
robustness of policy exclusions where they are applied. We were
satisfied that our exposure to cyber risk in these lines was limited
and did not pose a threat to the business. The general geopolitical
instability is also something we constantly monitor for implications
for our Political Risk and trade-related lines such as Cargo and
Sovereign obligors. The steep decline in the oil price is also
34
Lancashire Holdings Limited | Annual Report & Accounts 2014
bound to have an affect on our energy business, and we certainly
expect the energy construction portfolio to be strongly impacted.
There is little we can do to mitigate this, although parts of our
Gulf of Mexico wind portfolio are sold on a multi-year basis,
which is of some assistance.
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.
RISK UNIVERSE
We performed a detailed study and provided a paper to the ORSA
Working Group in 2014 that looked at the taxonomy of risk –
how we identify and classify risks, and what this means in terms
of our management and mitigation strategy. We classify risks
in three broad classes;
• 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 is the risk we accept as inherent in the core functions of our
business; so we recognise that by insuring against fortuitous events
we can suffer losses, and by investing premiums and other assets
we can see the value of those investments fall. We cannot avoid
these risks so we focus on the correlated operational risks and
seek to mitigate them. So for example, we know that by insuring
against 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
• Operational Risk: ‘The potential for specific losses arising as
a result of inadequate or failed internal processes, personnel,
systems or (non-insurance) external events’. Risks that are
operational in causation can be split in to two sub-categories
in terms of how they crystallise:
– Independent: risks that have the potential to crystallise
independently from intrinsic risk. For example, losses arising
through the imposition of fines as a result of a regulatory
breach, so unrelated to our core functions.
– Correlated: risks that relate to the failure to effectively operate
the processes designed to manage intrinsic risk, and therefore
have the potential to amplify its impact beyond that modeled.
For example, increased reinsurer default losses arising through
the use of non-approved counterparties.
• Other Risk: This is the more nebulous category of risks such as
reputational risk, or communication risk which cannot necessarily
be mitigated by holding capital since they may not have direct
balance sheet implications. These are included within the risk register
and assessed and mitigated through scenario and stress testing.
RISK UNIVERSE
Type
Category
Description
c
i
s
n
i
r
t
n
I
l
a
n
o
i
t
a
r
e
p
O
r
e
h
t
O
e Underwriting Market
r
o
C
(Investment)
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.
-
e Reserving
r
o
C
n
o
N
(Re)Insurance
Counterparty
Liquidity
Operational
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 in so far as practicable for the purposes of capital and risk
management and avoided or minimised insofar as is economically justifiable.
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.
Strategic Group
Emerging
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 in so far as is practicable.
www.lancashiregroup.com
35
PERFORMANCE
PRINCIPAL RISKS
PRINCIPAL RISKS
As described under our review of the Risk Universe, our classification
of risks as Intrinsic Core and Non-Core, Operational and Other,
helps us to focus on our management and mitigation of those risks.
Within BLAST 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 lots 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 as to the
specifics of timing and quantum of occurrence. Additionally, we
write lines of business that are subject to accumulations, including
accumulations of individual risks in 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.
TYPE
Investment: We need to hold sufficient assets in readiness
to pay claims, and 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 income bonds. 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 stressed scenarios to see
what kinds of losses we could expect under a range of outcomes.
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, the change
may have an impact on earnings, or indeed capital. We use
independent external reviews of our reserves which look at the
overall levels of expected losses, as well as individual large events,
including benchmarking analyses.
36
Lancashire Holdings Limited | Annual Report & Accounts 2014
MITIGATION
Modeling: We apply loads to, and stress test, stochastic models
and develop alternative views of losses using exposure damage ratios.
Risk and Return Committee: The Committee considers
accumulations, clashes and paramaterisation of losses and models.
Capital: We set our internal capital requirements at a level that
allows for buffers above accumulations of extreme events.
MITIGATION
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. In 2014,
we sought to hedge our interest rate risk through an increased
risk asset allocation.
Investment Risk and Return Committee: The IRRC forms
an integral part of our risk management framework, meeting
at least twice a quarter and reporting to the Board quarterly.
External advisers: Lancashire’s Board and management recognise
that the Company’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 is 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 conduct 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.
INTRINSIC RISK: NON-CORE CONTINUED
TYPE
Reinsurance and intermediary counterparty: Almost all our risks
are brought to us by brokers, who act as an intermediary 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 the
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.
MITIGATION
Counterparty credit limits: We use counterparty limits and seek
to deal with reputable reinsurers, 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. System checks
prevent the use of unauthorised intermediaries and we have
terms of business agreements with all of them that seek to limit
our exposure. All reinsurers must conform to minimum rating
standards or collateral arrangements where appropriate.
TYPE
Liquidity: In order to satisfy claims payments we need to ensure
that sufficient of our assets are held in readily realisable form.
This includes holding cash accounts for the expected level of
attritional losses, as well as ensuring we can meet claims payment
requirements in extreme events.
MITIGATION
Portfolio management: The Group maintains liquidity significantly
in excess of the Board agreed tolerances through its focus on
maintaining a portfolio that is highly liquid, of overall short
duration and highly creditworthy. We monitor this through the
use of stress tests, and mitigate it through the quality of the
investments themselves.
OPERATIONAL
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 failure of an IT system such as our
underwriting system could impact our ability to maintain accurate
and up-to-date records of our exposure, which if correlated with an
insurance loss 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.
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. A key area in 2014 has been Strategic Risk as we
have seen continued emergence of capital eating away at pricing,
and broadening of terms and conditions as the cycle reaches
a low point.
MITIGATION
Capacity: We mitigate the availability risk by adding redundancy
to the capacity we need and using backups of data including off-site
storage and we test these systems 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 need to use them.
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
Committee and the RRC consider these issues, and the CRO
reports to the Board include standing items on Emerging Risk.
Revision of Attritional Loss Ratio: Lancashire has responded
to the influx of new capital and the downturn in the market cycle
by revising the expected attritional loss ratios to account for the
changes to pricing and coverage, and using Kinesis to participate
in a niche product for the collateralised market.
www.lancashiregroup.com
37
PERFORMANCE
CORPORATE RESPONSIBILITY
BALANCING RISK, RETURN
AND RESPONSIBILITY
WHY CORPORATE RESPONSIBILITY
IS IMPORTANT TO LANCASHIRE
Just as the Group seeks to balance risk and reward
in the insurance market we are aware of the need to
balance the responsibilities we owe to our stakeholders
such as shareholders, regulators, staff and clients with
our responsibilities to the broader society in which we
operate. The insurance business by its nature seeks to
provide support to those afflicted by the unexpected,
but we recognise that many people and businesses
around the world cannot afford, or do not have access
to, the right kind of insurance. So we use our talents
and resources, our people, time and money to support
those who are in distress or at a disadvantage. We do
this through our Foundation which supports a number
of excellent charities, through giving our staff charity
sabbatical weeks after an initial period of employment.
We also do it by trying to be a responsible employer
and a good corporate citizen in the societies in which
we operate.
In terms of governance, the LHL Board sets the
Group Corporate Responsibility policy and reviews
reports on the activities of the Foundation (and is
represented directly by a Non-Executive Director as
one of the Trustees), the execution of the HR function,
and the environmental impact of the business.
The day-to-day activities of the Foundation are delegated
to a Donations Committee comprised entirely of staff
members, which monitors and reports on the activities
of the charities to which donations are made.
OUR APPROACH
Corporate responsibility is an integral part of
Lancashire’s approach to its business. We try to limit
the negative impact of our carbon footprint through
mitigation strategies and offsets, and we also try to
improve the world around us in positive ways such
as the donations of the Foundation and the staff charity
days to work on local improvement projects. 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
team-building benefits of the activities undertaken.
COMMUNITY
There is a growing sense in the insurance market of an
insurance community that can combine a commitment
to excellence in providing a crucial support for trade
and business with a determination to influence local
and global societies for the better. We remain strongly
committed to engaging with our local communities
in Bermuda and London and continue to support
local initiatives and activities across the network,
through partnerships with schools, local government
and local businesses.
OUR APPROACH
We support our communities through the Foundation
making donations to locally based charities and
through our staff charity day release programmes
and charity leave. We also help to run fundraising for
the London Summer in the City Appeal to provide
activities and care in the school holidays, and working
groups to help improve our industry. We make our
people available for market forums, and hold staff
raffles to aid in our fundraising efforts.
OUR FOCUS AREAS
We focus on victims of disasters and those who are
disadvantaged whether through lack of opportunity,
lack of resources or just a need for a helping hand.
As our business is in part based on insuring against
natural disasters we know very well how disruptive
they can be, so our biggest Foundation donation
is to Médecins Sans Frontières (MSF), who provide
immediate aid in crisis situations (both natural and
man-made) right across the globe.
The Foundation has made significant financial
commitments to charities that support families in crisis
(Family Centre) and children with autism (Tomorrow’s
Voices) in Bermuda, and charities supporting ex-
offenders throughout the UK (St Giles Trust), and
a poverty relief programme in the Philippines (ICM).
But we also support them in other ways, for instance
renovating premises for Tomorrow’s Voices, mentoring
staff members for St Giles Trust and sending volunteers
on week-long service missions to ICM.
We also make donations to charities suggested by staff
and indeed by clients and brokers. In 2014, we supported
Medical Detection Dogs, Find a Better Way, Action
on Addiction and Ace Africa, all at the suggestion
of our business partners, helping to build the sense
of an insurance community in Bermuda and London.
38
Lancashire Holdings Limited | Annual Report & Accounts 2014
COMMUNITY
$14.0m
donated through the
Lancashire Foundation
since inception.
ENVIRONMENT
100%
of CO2 emissions
offset.
MARKETPLACE
6,500
kids helped by the
summer appeal
co-ordinated by
Lancashire in 2014.
WORKPLACE
100%
of employees
are eligible for
RSS awards.
EMPLOYEE ENGAGEMENT
We recognise that the energy and talents of the people
of Lancashire can make a difference in a number
of ways, and that our charitable partnerships offer
a valuable way to channel these generous instincts.
We provide 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 a week’s
charity leave on completion of three years’ permanent
employment with the Group, which they can spend
with a charity of their choice or with an existing
Foundation-supported entity.
INTERNATIONAL CARE MINISTRIES (‘ICM’)
Teamwork is important at Lancashire, so for the last five years we’ve
sent a team of six volunteers each year to work with ICM in the Philippines
on a building project to improve the quality of life of the poorest of
the poor. In 2014, a team of eight built toilets for slum dwellers, assisted
in various lessons at kindergartens and hosted health and livelihood
sessions to participants of a major transformation project run by the
charity. The experience of working together in an environment that
is both physically and emotionally tough is one that all the participants
have cited as something that improves their relationships with colleagues
across the Group.
“Lancashire have been a faithful partner to the poorest of the poor in the
Philippines. Coming alongside ICM for the past 5 years with both financial
sponsorship and volunteer service, your commitment to improving lives in the
Philippines is an admirable and much needed investment.
At ICM, we focus on efficiency and effectiveness, and we are proud to say that
Lancashire’s funding has been stewarded to create the maximum impact in the
Philippines. Providing education to at risk children, delivering anti-malnutrition
food, and developing strong leaders with effective training teams, Lancashire’s
generosity has turned despair into hope for thousands of people, and provided
them a better future.
Thank you for your generosity, commitment and support. Your gifts to ICM,
both as volunteers and sponsors, inspire and encourage us to go further.
We are so grateful to have a company of such high calibre standing alongside us
in the fight against poverty. On behalf of the thousands of lives you have touched,
thank you.”
DAVID SUTHERLAND,
CHAIRMAN OF THE BOARD, ICM
ENVIRONMENT
As a business based in London and Bermuda, with
clients and brokers around the globe, the Lancashire
Group incurs the bulk of its carbon footprint in
the form of airline travel, which we offset through
an organised programme. In 2014, Cathedral
and Lancashire UK moved into a new building at
20 Fenchurch Street, which complies with all the
latest standards for energy use and recycling.
OUR APPROACH
The figures in this report calculate 12 months from
1 January 2014 to 31 December 2014. Lancashire
has elected to use the number of full-time employees
(FTE) as its intensity metric and has determined
an intensity ratio of 12.9 tCO2e per FTE.
Types of Emissions
Activity
Direct (Scope 1)
Gas (kWh)
Refrigerant
tCO2e
40.3
13.0
Electricity (kWh)
751.6
Indirect energy
(Scope 2)
Indirect other
(Scope 3)
Business travel (km)
Additional
Upstream Activities
Other
TOTAL EMISSIONS (tCO2e)
Intensity metric:
Staff number – 192 FTE
TOTAL EMISSIONS (tCO2e)
Intensity ratio per FTE
1,270.9
334.3
67.4
2,477.5
12.9
OUR FOCUS AREAS
Using an operational control approach, Lancashire
assessed its boundaries to identify all of the activities
and facilities for which it is responsible and reported
on all of the material Green House 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.
www.lancashiregroup.com
39
PERFORMANCE
CORPORATE RESPONSIBILITY CONTINUED
Results show that GHG emissions in the year
were 2,477.5 tonnes of CO2e, comprised of direct
emissions (Scope 1) amounting to 53.3 tonnes
of CO2e, and indirect emissions (Scope 2) amounting
to 751.6 tonnes of CO2e. The source of other indirect
emissions (Scope 3) comprised 1,672.6 tonnes
of CO2e. Lancashire has purchased carbon credits
to reduce its gross GHG emissions by 2,477.5 tonnes,
off-setting its total carbon emissions and remaining
carbon neutral.
In terms of emissions intensity, tCO2e per FTE
has increased by 13.2 per cent. This is due to the
acquisition of Cathedral in 2013 and a subsequent
increase in the number of FTEs. As actual data for
Cathedral was unavailable in 2013, an extrapolation
method was used based on industry standards; however
a full set of actual data has been used in 2014’s
calculation, which has also contributed to the increase
in Group emissions. In addition, Well-to-Tank (WTT)
and Transmission and Distribution (T&D) emissions
that were not reported in 2013, have been included
in 2014’s calculation, and account for more than
13 per cent of total Group emissions.
MARKETPLACE
We continue to help the development of our
marketplace by making employees available to sit
on market committees, boards and working groups.
In 2014, they have given talks at industry conferences,
investor days and symposia, and as part of market
education programmes. We continue to work closely
with colleagues in the market on the Summer in the
City fundraising. As noted above, we also donate
to many of the causes supported by our industry
peers through the Foundation.
OUR APPROACH
We believe the most important thing we can do is
to make the talents of our people available, and we
do this happily. We also engage actively with our
regulators in Bermuda and London, and the Cathedral
team are active within the Lloyd’s market structure.
With our clients we are happy to welcome them to
our offices, but we also travel to see them and their
businesses right around the world.
40
Lancashire Holdings Limited | Annual Report & Accounts 2014
INTERNSHIP PROGRAMME
Following a meeting with the Bermuda Minister for Home Affairs,
the Company and the Lancashire Foundation jointly sponsor two two-year
internship positions for Bermuda resident college graduates, to be spent
working and learning in the Group’s London office. The two-year term
is a major commitment demonstrating the Group’s determination to give
back to Bermuda and the first two interns have been working in the
London office during 2014.
“The Lancashire Foundation Graduate Development
Programme has given me great insight into the
underwriting process. The daily underwriting
call allows for exposure to all classes of business
written at Lancashire, enabling me to gain an
understanding of various lines of business,
beyond those that I have had the opportunity to
be involved with on a daily basis. The Lancashire
culture is one into which it has been incredibly easy
to fit. Everyone is exceptionally approachable, willing
to help and answer any questions; this setting has allowed me
to learn about different aspects of the business beyond underwriting. The Lancashire
Foundation Graduate Development Programme is a great jump start to my career and
so far has given me a solid foundation in the London insurance market. I am really
looking forward to the rest of my time at Lancashire.”
JAIME FERRARI-MCCOMB
INTERN
“The Lancashire Foundation Graduate Development
Programme has been a great experience for me.
In my role I have been exposed to various
classes of business. This has expanded my
knowledge on different types of insurance,
and I’ve learned more about the dynamic
London market. Through various research
tasks I’ve become more aware of current events
around the world, and I am constantly learning
new things. In my team I’m encouraged to ask
questions, lines of communication are open, and teamwork
is essential. During my time at the Bermuda office, I gained more knowledge about
the reinsurance sector as well as more insight into the property catastrophe class of
business. It was a very good learning experience to work with the team in Bermuda,
particularly throughout the renewal period. The Lancashire Foundation Graduate
Development Programme has had a very positive impact on me personally
and professionally, and I am excited to see what the future holds!”
NICHOLAS BUTTERFIELD
INTERN
Visit our corporate website for more information:
http://www.lancashiregroup.com
OUR FOCUS AREAS
Regulators: we recognise the need to engage closely
with our regulators at the BMA, PRA, FCA and at
Lloyd’s and seek to be transparent in all our dealings
with them.
Clients: we strive to offer clear, fairly-priced and useful
products that meet our clients’ needs across our three
capital bases.
Brokers: we are fully committed to being 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.
WORKPLACE
We continue to strive to attract excellent employees
who drive our appetite to outperform. Every company
says it, but we truly believe that the talents of our
people and our unique culture set us apart from our
competitors. We strive to attract and retain the very
best employees in the insurance industry.
Recruiting the right people for the Group will always
be a high priority for the business. It is critical that the
aspirations and values of new recruits are a good match
to both the role and the values of the Company.
OUR FOCUS AREAS
Our focus in 2014 has been to maintain the success of
our employees through ongoing training and coaching –
provided both internally and externally. We have continued
to deliver the Management Development Programme and
we measure our employees’ success through attainment
of personal performance metrics as well as performance
within the Group’s values framework.
DIVERSITY
We are committed to being an equal opportunities
employer. The Lancashire Group is currently
represented by employees from 16 different nations.
There is a 65/35 per cent split of males to females
(see page 58) that work in the Group. New staff receive
equal opportunities training during their induction,
and refresher training sessions for all staff are planned
for 2015. We promote the value of having a diverse
workforce. We have recently supported the ‘Ban the
Box’ campaign, an initiative from Business in the
Community to give ex-offenders better employment
opportunities by calling for the removal of tick boxes
from employment application forms that ask about
criminal convictions.
Page 58
See our diversity figures
MÉDECINS SANS FRONTIÈRES
“2014 has been a remarkable year for MSF, as our
staff continue to face an almost unprecedented
level of humanitarian need. At the start
of the year, MSF teams were responding to
emergencies in South Sudan, Central African
Republic and the Philippines. Whilst the
devastation wrought by Typhoon Haiyan
required a much shorter response, the violence
prevalent in South Sudan and Central African
Republic has been widespread. There has been little
immunity granted to those working to provide healthcare
to affected people – in South Sudan MSF hospitals have been bombed, looted and
destroyed; in Central African Republic hospitals sheltering those wounded and sick
were targeted, and in April, MSF lost three of our own staff in such an attack.
Other concurrent emergencies were even more challenging to respond to. The targeting
of aid workers in Syria, including our own staff, resulted in the closure of MSF
health facilities in the north-west of the country. Despite the mass violence and
huge needs in Syria, MSF teams are constrained to working on the periphery
of the country, providing medical care for those who make it to Jordan or Lebanon,
and supporting national medical staff inside the country with supplies and
equipment. In Myanmar, MSF activities in Rakhine State were suspended in
February by the government, depriving a Muslim minority group, the Rohingya,
many of whom live in squalid camps with restricted movement and without
vital healthcare.
Then Ebola happened. An outbreak, not a war or communal violence, not a natural
disaster, and not the actions of a government. During my years with MSF, I’ve read
many testimonies from our staff working in crisis situations, however I’ve never
been transported to the horrors of a situation quite so vividly as to the horrors
of West Africa in the grip of the biggest Ebola outbreak the world has ever seen.
A disease that preys on the compassion of those who care for those that are sick.
Yet somehow in between all of the horror, our staff have also managed to transport
me to those that have survived.
The work we do is possible because of your support. MSF puts a priority on private
funds, raised from donors like Lancashire Insurance. Without this, MSF would
not be able to work in situations that are not in the public eye, nor would we have
been able to be the first responder to Ebola, or mounted large emergency responses
in remote parts of South Sudan and Central African Republic.
Knowing that we have the continued support of Lancashire Insurance is so important
to our teams, both in the office and in the field. I want to extend my personal thanks
to you for that support, for entrusting MSF with your donation and enabling us
to do our vital work. Thank you.”
VICKIE HAWKINS
EXECUTIVE DIRECTOR – MSF UK
www.lancashiregroup.com
41
PERFORMANCE
GOVERNANCE
Opportunities
emerge &
while here at Lancashire, we keep
ourselves one step ahead of the curve,
so that we are ready to maximise the
right opportunities as they emerge
into the market.
DIVIDEND YIELD
Lancashire’s dividend yield demonstrates
the active capital management that
underpins our business model. Although
we will buy back shares when the valuation
makes sense, if we want to right-size capital
quickly, the special dividend has become
the key tool to enable us to do this.
17.8%
20
15
10
5
0
2010
2011
2012
2013
2014
5 Year average
13.0%
42
Lancashire Holdings Limited | Annual Report & Accounts 2014
evolve
GOVERNANCE
www.lancashiregroup.com
43
CHAIRMAN’S INTRODUCTION
EFFECTIVELY MANAGING CHANGE
“ A combination of independence
and diversity of talents
and perspectives equips the
Board to meet the challenges
of our business. ”
Martin Thomas,
Non-Executive Chairman
Q | IS THE BOARD EFFECTIVE?
A | In my opening remarks I highlighted those changes that
we have implemented to the Board and management team during
this last year. The transition in management required time and
attention from all the Non-Executive members of our Board,
and I am grateful to all our Directors for the diligence with which
they discharged their duties during the year. A Board is not always
a comfortable place, but when it holds the necessary diversity
of skills and experience it can operate as a forum to provide
the strategic leadership and direction required by a business,
particularly during times of transition. Having risen to these
challenges earlier during the year, the Board took the opportunity
to consider in more detail its own operation, composition and
governance in a process facilitated by KPMG. That process has
helped our Board to learn useful lessons and to focus on the
requirement to maintain a Board whose members are independent
in judgement and character and whose diversity of talent and
perspectives equips the Board as a whole to meet challenges
of the business. It has also helped inform our search for new talent
and insight and I am delighted to be able to welcome Peter Clarke
and Tom Milligan to our Board, who between them bring a wealth
of experience in the areas of insurance, underwriting and
investments as well as senior management and the operation
of listed companies.
In my opening statement I gave a broad overview of the challenges
addressed by the Board during 2014 in ensuring that our business
has the right management and strategic goals. The following
section contains a more detailed account of the work carried out
by the Board and its Committees in exercising effective oversight,
taking decisions and providing support and constructive challenge
to the business.
Q | HOW DOES THE BOARD SET AND MONITOR THE
GOVERNANCE OBJECTIVES FOR THE GROUP?
A | Lancashire seeks to achieve the highest standards of corporate
governance. By virtue of its premium listing on the LSE, Lancashire
measures its corporate governance compliance against the
requirements of the UK Corporate Governance Code published
by the UK Financial Reporting Council (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 Code was
further revised during 2014 for financial years beginning on or
after 1 October 2014, but Lancashire and the Board have decided
to comply with these new requirements in this year’s Annual
Report. The Company monitors its compliance with the Code,
and in this corporate governance section and throughout this
Annual Report for the 2014 financial year, areas of corporate
governance compliance and non-compliance are explained by
reference to the Code, as revised. The Company also monitors
its compliance with applicable corporate governance requirements
under Bermuda law and regulations. I am pleased to be able
to report that there are no areas of material non-compliance
with the Code.
44
Lancashire Holdings Limited | Annual Report & Accounts 2014
The 2014 performance appraisal of the Board and its Committees
was facilitated by Chris Head, our Company Secretary, (see page 50
for further details). A summary report was discussed by the full
Board and I am pleased to report the conclusion that the Board
and each of its Committees are considered to have a balance
of skills and perspectives that serve the Company effectively.
The process also identified a number of areas for procedural
improvements, training and learning. Following the recent period
of rebuilding and refreshment, I believe Lancashire’s Board
is appropriately constituted to deliver the benefits of experience
from a diverse range of perspectives and backgrounds. All the
current Directors are recommended to shareholders for re-election
at the 2015 AGM and I anticipate that 2015 will be a year of
relative stability and continuity on the Board.
In closing I would like to record the thanks and appreciation
of everyone at Lancashire to Ralf Oelssner, who sadly died in
May 2014, shortly after having stepped down from the Boards
of LHL and LUK. Ralf was a true gentleman who served our
business over many years with a close attention to detail and
a particular talent for contributing to the debate only at those
moments when his insight was most valuable.
MARTIN THOMAS
CHAIRMAN
OUR GOVERNANCE STRUCTURE
Group
Board
LANCASHIRE HOLDINGS LIMITED
BOARD OF DIRECTORS
Group
Committees
AUDIT
COMMITTEE
NOMINATION
& CORPORATE
GOVERNANCE COMMITTEE
INVESTMENT
COMMITTEE
REMUNERATION
COMMITTEE
UNDERWRITING
& UNDERWRITING
RISK COMMITTEE
Page 52
Page 57
Page 56
Page 60
Page 59
Operational
Boards
LUK
BOARD
LICL
BOARD
KCML
BOARD
CCL BOARD
www.lancashiregroup.com
45
GOVERNANCE
BOARD OF DIRECTORS
OUR TEAM
MARTIN THOMAS (AGE 51),
NON-EXECUTIVE CHAIRMAN
ALEX MALONEY (AGE 41),
CHIEF EXECUTIVE OFFICER
ELAINE WHELAN (AGE 40),
CHIEF FINANCIAL OFFICER
PETER CLARKE (AGE 55),
NON-EXECUTIVE DIRECTOR
EMMA DUNCAN (AGE 55),
NON-EXECUTIVE DIRECTOR
SIMON FRASER (AGE 51),
SENIOR INDEPENDENT
NON-EXECUTIVE DIRECTOR
SAMANTHA HOE-RICHARDSON (AGE 44),
NON-EXECUTIVE DIRECTOR
TOM MILLIGAN (AGE 45),
NON-EXECUTIVE DIRECTOR
CHRISTOPHER HEAD (AGE 48),
COMPANY SECRETARY
46
Lancashire Holdings Limited | Annual Report & Accounts 2014
MARTIN THOMAS (AGE 51),
NON-EXECUTIVE CHAIRMAN
PETER CLARKE (AGE 55),
NON-EXECUTIVE DIRECTOR
Martin Thomas is a partner and board member of Altima Partners,
LLP, the hedge fund manager, and a Director of two farming
businesses, El Tejar Limited and Spearhead International Limited.
Prior to this, he was an official of the Bank of England, most
recently on secondment to the EU Commission where he worked
in the Financial Services Policy and Financial Markets Directorate
of the Internal Market and Services Directorate General. Before
Mr Thomas joined the Commission, he established the Financial
Markets Law Committee at the Bank of England. Prior to that, he
was Deputy Chief Executive of the Financial Law Panel and prior
to that, senior counsel to the European Central Bank in Frankfurt.
He started his career in private practice, specialising in corporate
and commercial litigation at Travers Smith and in the law and
regulation of financial services at Clifford Chance.
ALEX MALONEY (AGE 41),
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 of underwriting experience and has
also worked in the New York and Bermuda markets.
ELAINE WHELAN (AGE 40),
CHIEF FINANCIAL OFFICER
Elaine Whelan joined Lancashire in March 2006 and leads both
the Group finance function and the Bermuda insurance 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 predominately (re)insurance and
captive insurance clients.
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 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 the National Teaching Awards Trust and
a Non-Executive Director of both AXA Investment Management S.A.
and Lombard Odier Investment Management. 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.
EMMA DUNCAN (AGE 55),
NON-EXECUTIVE DIRECTOR
Emma Duncan is the Deputy Editor of The Economist. She has
also held several other posts on the magazine, including Britain
Editor and Asia Editor. She has covered the media business,
the Middle East, home affairs, agriculture, commodities and the
transport industry and has served as Delhi correspondent, covering
India, Pakistan, Bangladesh and Sri Lanka. She has written special
reports for the magazine on Saudia Arabia and the Gulf states,
India, Pakistan and the food industry. Ms Duncan appears regularly
on television and radio programmes. She has written widely on a
freelance basis, for publications such as The Times, The Sunday
Times, The Daily Telegraph, Vogue and Cosmopolitan. She has
an honours degree in politics, philosophy and economics from
Oxford University and started her career as a researcher and
reporter at Independent Television News.
www.lancashiregroup.com
47
GOVERNANCE
BOARD OF DIRECTORS CONTINUED
SIMON FRASER (AGE 51),
SENIOR INDEPENDENT NON-EXECUTIVE DIRECTOR
CHRISTOPHER HEAD (AGE 48),
COMPANY SECRETARY
Christopher Head joined Lancashire in September 2010. Mr Head
is Company Secretary of Lancashire Holdings Limited and advises
on issues of corporate governance and generally on legal affairs
for the Group. Prior to joining Lancashire, Mr Head was in-house
counsel with the Imagine Insurance Group, advising specifically
on policy wording and 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 qualified solicitor having trained at Barlow Lyde
and Gilbert where he worked in the Reinsurance and International
Risk Team. Mr Head has a History degree and legal qualification
from Cambridge University, where he was a choral scholar in
the choirs of King’s College and Trinity College.
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 London Stock Exchange
issues. Mr Fraser has an MA degree in modern history from
St Andrews University. He is also a Non-Executive Director
of Derwent London plc where he chairs the Remuneration
Committee and sits on the Audit and Nominations Committees.
SAMANTHA HOE-RICHARDSON (AGE 44),
NON-EXECUTIVE DIRECTOR
Samantha Hoe-Richardson is Head of Environment for Anglo
American plc, one of the world’s leading mining and natural
resources companies. Ms Hoe-Richardson is responsible for
improving sustainable development performance across the
breadth of Anglo American’s business units in areas such as
water and climate change. She is also a director 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.
TOM MILLIGAN (AGE 45),
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. and worked in both London
and Bermuda as an insurance intermediary and underwriter.
In 2005, Mr Milligan joined Goldman Sachs Group Inc. to start
and manage the GS Reinsurance Group’s non-life activities.
As a Managing Director of Goldman Sachs, Mr Milligan served
as Chief Underwriting Officer of Arrow Capital Re in Bermuda,
before starting GS-owned Lloyd’s Syndicate 1910 in 2008 and
serving as Active Underwriter until 2012. In 2012, Mr Milligan
led GS’ 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. Mr Milligan
graduated from Durham University in 1991.
48
Lancashire Holdings Limited | Annual Report & Accounts 2014
CORPORATE GOVERNANCE REPORT
BOARD COMMITTEES
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.
Peter Clarke, Emma Duncan, Samantha Hoe-Richardson 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. Prior to his appointment in 2013,
the Board noted special circumstances relevant to determination
of the independence of Simon Fraser which required consideration
under the Code. Having taken into account Simon Fraser’s
employment at Merrill Lynch, in which capacity he had acted
as lead corporate broker to the Company, and from which he
had retired in December 2011, the Board determined that Simon
Fraser is independent in character and judgement. This matter
was previously disclosed and discussed in the Company’s 2013
Annual Report. Simon Fraser became the Senior Independent
Director on 30 April 2014 succeeding Ralf Oelssner upon his
retirement from the Board. Martin Thomas was independent
upon his appointment as Chairman on 1 May 2007. At the Board
meeting held on 11 February 2015, 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 Code, all Directors
are subject to annual election by shareholders. Shareholders
are asked to note that Martin Thomas will have served as both
a Non-Executive Director and Chairman of the Board for more
than six years. Notwithstanding this period of service, the Board
is of the view that Mr. Thomas continues to offer valuable
service to the Company. The Board proposes to recommend
the re-election of all the Directors at the 2015 AGM.
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 Company, and includes meeting with senior management
and visiting the Company’s operations. Information and advice
regarding the Company’s official list and legal and regulatory
obligations and on the Company’s compliance with the
requirements of the Code is also provided on a regular basis.
An analysis of the Company’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 Company’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
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 Company’s
commercial strategy.
www.lancashiregroup.com
49
GOVERNANCE
CORPORATE GOVERNANCE REPORT CONTINUED
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,
composition, supporting processes and management of the
Group, as well as to review each Director’s performance, training
and development needs. The 2012 performance evaluation
was facilitated by external consultants, whilst in 2013 and 2014
the evaluation was conducted internally.
During 2014, it was decided that the evaluation process would be
led by the Company Secretary, who conducted a series of meetings
with each of the Directors to appraise and discuss their individual
performances and to ascertain their views on the effectiveness
of the Board and its Committees, the contribution of each of
the individual Directors, and the management of the Company.
The process was informed by the governance review which had
been facilitated by KPMG earlier during 2014. On completion of
the interviews, the Company Secretary reported to the Nomination
and Corporate Governance Committee and the Board.
In summary, the 2014 evaluation discussions found that the
Board 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 Company and
to making the Board and its Committees work effectively.
Attendance at Board meetings was found to be good. 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 and the Board Committees are considered to
have an appropriate balance of skills and to function effectively.
The Board will continue to review its procedures, training
requirements, effectiveness and development in 2015.
The Chairman’s performance appraisal was convened by the Senior
Independent Director, who consulted with the Non-Executive
Directors with input from the Executive Directors during July 2014.
The Chairman’s performance was found to be effective.
At the end of the year, the Chairman met the CEO, and the CEO
met the CFO, to conduct a performance appraisal in respect
of 2014 and to set targets for 2015.
Non-Executive Directors
John Bishop1
Peter Clarke2
Emma Duncan3
Simon Fraser4
Samantha Hoe-Richardson5
Neil McConachie6
Ralf Oelssner7
Robert Spass8
William Spiegel9
Martin Thomas
Executive Directors
Richard Brindle10
Alex Maloney
Elaine Whelan
Board
Audit
Committee
Investment
Committee
Nomination
and Corporate
Governance
Committee
Remuneration
Committee
Underwriting
and Underwriting
Risk Committee
4/4
3/3
8/8
8/8
8/8
3/4
0/4
8/8
7/8
8/8
1/1
7/7
6/6
2/2
1/2
–
4/4
4/4
–
0/2
_
–
–
–
–
–
–
1/2
0/0
–
–
2/2
_
3/4
3/4
_
_
–
4/4
–
_
3/3
_
3/3
–
1/5
–
4/5
8/8
–
–
–
–
0/0
6/6
6/6
–
_
0/4
_
5/6
–
_
–
_
2/2
_
–
–
–
–
0/2
–
–
–
1/2
4/4
–
(1) John Bishop retired from the Board, and as a member of the Audit and Underwriting and Underwriting Risk Committees, on 30 April 2014.
(2) Peter Clarke was appointed to the Board and as a member of the Audit and Investment Committees on 9 June 2014, and was appointed as a member of the Remuneration Committee on 4 November 2014.
(3) Emma Duncan was appointed as a member of the Nomination and Corporate Governance Committee on 5 June 2014 and as a member of the Investment Committee on 4 November 2014.
(4) Simon Fraser was appointed Chair of the Remuneration Committee on 30 April 2014.
(5) Samantha Hoe-Richardson was appointed Chair of the Audit Committee on 30 April 2014 and as a member of the Nomination and Corporate Governance Committee on 5 June 2014.
(6) Neil McConachie retired from the Board and as a member of the Investment Committee on 30 April 2014.
(7) Ralf Oelssner suffered from ill health for much of 2014 and was unable to attend the majority of meetings held prior to his retirement from the Board on 30 April 2014. He also retired as a member
of the Audit, Nomination and Corporate Governance, Remuneration and Underwriting and Underwriting Risk Committees on 30 April 2014. Mr Oelssner sadly passed away shortly after his retirement.
(8) Robert Spass retired from the Board and the Investment Committee on 31 December 2014.
(9) William Spiegel retired from the Nomination and Corporate Governance Committee on 5 June 2014 and from the Board and Investment and Remuneration Committees on 31 December 2014.
(10) Richard Brindle retired from the Board, and as a member of the Underwriting and Underwriting Risk Committee, on 30 April 2014.
50
Lancashire Holdings Limited | Annual Report & Accounts 2014
COMMITTEES
The Board has established Audit, Nomination and Corporate
Governance, Remuneration, Investment and Underwriting and
Underwriting Risk Committees. Each of the Committees has
written Terms of Reference, which are reviewed regularly and are
available on the Company’s website (www.lancashiregroup.com).
All the Committee Terms of Reference were reviewed and revised
by the Board during 2014 with particular reference to the good
practice guidance published by the ICSA. The Committees
are generally scheduled to meet quarterly although additional
meetings are scheduled as business requirements dictate.
The composition of the Committees as at 31 December 2014 was
as set out in the table appearing on page 45. A report from each
of the Committees is set out from page 52 through to page 60.
RELATIONS WITH SHAREHOLDERS
During 2014, the Group’s Head of Investor Relations, usually
accompanied by one or more of the CEO, the CUO, the CFO,
the CRO, 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.
Conference calls with shareholders and analysts hosted by senior
management are held quarterly following the announcement
of the Group’s financial results. The CEO, CUO and 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 2015 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 appetite
and preferences, defining its risk tolerances, and monitoring
and ensuring compliance with risk tolerances. During 2014,
the Board carried out a robust assessment of the principal
risks affecting the Group’s business model, future performance,
solvency and liquidity.
Further discussion of the risks affecting Lancashire and the
policies in place to manage them can be found in the risk
disclosures section on pages 100 to 126.
Each of the Committees is responsible for various elements of risk.
The 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 CRO
provides regular reports to the Group and subsidiary Boards
covering, amongst other things, actual risk levels against tolerances,
emerging risks and any lessons learned from risk events. The Board
considers that a supportive ERM culture, established at the Board
and embedded throughout the business, is of key importance.
Facilitating and embedding of ERM and helping the Group
to improve its ERM practices is a major responsibility assigned
to the CRO. The Group’s risk management is informed by FRC’s
Internal Control: Revised Guidance for Directors on the Combined
Code. The CRO’s remuneration is subject to annual review
by the Remuneration Committee.
www.lancashiregroup.com
51
GOVERNANCE
COMMITTEE REPORTS
Samantha Hoe-Richardson –
Chairman of the Audit Committee
AUDIT COMMITTEE
“ The Audit Committee works closely with
management and the Company’s internal and
external auditors to give the Board and our
broader stakeholders assurance on the quality
and integrity of the Company’s financial
statements, reports and financial controls.”
Following the AGM on 30 April 2014, I was delighted to take up
the position of Audit Committee Chairman, a role that I assume
from John Bishop who had ably chaired the Audit Committee
since 2010. I would like to thank John Bishop and Ralf Oelssner,
who served on the Audit Committee until their retirement
from the Board at the 2014 AGM, as well as the current Audit
Committee members and all those staff who contribute to the
Audit Committee’s work.
COMMITTEE MEMBERSHIP
The Audit Committee comprises three independent Non-Executive
Directors and is chaired by Samantha Hoe-Richardson, a qualified
accountant, whom the Board considers to have recent and relevant
financial experience (see Ms Hoe-Richardson’s biography on page
48). 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
Peter Clarke (appointed effective 9 June 2014)
Former members
John Bishop
Ralf Oelssner
Notes:
(1) John Bishop and Ralf Oelssner retired from the Committee on 30 April 2014
(see notes 1 and 7 on page 50).
Meetings attended
4/4
4/4
1/2
2/2
0/2
PRIORITIES FOR 2015
The Committee’s priorities for 2015 are to ensure the continued
effectiveness of the Company’s control environment and ensure
that the Company is able to meet the requirements of the new
Solvency II regime in 2016.
52
Lancashire Holdings Limited | Annual Report & Accounts 2014
FINANCIAL REPORTING
COMMITTEE RESPONSIBILITY
Monitors the integrity of the
Company’s financial statements
and any other formal announcement
relating to the Company’s financial
performance. Reports to the Board
on significant financial reporting
issues and judgements contained
in the financial statements.
COMMITTEE ACTIVITIES
At each quarterly meeting the Committee reviews the Company’s financial statements for the
purposes of recommending their approval by the Board. The Committee also monitors the
activities of the Company’s Disclosure Committee and reviews the Company’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, and
• loss reserving (see page 143 for further details).
An annual paper is also presented that details the areas of judgement or estimation in the
financial statements (see accounting policies page 94 for detail of these areas). The Committee
also considers quarterly reports on the financial statements from the external auditors, including
an interim review report and a year-end audit results report. These are discussed with the
external auditors at the Committee’s meetings.
Of the areas of judgement or estimation considered by the Committee in 2014, those that were
considered significant are loss reserving and the valuation of intangible assets. These are explained
in further detail in the box below. In accordance with auditing guidance, the external auditors’
report includes revenue recognition and the estimation of premium revenues as an area of risk.
The Audit Committee considered this and concluded that for Lancashire revenue recognition
is straightforward and low risk. While 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.
The Chairman of the Committee reviews early drafts of the Annual Report and Accounts to
keep appraised of its key themes and messages and to raise any issues early in the process.
The Committee reviewed the 2014 Annual Report and Accounts at the February 2015 Audit
Committee meeting and advised the Board that the Annual Report and Accounts, taken as
a whole, are fair, balanced and understandable and provides the information necessary for
shareholders to assess the Company’s position and performance, business model and strategy.
SIGNIFICANT AREAS OF JUDGEMENT OR ESTIMATION
LOSS RESERVING
As detailed on pages 143 to 146 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 Company’s loss reserves at each Audit Committee
meeting, for which purpose it receives quarterly reports
from the Company’s Reserving Actuary. Both the Reserving
Actuary and Ernst & Young LLP (EY) present a comparison
of Lancashire’s reserves to their own best estimate at the
Q2 and Q4 Audit Committee meetings. EY also conducts a
high level review of the Company’s loss reserves as part of their
Q1 and Q3 review procedures. During 2014, the Committee
focused its discussions around the Company’s loss reserves on:
the range of reasonable actuarial estimates and the divergence
of the Company’s estimates to the external actuarial estimates;
current and prior year loss development including ‘back-testing’
of the Company’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 Company’s loss reserves
and the relevant disclosures around loss reserving in the
Company’s consolidated financial statements.
INTANGIBLE ASSET VALUATION
The Company 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 96
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 Company’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 that there was no indication
of an impairment of the Company’s intangible assets and
that the valuation of these assets was reasonable.
www.lancashiregroup.com
53
GOVERNANCE
COMMITTEE REPORTS CONTINUED
SOLVENCY II
COMMITTEE RESPONSIBILITY
Monitors developments in the
Solvency II regime and the progress
made within the Group in readiness
for its implementation.
INTERNAL AUDIT
COMMITTEE RESPONSIBILITY
Monitors and reviews the
effectiveness of the Group’s
Internal Audit function in the
context of the Group’s overall
risk management system.
EXTERNAL AUDIT
COMMITTEE RESPONSIBILITY
Oversees the relationship with
the Group’s external auditors and
is responsible for assessing annually
their independence and objectivity,
taking into account the relevant
professional and regulatory
requirements, specifically including:
• An annual assessment of the
qualifications, expertise and
resources of the external
auditors and the effectiveness
of the external audit process.
COMMITTEE ACTIVITIES
A quarterly report is provided to the Audit Committee by the CRO detailing the Company’s
current progress towards meeting its Solvency II requirements. The Group remains on track
to meet the requirements of the new regime on implementation in 2016.
COMMITTEE ACTIVITIES
The Group’s Internal Audit function reports directly to the Committee. Each year the Head
of Internal Audit presents an audit plan to the Committee for consideration and approval.
The key objective of Internal Audit is to audit on at least an annual basis those areas of the
Group’s business that are deemed to pose the greatest risk to the achievement of the Group’s
business objectives, and to audit all other areas of the Group’s operations at least once every
three years. The findings of each internal audit are reported to the Committee at the quarterly
meetings. The Committee has a responsibility to ensure the timely implementation of agreed
management actions and to review the status of these at its meetings.
During 2014, the Committee reviewed and approved an updated Internal Audit Charter. This can
be viewed on the Company’s website. An external assessment of the effectiveness of the Internal
Audit function was commissioned by the Committee and was conducted by Deloitte LLP (Deloitte),
with a report issued to the Committee. The Committee discussed the report and its findings
with Deloitte and the Head of Internal Audit and noted that no significant issues were raised.
The Committee concluded that the Internal Audit function is operating effectively and efficiently
in the context of the Group’s overall risk management system and is adequately resourced.
COMMITTEE ACTIVITIES
The Committee reviews reports from the external auditors at each quarterly Committee meeting
including the annual audit plan and an ongoing assessment of the effective performance of
the audit compared to the plan. The Committee Chairman conducts informal meetings with
the auditors and the CFO prior to, during and after the quarterly audits. The Committee meets
in executive session with the external auditors and with management at least twice per annum.
During 2014, a detailed assessment of the effectiveness of the external audit process was
performed by the Committee Chairman by means of the completion of a detailed questionnaire.
This included input from the Company’s senior management and the external auditors.
The review enabled the Audit Committee to determine that the external audit process was
effective and to note some minor development areas for future audits. Also during 2014, a review
of EY’s 2013 audit of the Company was completed by the FRC with no significant issues noted.
The results of this review were discussed by the Committee and minor improvements to the
external audit process were agreed for future years.
54
Lancashire Holdings Limited | Annual Report & Accounts 2014
EXTERNAL AUDIT CONTINUED
• The implementation of a policy
on the supply of non-audit services
to ensure that the provision of
non-audit services by the external
auditors does not impair their
independence and objectivity.
• Making 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 Company’s
external auditors.
The Committee has approved and adopted a non-audit services policy that is reviewed on an
annual basis and was last updated in October 2014. The policy, which stipulates rules around
approvals required for various types of non-audit services, can be found on the Company’s
website. During 2014, EY provided non-audit services in relation to taxation services, capital
management projects, Cathedral group restructuring and services pursuant to the KCML
shareholder and subscription agreement. Fees for non-audit services provided in 2014 totalled
$0.3 million representing 15.0 per cent of total fees paid to EY. 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 would not affect the independence and objectivity of EY as auditors.
The Committee has recommended to the Board the re-appointment of EY to perform the
2015 external audit. EY has been the Group’s external auditors since 2005 and Angus Millar
has been the lead audit partner since 2012. When making its recommendation to the Board,
the Committee considered and had regard to EY’s length of tenure and any non-audit services
provided during the year, and continued to be satisfied with EY’s performance, independence
and objectivity, level of fees charged, compliance with ethical standards and audit partner
rotation policy. During 2014, the Board approved a recommendation by the Committee that
the external audit contract is put out to tender during 2016, which will be during the fifth
year for the current EY lead audit partner. A recommendation will be made to shareholders
at the 2017 AGM.
INTERNAL CONTROLS AND RISK MANAGEMENT SYSTEMS
COMMITTEE RESPONSIBILITY
Reviews the adequacy and
effectiveness of the Group’s
internal financial controls and
internal control and financial
risk management systems
(including financial, operational
and compliance controls).
Reviews for adequacy and security
of the Company’s ‘whistleblowing’
arrangements, procedures for
detecting fraud and systems and
controls for the prevention
of bribery and money laundering.
COMMITTEE ACTIVITIES
The Board has ultimate responsibility for maintaining a robust framework of internal controls
and risk management and for overseeing and ensuring the effectiveness of the Group’s risk
management and internal control systems and has delegated the monitoring and review of
this framework to the Committee. The system of internal control 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 an
annual paper detailing the effectiveness of the Company’s internal controls, which is reviewed
and discussed by the Committee. This paper covers all material controls including financial,
operating and compliance controls. In 2014, the Committee was satisfied that the Company’s
internal control framework was operating effectively.
During 2014, the Committee reviewed and recommended the adoption by the Board of updated
policies and procedures for anti-money laundering, bribery and financial crime, conflicts
of interest and whistleblowing. The Committee regularly reviews the Company’s procedures
for detecting fraud. The Committee also keeps under review the adequacy and effectiveness
of the Company’s legal and compliance function.
www.lancashiregroup.com
55
GOVERNANCE
COMMITTEE REPORTS CONTINUED
INVESTMENT COMMITTEE
“ The focus of the Committee continues
to be on capital preservation and liquidity
to support and complement the Group’s
underwriting operations.”
Elaine Whelan –
Chairman of the Investment Committee
COMMITTEE MEMBERSHIP
The Investment Committee comprises two Non-Executive Directors
and one Executive Director (the CFO) together with the Head
of Investments and Treasury (who is not a Director).
Meetings attended
Elaine Whelan (Chairman)
Peter Clarke
Emma Duncan
Denise O’Donoghue
Former members
Neil McConachie1
Robert Spass2
William Spiegel3
Notes:
4/4
1/2
0/0
4/4
2/2
3/4
3/4
(1) Neil McConachie retired from the Committee on 30 April 2014.
(2) Robert Spass retired from the Committee on 31 December 2014 (see note 8 on page 50).
(3) William Spiegel retired from the Committee on 31 December 2014 (see note 9 on page 50).
PRINCIPAL RESPONSIBILITIES OF THE COMMITTEE
• Recommend investment strategies, guidelines and policies for the
Board of the Company and operating entities to approve annually.
• Recommend and set risk asset definitions and risk tolerance
levels for management to operate within.
• Recommend the appointment of investment managers to manage
the Group’s investments.
• Monitor the performance of the investment strategies against
pre-defined benchmarks.
• Establish and monitor compliance with investment operating
guidelines relating to custody of investments and internal controls.
56
Lancashire Holdings Limited | Annual Report & Accounts 2014
HOW THE COMMITTEE DISCHARGED ITS
RESPONSIBILITIES DURING 2014
During 2014, the Investment Committee recommended the
development of a hedge fund portfolio and the appointment
of hedge fund managers. The Committee also conducted a review
of the Group portfolio investment managers and recommended
a reduction in the number of generalist fixed income managers.
The Committee undertook a strategic asset allocation study that
resulted in recommended changes to the Group asset allocations.
The Committee also recommended amendments to the definition
of risk assets, although no changes were proposed to the maximum
risk asset allocation.
The Committee considered regular reports on investment
performance, asset allocation and compliance with pre-defined
guidelines and tolerances.
During Q4 2014, the Investment Committee recommended
to the Board the adoption of the 2015 investment strategy.
PRIORITIES FOR 2015
The Investment Committee will continue to focus upon the
appropriate balance of risk and return in the implementation
of the Group’s investment strategy, preserving capital and
managing its interest rate risk.
NOMINATION AND
CORPORATE GOVERNANCE
COMMITTEE
“ A particular focus of the Committee during
2014 has been to ensure that, during a period
of transition for the management team and
the Board, the business is refreshed with
individuals who bring skills, experience and
a diversity of perspectives and backgrounds.”
Martin Thomas –
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 Martin Thomas who is the Chairman
of the Board.
Martin Thomas (Chairman)
Emma Duncan
Samantha Hoe-Richardson
Former members
Ralf Oelssner1
William Spiegel2
Notes:
Meetings attended
8/8
3/3
3/3
1/5
4/5
(1) Ralf Oelssner retired from the Committee on 30 April 2014 (see note 7 on page 50).
(2) William Spiegel retired from the Committee on 5 June 2014 (see note 9 on page 50).
PRINCIPAL RESPONSIBILITIES OF THE COMMITTEE
• Review the structure, size and composition (including the
skills, knowledge, experience and diversity) of the Board.
• Consider succession planning for Directors and other
senior executives.
• Nominate candidates to fill Board vacancies.
• Make 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.
• Review the Company’s corporate governance arrangements
and compliance.
HOW THE COMMITTEE DISCHARGED ITS
RESPONSIBILITIES DURING 2014
BOARD COMPOSITION
The Committee reviewed the composition of the Board, with
particular focus on the Non-Executive Directors, to ensure that
the balance of skills, experience and diversity continued to be
appropriate for the Group’s business to meet the strategic objectives.
The Committee also considered whether any additional skills and
experience would be needed, either to complement those already
on the Board, or to plan for filling vacancies due to the retirement
of Directors.
The Committee recommended changes to the composition
of the Board Committees during the year. It also recommended
Simon Fraser for the role of Senior Independent Director upon
the retirement of Ralf Oelssner at the 2014 AGM.
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 of the business. The Committee
also recommended the appointment of Paul Gregory as Group
Chief Underwriting Officer following the promotion of Alex
Maloney to Group Chief Executive Officer.
APPOINTMENT OF DIRECTORS
Peter Clarke and Tom Milligan were considered by the Committee
and recommended to the Board for appointment as new
Non-Executive Directors. In each case, the recruitment process
was initiated by the Committee and, as part of that process, the
Company engaged Odgers Berndtson (an executive search firm
with no other connection to the Lancashire Group), who identified
a number of potential candidates. Both Directors have received
a tailored induction programme led by the Company Secretary.
www.lancashiregroup.com
57
GOVERNANCE
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 its individual
Directors – see page 50.
During 2014, the Committee recommended the adoption by
the Board of revised Terms of Reference for the Audit Committee,
the Nomination and Corporate Governance Committee and
the Remuneration Committee. It also recommended the approval
by the Board of an amended Schedule of Reserved Matters and
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 recommended approval by the Board of an
updated statement on the representation of women on the
Board, on executive committees and in senior management.
This is published on the Company’s website. In the context of
the Davies Report, the Committee recognises the benefits that
a broad diversity of skills, experience and gender, amongst other
factors, brings to enhance Board performance but considers
that quotas are not the best option for achieving diversity.
The Committee considered statistics relevant to the gender
composition of the Board, Group management excluding
Non-Executive Directors, and overall Lancashire Group employees.
These statistics are shown opposite.
THE LANCASHIRE FOUNDATION
Flowing from the review of the Committee’s Terms of Reference,
the Committee assumed responsibility 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.
PRIORITIES FOR 2015
The priority for the Nomination and Corporate Governance
Committee for 2015 will be a continued focus on succession
planning and to support management in the development
of talent planning within the business, to ensure that the Board
benefits from the skills and expertise of a diverse and independent
team of Non-Executive Directors.
COMMITTEE REPORTS CONTINUED
LHL BOARD MEMBERS
Female: 3
Male: 6
GROUP MANAGEMENT EXCLUDING
LHL NON-EXECUTIVE BOARD DIRECTORS
Female: 4
Male: 16
OVERALL LANCASHIRE GROUP EMPLOYEES
Female: 68
Male: 124
* As at 31 December 2014.
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Lancashire Holdings Limited | Annual Report & Accounts 2014
UNDERWRITING
AND UNDERWRITING
RISK COMMITTEE
“ The Committee is an important forum
for discussing and setting the right
underwriting risk appetites. It also monitors
the Company’s underwriting performance
against the risk tolerances.”
Alex Maloney –
Chairman of the Underwriting
and Underwriting Risk Committee
COMMITTEE MEMBERSHIP
The Underwriting and Underwriting Risk Committee comprises one
Executive Director (the Group CEO) together with the Group CUO,
the CUO of LICL, the CUO and Reinsurance Manager of LUK and
the Head of Capital Modeling (who are not Directors).
Meetings attended
Alex Maloney (Chairman)
Paul Gregory
Hayley Johnston
Sylvain Perrier
Ben Readdy
Former members
John Bishop1
Richard Brindle1
Ralf Oelssner1
Note:
4/4
4/4
1/1
4/4
4/4
2/2
1/2
0/2
(1) John Bishop, Richard Brindle and Ralf Oelssner all retired from the Committee on 30 April 2014
(see notes 1, 7 and 10 on page 50).
PRINCIPAL RESPONSIBILITIES OF THE COMMITTEE
• Formulate Group underwriting strategy.
• Oversee the development of, and adherence to, underwriting
guidelines by operating company CUOs.
• Review underwriting performance.
• Review significant changes in underwriting rules and policies.
• Establish, review and maintain strict underwriting criteria and limits.
• Monitor underwriting risk and its consistency with Lancashire’s
risk profile and risk appetite.
HOW THE COMMITTEE DISCHARGED ITS
RESPONSIBILITIES DURING 2014
Underwriting risk is one of the key risks faced by the Company,
and the Committee is actively engaged in the development of strategy
and underwriting risk tolerances, which are approved by the Board.
The Committee also monitors underwriting performance on a
quarterly basis. In what has been a challenging ratings environment,
Lancashire continues to prioritise good risk selection first and
foremost, and the portfolio mix since inception has been relatively
stable. The soft market has presented opportunities for the business
to increase its reinsurance purchasing thereby de-risking the
portfolio. The strategic underwriting priority for the business is to
service the needs of clients and their brokers and thereby build a core
book of business capable of sustaining a relevant and viable operation
over the insurance cycle. During 2014, the Cathedral platform has
afforded opportunities for new lines of business within the Lloyd’s
market through the build out of Syndicate 3010. The Committee
has also received regular reports on the progress made in the
development of the Kinesis platform during 2014. The Committee
receives quarterly reports of significant claims to the business.
During 2014, the Committee meetings were open to attendance
by all 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.
A more detailed analysis of the Lancashire underwriting performance
appears in the Business Review section of this Annual Report at pages
24 to 32.
PRIORITIES FOR 2015
For the coming year the Underwriting and Underwriting Risk
Committee will continue to monitor the development of a forward-
looking and disciplined underwriting strategy appropriate for
the Group’s three underwriting platforms, within a framework
of appropriate risk tolerances.
www.lancashiregroup.com
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GOVERNANCE
COMMITTEE REPORTS CONTINUED
REMUNERATION
COMMITTEE
“The Committee seeks to align the interests
of the Company’s owners with those of its senior
executives. Our remuneration policy affords
financial rewards which are closely linked
to performance.”
Simon Fraser –
Chairman of the Remuneration Committee
COMMITTEE MEMBERSHIP
The Remuneration Committee comprises three independent
Non-Executive Directors.
Simon Fraser (Chairman)
Peter Clarke
Emma Duncan
Former members
Ralf Oelssner1
William Spiegel2
Notes:
Meetings attended
6/6
0/0
6/6
0/4
5/6
HOW THE COMMITTEE DISCHARGED ITS
RESPONSIBILITIES DURING 2014
During 2014, the Committee approved the terms of the retirement
arrangements for Richard Brindle, the former Group CEO.
The Committee also approved the remuneration packages for
Alex Maloney as the new Group CEO and for Paul Gregory as
the new Group CUO.
The Committee considered the salary and bonus awards for 2014
for Executive Directors and other designated senior executives.
The Committee also approved the grant of awards under the
Company’s restricted share scheme.
(1) Ralf Oelssner retired from the Committee on 30 April 2014 (see note 7 on page 50).
(2) William Spiegel retired from the Committee on 31 December 2014 (see note 9 on page 50).
The Committee approved revised share ownership guidelines for
senior and key executives.
PRINCIPAL RESPONSIBILITIES OF THE COMMITTEE
• Set the remuneration policy for the Company’s Chairman, the
Executive Directors, Company Secretary and other designated
senior executives, to deliver long-term benefits to the Company.
• Determine the total individual remuneration package, including
pension arrangements, of the Company’s Chairman, the Executive
Directors and other designated senior executives.
• Agree personal objectives for each Executive Director and the
related performance and pay-out metrics for the performance
element of the annual bonus.
• Determine each year whether awards will be made under the
Company’s restricted share scheme 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.
• Ensure that contractual terms on termination, and any payments
made, are fair to the individual and the Company.
• Oversee any major changes in employee benefit structures
throughout the Group.
The Committee also reviewed the policy for Executive Director
remuneration which was approved by shareholders at the 2014 AGM.
The Committee considers the policy fit for purpose and does not
propose any amendments for the 2015 AGM.
The Directors’ Remuneration Policy and the Annual Report on
Remuneration for which the Committee is responsible can be found
on pages 61 to 78.
The Committee’s Terms of Reference were amended on 4 November
2014 to include provisions for the Committee’s oversight and
approval of performance objectives for Executive Directors and the
related metrics for the performance element of the annual bonus.
PRIORITIES FOR 2015
During the coming year the Remuneration Committee, working
with management, will undertake a review of incentivisation
packages throughout the Group to ensure that remuneration
is structured appropriately to promote the long-term success of
the Company. This is expected to involve a degree of standardisation
across the Group as Catherdral is integrated fully. The RSS
structure for Executive Directors will also be reviewed to ensure
that the performance metrics continue to align the interests
of the Company, its investors and management.
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Lancashire Holdings Limited | Annual Report & Accounts 2014
DIRECTORS’ REMUNERATION REPORT
ANNUAL STATEMENT
Dear Shareholder,
I am pleased to present my first Directors’ Remuneration Report to
shareholders following my appointment to chair the Remuneration
Committee on 30 April 2014.
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 London Stock Exchange and
reflecting the Committee’s approach to good governance, shareholders
were given the opportunity to approve our remuneration policy at the
2014 AGM and we were grateful for the support of over 90 per cent of
our shareholders. We are not proposing any changes to our remuneration
policy but for convenience we have reproduced the policy on pages
62 to 65.
REMUNERATION AND STRATEGY
Lancashire’s goal continues to be to reward its employees fairly and
responsibly, by providing an appropriate balance between fixed 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 at the front of this Annual Report, our
strategy focuses on the effective operation of the business necessary to
maximise long-term and sustainable RoE and the delivery of superior
total shareholder returns. Our remuneration policy is closely aligned
to this strategy.
PERFORMANCE OUTCOME FOR 2014
The Lancashire Group has delivered solid results in a challenging market
for 2014 (see the performance review of this report on pages 70 to 74).
Against a background of challenging market conditions there was a
significant reduction between 2013 and 2014 in the total remuneration
for our CEO and CFO (see the comparison table for single figure
remuneration on page 69). This resulted in part from a lower RoE
than was achieved in 2013 and a disappointing total shareholder
return of -24.2 per cent for the year (see page 21 for further details).
The annual bonus was focused on both absolute RoE and relative RoE
and also on individual objectives. Executive Directors’ performance targets
set at the beginning of 2014 for financial performance were stretching,
and reflecting the Company's 2014 performance were achieved at about
target level (and at or below 53 per cent of maximum bonus). Executive
Directors’ 2014 bonuses are expected to pay between 100 per cent and
106 per cent of target. Due to the large number of warrants outstanding,
and the potentially volatile impact on the annual bonus performance
metrics and the fact that the warrants are no longer owned by employees,
the Committee decided at the beginning of the year that for the annual
bonus performance targets for both the absolute and relative elements
there should be an adjustment for the impact of warrant exercises.
Accordingly the warrant adjusted RoE used for purposes of the absolute
RoE metric is 14.7 per cent which represents an uplift of 0.8 per cent
on the 2014 actual RoE of 13.9 per cent. For full details of Executive
Directors’ bonuses and the associated performance delivered see page 71.
In relation to long-term incentives, the 2012 Performance RSS awards
were half based on absolute RoE targets and half on relative TSR against
other peers over the three year period to 31 December 2014. Our TSR
performance (in USD) over this period ranked the Company below the
median of the designated peer group of 11 companies, resulting in no
vesting for the TSR component. This, in part, was a reflection of the
out-performance of the Company’s share price relative to its peer group
comparator companies in 2011, with a high base point resulting in a
weaker TSR performance by comparison to peers during the relevant
three year period.
Our average RoE performance over this period was 16.5 per cent
against a threshold target of the 13 week Treasury bill rate plus 6 per cent,
resulting in 100 per cent of the RoE component of the 2012 Performance
RSS award vesting, a total vesting of 50 per cent of awards. This compared
to the 100 per cent vesting of the 2011 RSS Performance awards, which
we reported last year.
The total remuneration received by our current directors in 2014 was
significantly lower than what was received in 2013 and this demonstrates
the Committee's key principles of setting challenging performance
criteria and having a significant proportion of the overall package linked
to Company performance. The like for like employee costs at Lancashire
(excluding the costs of the Lloyd’s segment, but including the cost of the
retirement package for Richard Brindle) were $1.3 million lower in
2014 (see page 29 for further detail).
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.
CHANGES TO THE EXECUTIVE BOARD
As detailed in the Nomination and Corporate Governance Committee
report, at the 2014 AGM, there was a change in Chief Executive as
Richard Brindle retired and Alex Maloney was promoted from his
previous role as the Group's Chief Underwriting Officer.
As specified in his contract, Richard Brindle received payments
comprising salary, benefits and pension in lieu of his notice period, and a
pro-rata bonus for the period he was employed in 2014. In consideration
of his decision to retire and his significant contribution to the foundation
and management of Lancashire since its incorporation in 2005, the
Committee decided to treat him as a good leaver under the rules of the
annual bonus and Restricted Share Scheme. Full details of his termination
payments are set out in the Annual Report on Remuneration on page 72.
APPLICATION OF REMUNERATION POLICY FOR 2015
Since my appointment, the Remuneration Committee has reviewed the
policy approved by shareholders and considers it to remain fit for purpose.
That said we have taken on board shareholder comments expressed at the
last AGM and have made a number of changes in the way we will operate
our policy for 2015.
The policy includes a share ownership guideline requiring the CEO
to build and maintain a holding of two times his salary and for other
Directors to have shares worth one times salary. The Committee
has revisited the share ownership guideline and tightened up the
definition of ownership. Going forward, only wholly-owned shares or
vested entitlements to shares will count whereas previously unvested
deferred bonus awards were included. This will strengthen the
alignment between management and shareholders.
www.lancashiregroup.com
www.lancashiregroup.com
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GOVERNANCE
DIRECTORS’ REMUNERATION REPORT CONTINUED
The Committee is cognisant of the need to set remuneration at a
level which is sufficiently attractive to incentivise the best talent in a
very competitive industry but at the same time to ensure that reward
is not excessive by market and shareholder standards. In this regard,
it should be noted that we have set the new Chief Executive's pay
at a level which is significantly lower than his predecessor. See
page 77 for further details.
The minimum and maximum absolute RoE targets (adjusted for
warrant exercises) attached to our annual bonus plan have been
left unchanged despite the increased likelihood of a softer market
in 2015. The target pay-out has been reduced from 12 per cent to
11 per cent to reflect the market outlook.
The final section of this report is the Annual Report on Remuneration
which provides detailed disclosure on how the policy will be implemented
for 2015 and how Directors have been paid in relation to 2014.
DIRECTORS’ REMUNERATION POLICY SECTION
This part of the Directors’ Remuneration Report sets out the
Remuneration Policy for the Company. The policy has been developed
taking into account the principles of the Code and the views of our
major shareholders. The policy was voted into effect from the date
of the 2014 AGM and is currently intended to operate until the
AGM in 2017.
Although not required by the regulations, the substantive terms of
the Remuneration Policy are reproduced below for ease of reference.
However, any details that were specific to 2014 or earlier years
(including, for example, the disclosure of the illustrative remuneration
scenarios) have been updated where applicable. The policy table has
been updated to incorporate the change to the share ownership
guideline as set out in the Annual Statement. The full Policy Report
approved by the Company's shareholders at last year's AGM can be
accessed in the 2013 Annual Report on the Company's website.
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 Remuneration Committee and the Board have considered
whether any element of the current Remuneration Policy could
conceivably encourage Executive Directors to take inappropriate risks
and have concluded that this is not the case, given the following:
there is an appropriate balance between fixed and variable pay, and
therefore Executive Directors are not required to earn performance
related pay to maintain 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;
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Lancashire Holdings Limited | Annual Report & Accounts 2014
The disclosures provide 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. The Committee has committed
to a full review of Group compensation for 2016 to include all
Group Companies.
SIMON FRASER
CHAIRMAN OF THE REMUNERATION COMMITTEE
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
the Company has the power to claw back 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 Company’s financial statements, error 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, will 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, the
same as that for Executive Directors in that all employees are offered
similarly structured packages, with participation in annual bonus
and long-term incentive plans. 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.
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.
DIRECTORS’ REMUNERATION REPORT CONTINUED
The Committee is cognisant of the need to set remuneration at a
The disclosures provide shareholders with the information necessary to
level which is sufficiently attractive to incentivise the best talent in a
form a judgement as to the link between Company performance and
very competitive industry but at the same time to ensure that reward
how the Executive Directors are paid. This Annual Statement together
is not excessive by market and shareholder standards. In this regard,
with the Annual Report on Remuneration will be subject to an advisory
it should be noted that we have set the new Chief Executive's pay
vote and I hope that you will be able to support the resolution at the
at a level which is significantly lower than his predecessor. See
forthcoming AGM.
page 77 for further details.
The minimum and maximum absolute RoE targets (adjusted for
dialogue with our shareholders on remuneration matters and I
warrant exercises) attached to our annual bonus plan have been
welcome any feedback you may have. The Committee has committed
left unchanged despite the increased likelihood of a softer market
to a full review of Group compensation for 2016 to include all
The Committee is committed to maintaining an open and constructive
in 2015. The target pay-out has been reduced from 12 per cent to
Group Companies.
11 per cent to reflect the market outlook.
The final section of this report is the Annual Report on Remuneration
which provides detailed disclosure on how the policy will be implemented
SIMON FRASER
DIRECTORS’ REMUNERATION POLICY SECTION
This part of the Directors’ Remuneration Report sets out the
there is a high level of share ownership amongst Executive
Remuneration Policy for the Company. The policy has been developed
Directors, meaning that there is a strong focus on sustainable
taking into account the principles of the Code and the views of our
long-term shareholder value; and
major shareholders. The policy was voted into effect from the date
of the 2014 AGM and is currently intended to operate until the
AGM in 2017.
the Company has the power to claw back bonuses (including the
deferred element of the annual bonus) and long-term incentive
payments made to Executive Directors in the event of material
Although not required by the regulations, the substantive terms of
misstatements in the Company’s financial statements, error in the
the Remuneration Policy are reproduced below for ease of reference.
calculation of any performance condition, or the Executive Director
However, any details that were specific to 2014 or earlier years
ceasing to be a Director and/or employee due to gross misconduct.
(including, for example, the disclosure of the illustrative remuneration
been updated to incorporate the change to the share ownership
guideline as set out in the Annual Statement. The full Policy Report
approved by the Company's shareholders at last year's AGM can be
accessed in the 2013 Annual Report on the Company's website.
GOVERNANCE AND APPROACH
The Company's Remuneration Policy is geared towards providing a
INTO ACCOUNT
The Committee Chairman and, where appropriate, the Company
Chairman, will 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.
level of remuneration which attracts, retains and motivates Executive
HOW THE VIEWS OF EMPLOYEES ARE TAKEN
Directors of the highest calibre to further the Company's interests and
INTO ACCOUNT
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 Remuneration Committee and the Board have considered
whether any element of the current Remuneration Policy could
conceivably encourage Executive Directors to take inappropriate risks
and have concluded that this is not the case, given the following:
there is an appropriate balance between fixed and variable pay, and
therefore Executive Directors are not required to earn performance
related pay to maintain 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;
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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, the
same as that for Executive Directors in that all employees are offered
similarly structured packages, with participation in annual bonus
and long-term incentive plans. 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.
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.
POLICY TABLE
Base Salary
Purpose and Link to Strategy
Helps recruit, motivate and retain high-calibre Executive Directors by offering salaries at market competitive levels.
Operation
Reflects individual experience and role.
Reviewed annually and fixed for 12 months, effective from 1 January. Positioning and annual increases influenced by:
role, experience and performance;
change in broader workforce salary; and
changes in responsibility or position.
Salaries are benchmarked periodically against insurance company peers in the UK and in Bermuda.
Opportunity
No maximum.
Benefits
for 2015 and how Directors have been paid in relation to 2014.
CHAIRMAN OF THE REMUNERATION COMMITTEE
Purpose and Link to Strategy
Market competitive structure to support recruitment and retention.
scenarios) have been updated where applicable. The policy table has
HOW THE VIEWS OF SHAREHOLDERS ARE TAKEN
Opportunity
Company contribution is currently 10 per cent of base salary.
Medical cover aims to ensure minimal business interruption as a result of illness.
Operation
Executive Directors are entitled to healthcare, dental, vision, gym membership and life insurance. Executive Directors
who are expatriates may be eligible for a housing allowance or other relocation-related expenses.
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 where contributions would exceed HMRC pension limits in the UK.
There is a salary sacrifice structure in the UK.
There is the opportunity for additional voluntary contributions to be made by individuals, if elected.
www.lancashiregroup.com
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GOVERNANCE
DIRECTORS’ REMUNERATION REPORT CONTINUED
POLICY TABLE CONTINUED
Annual Bonus1,2
Purpose and Link to Strategy
Rewards the achievement of financial and personal targets.
Operation
Bonus targets (percentage of salary) are based on mechanistic calculations for 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, based upon input from the CEO, will have the ability to override the results of any mechanistic bonus
calculation to either increase or decrease 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 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.
If Lancashire’s comprehensive income in the relevant full financial year should be negative, there will be no pay-out
possible under the Relative Financial Performance element (details of the bonus metrics are included on page 68 of the
Annual Report).
The bonus is subject to claw back if the 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.
Opportunity3
Bonus for achieving target level of performance as a percentage of salary is:
CEO – 200 per cent
CUO – 175 per cent (note this is not currently an Executive Director position)
CFO – 150 per cent
Maximum opportunity is two times target.
Note for 2015: The Committee may set bonus opportunities less than the amounts set out above – see Implementation
of Policy section of the Annual Report on Remuneration.
Performance Metrics
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, combined ratio, investment return or any other financial KPI4.
A sliding scale of targets applies for financial performance targets. Bonus is earned on an incremental basis once a
predetermined threshold level is achieved. 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 pay-out for this part of the bonus.
The weightings applying 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 have a higher weighting than the personal element.
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Lancashire Holdings Limited | Annual Report & Accounts 2014
DIRECTORS’ REMUNERATION REPORT CONTINUED
POLICY TABLE CONTINUED
Annual Bonus1,2
Long Term Incentives (LTI)
Purpose and Link to Strategy
Rewards Executive Directors for achieving superior returns for shareholders over a longer-term timeframe.
Purpose and Link to Strategy
Rewards the achievement of financial and personal targets.
Operation
Bonus targets (percentage of salary) are based on mechanistic calculations for financial and personal performance.
Operation2,4
The precise weightings may differ each year, although there will be a greater focus on financial as opposed to
personal performance.
and performance.
The Committee, based upon input from the CEO, will have the ability to override the results of any mechanistic bonus
calculation to either increase or decrease the amount payable (subject to the cap) to ensure a robust link between reward
At least 25 per cent of each Executive Director’s bonus is automatically deferred into shares as nil cost options 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.
If Lancashire’s comprehensive income in the relevant full financial year should be negative, there will be no pay-out
possible under the Relative Financial Performance element (details of the bonus metrics are included on page 68 of the
Enables Executive Directors to build a meaningful shareholding over time and align goals with shareholders.
RSS awards are made annually in the form of nil cost options 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 at 1 January in the year of grant unless
the Committee at its discretion determines otherwise.
The Remuneration 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 claw back if there is a material misstatement in the Company’s 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.
Opportunity
Award levels are determined primarily by seniority. A maximum individual grant limit of 350 per cent of salary applies.
The bonus is subject to claw back if the 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
Performance Metrics
Note for 2015: The Committee may set bonus opportunities less than the amounts set out above – see Implementation
Share Ownership Guidelines5
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 measures1.
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 at threshold performance.
For TSR, none of this part of the award will vest below median ranking and full vesting will require upper quartile
performance or better. Awards vest on a proportionate basis for performance between the median and upper quartiles.
Under the guidelines, the CEO is expected to maintain an interest equivalent in value to no less than two times salary over time. For other Executive Directors
the threshold is one times salary. 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’ (NEDs) fees
Purpose and Link to Strategy
Helps recruit, motivate and retain a Chairman and Non-Executive Directors of a high calibre by offering a market
competitive fee level.
Operation
The Chairman is paid a fee for his responsibilities as Chairman and also receives a separate fee for his position as
Chairman of LUK. 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.
Opportunity
Notes
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 schemes operated by the Company but remain outstanding remain eligible to vest based on their original award terms and this provision forms part
of the policy.
(3) The target bonuses set at the 2014 AGM in this policy were based on the incumbents in the roles at the time.
(4) Performance Measures; these may include the performance indicators shown on pages 20 to 21 or others described within the Annual Report Glossary commencing on page 160.
(5) Share Ownership interest equivalent is defined as wholly owned shares or fully vested rights over shares; since November 2014 unvested annual RSS bonus awards do not count towards share ownership.
Annual Report).
due to gross misconduct.
CEO – 200 per cent
CFO – 150 per cent
Opportunity3
Bonus for achieving target level of performance as a percentage of salary is:
CUO – 175 per cent (note this is not currently an Executive Director position)
Maximum opportunity is two times target.
of Policy section of the Annual Report on Remuneration.
Performance Metrics
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, combined ratio, investment return or any other financial KPI4.
A sliding scale of targets applies for financial performance targets. Bonus is earned on an incremental basis once a
predetermined threshold level is achieved. 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 pay-out for this part of the bonus.
The weightings applying 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 have a higher weighting than the personal element.
64
Lancashire Holdings Limited | Annual Report & Accounts 2014
www.lancashiregroup.com
www.lancashiregroup.com
65
65
GOVERNANCE
DIRECTORS’ REMUNERATION REPORT CONTINUED
ILLUSTRATIONS OF ANNUAL APPLICATION OF REMUNERATION POLICY
The charts below show the potential total remuneration opportunities for the Executive Directors in 2015 at different levels of performance
under the policy.
)
M
$
(
N
O
I
T
A
S
N
E
P
M
O
C
L
A
T
O
T
6
5
4
3
2
1
0
5.30
40%
44%
16%
3.08
34%
38%
28%
0.86
100%
2.21
33%
36%
31%
0.68
100%
3.73
39%
43%
18%
Fixed pay
On-target
Maximum
Fixed pay
On-target
Maximum
CEO
CFO
Fixed pay
Annual bonus
LTI Awards (RSS)
Fixed pay = 2015 Salary + Actual value of 2014 Benefits + 2015 Pension Contribution.
On-target = Fixed Pay + Target Bonus (being half the Maximum Bonus Opportunity) + Target Value of 2015 RSS grant
(assuming 50 per cent vesting with face values of 275 per cent and 276 per cent of salary for the CEO and CFO respectively).
Maximum = Fixed Pay + Maximum Bonus Opportunity + Maximum Value of 2015 RSS grant (assuming 100 per cent vesting
shown as the face value of grant).
No account has been taken of any share price growth or dividend equivalents accrual.
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 annual bonus and LTI potential would be
in line with the Policy. 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, 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.
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. No Executive Director has a contractual right to a bonus for any period of notice not worked.
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.
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Lancashire Holdings Limited | Annual Report & Accounts 2014
Lancashire Holdings Limited | Annual Report & Accounts 2014
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.
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 shares will remain exercisable. Unvested deferred bonus shares 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. The Committee has discretion to
permit such unvested awards to vest early rather than continue on the normal vesting timetable and also retains discretion, acting fairly and
reasonably, as to whether or not to apply (or to apply to a lesser extent) the pro-rata reduction to the bonus shares where it feels the reduction
would be inappropriate.
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 vesting period.
Depending upon circumstances, the Committee may consider other payments in respect of 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. The Company encourages share ownership by the Non-Executive Chairman and Non-Executive Directors, and Non-Executive Directors
who do not own shares are encouraged to use a proportion of their fees to buy shares in the Company and retain such shareholdings for their
remaining periods of office.
In accordance with best practice under the Code, the Board proposes to submit the Directors individually for re-election by the shareholders at
the 2015 AGM.
ANNUAL REPORT ON REMUNERATION
This Annual Report on Remuneration together with the Chairman’s Annual Statement, as detailed on page 44 will be subject to an advisory
vote at the 2015 AGM. The information on page 69 with respect to Directors’ Emoluments and onwards through page 78 has been audited.
IMPLEMENTATION OF REMUNERATION POLICY FOR 2015
In relation to the Policy described in the previous section, the following table sets out additional disclosure on the expected application of the
Policy for 2015.
BASE SALARY AND FEES
Executive Directors
Increases and resulting salaries effective from 1 January 2015 are set out below:
CEO – the incoming CEO’s salary was set at $750,000 upon his promotion to CEO on 1 May 2014 and this was significantly lower than his
predecessor's salary. The CEO's salary for 2015 was increased by 3 per cent to $772,500.
CFO – salary increased by 3 per cent to $530,450.
For 2015, increases of 3 per cent are in line with the salary increases across the general workforce population.
www.lancashiregroup.com
www.lancashiregroup.com
67
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GOVERNANCE
DIRECTORS’ REMUNERATION REPORT CONTINUED
IMPLEMENTATION OF REMUNERATION POLICY FOR 2015 CONTINUED
Non-Executives
The Chairman's and Non-Executive Directors' fees remain the same for 2015:
The fee for the Chairman is $325,000 per annum and the additional fee for the Chairman of LUK is $100,000.
The Non-Executive Director fee is $175,000 per annum.
ANNUAL BONUS
For 2015, the CEO will have a target bonus of 150 per cent of salary and, therefore, a maximum opportunity of 300 per cent of salary which is
within the approved policy limit and represents a 100 per cent of salary maximum opportunity reduction compared with the previous CEO.
This lower bonus opportunity is driven off a significantly lower salary than the previous CEO's (as highlighted above). The CFO's target bonus
opportunity will be in line with the policy at 150 per cent of salary (maximum 300 per cent).
As for 2014, the 2015 bonus will be based 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 Return on Equity which is the core indicator of the delivery of our strategic priorities of ensuring
strong underwriting, effectively balancing risk and return and managing capital nimbly through the insurance cycle (see the strategic overview
on pages 14 and 15 of this report). Accordingly, for 2015, the financial component comprises two parts – 60 per cent of this element is based on
the performance of the Group’s absolute RoE (measured as the internal rate of return of the change in the fully converted book value per share
or ‘FCBVS’) plus dividends accrued and 40 per cent is based on the Group's relative RoE performance against appropriate peer companies
(peer companies can be located on page 75). The RoE is to be adjusted for the effect of warrant exercises during the year.
Absolute RoE:
A sliding scale range of RoE targets is set with 25 per cent of bonus payable if the threshold level of increase in RoE is achieved (being 9 per
cent), rising to 100 per cent of bonus target being payable for target growth in RoE of 11 per cent and 200 per cent of bonus target being
payable for achieving the maximum RoE growth target of 19 per cent or higher. There is linear interpolation between these points. The Board
considers that these target ranges are appropriately challenging in a difficult market and that the stretch target of 19 per cent would represent
exceptional performance in the current market, but without encouraging excessive risk taking.
Relative RoE:
Relative performance will be measured against an identified comparator group of companies which can be seen on page 75. Vesting will be
based on performance against a sliding scale with no vesting for below median performance, 25 per cent payable for achieving a median
ranking, and up to 100 per cent for upper quartile or better. Vesting for performance in between the median and upper quartiles is determined
on a proportionate basis.
Personal Performance (25 per cent)
This element of the bonus plan is based upon individual achievement of clearly articulated objectives created at the beginning of each year.
The Committee has chosen not to disclose the personal performance objectives in advance as it considers them to be commercially sensitive.
As in previous years there will be broad disclosure retrospectively in the 2015 Annual Report on Remuneration.
RESTRICTED SHARE SCHEME
Performance Conditions
2015 RSS awards are subject to RoE and relative TSR performance conditions. These metrics were chosen as RoE provides a focus on the
Company's underlying financial performance and cycle management, and relative TSR provides an objective reward for stock market
performance against the Company’s peers.
Weighting
For 2015, the TSR/RoE weighting is 25 per cent on TSR and 75 per cent on RoE.
Target ranges
The RoE target range for 2015 awards is unchanged from the previous year:
threshold – average RoE compared to the 13 week Treasury bill rate + 6 per cent;
maximum – average RoE compared to the 13 week Treasury bill rate + 15 per cent; and
none of the award will vest if RoE 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.
The Board and Committee consider that given current market conditions the stretch target represents exceptional and consistent cross cycle
out-performance above the Group’s stated strategic cross-cycle return of risk free plus 13 per cent. The target range closely aligns the longer
term remuneration of our Executive Directors with consistent out-performance and the interests of our shareholders, but is not so stretching as
to encourage excessive risk taking.
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Lancashire Holdings Limited | Annual Report & Accounts 2014
Lancashire Holdings Limited | Annual Report & Accounts 2014
TSR target for 2015 awards:
Lancashire’s TSR is compared against a comparator group comprising 11 peer companies as disclosed on page 75.
0 per cent will vest for a below median ranking;
25 per cent of the award will vest if Lancashire’s performance is at the median; and
100 per cent will vest for upper quartile and above performance.
vesting will be on a proportionate basis for performance between median and upper quartile.
Award levels
The CEO’s RSS award level is less than his predecessor’s. 2015 RSS award levels are as follows:
CEO – 244,208 shares (275 per cent of salary);
CFO – 168,149 shares (276 per cent of salary).
The number of shares awarded was determined based on the share price at 1 January 2015.
SINGLE FIGURE ON REMUNERATION
The following table presents the Executive Directors’ emoluments in U.S. Dollars in respect of the year ended 31 December 2014.
Executive Directors
Alex Maloney4,5, CEO
Elaine Whelan4, CFO
Richard Brindle4,8, Former CEO
Salary
$
Pension
$
Taxable
Benefits1,6
$
Annual Bonus7
$
Long-Term
Incentives
(RSS)2,3
$
2014
2013
2014
2013
2014
2013
675,181
453,534
518,117
499,865
368,576
1,110,226
78,573
86,830
51,500
50,000
36,858
111,023
9,620
1,115,918
1,205,919
13,279
1,366,703
4,065,805
95,738
772,390
474,119
107,913
1,158,675
1,399,685
7,127
1,180,355
4,690,533
644,914
6,928,363
29,476
3,541,067
5,383,381
–
10,175,173
Other9
$
–
–
–
–
Total4
$
3,085,211
5,986,151
1,911,864
3,216,138
(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 2014, the long-term incentive values are based on the 2012 RSS awards which vest at 50 per cent on 12 February 2015 and are based on a 3 year performance period that ended on 31 December 2014. The values are based
on the share price at 31 December 2014 and include the value of dividends accrued on vested shares.
(3) For 2013, the long-term incentive values are based on the 2011 RSS awards which vested at 100 per cent on 13 February 2014 and are based on a 3 year performance period that ended on 31 December 2013. The values include
dividends that have accrued on vested shares.
(4) Some amounts were paid in pounds sterling and converted at the average exchange rate for the year of 1.6544.
(5) Alex Maloney's base salary and pension reflect his UK salary sacrifice pension contributions arrangement and are calculated at 4 months in his post as CUO (at an annual rate of $515,000) and 8 months as CEO (at an annual
rate of $750,000).
(6) Elaine Whelan’s taxable benefits have been restated to reflect the Bermudian payroll tax and social insurance portion that she received in 2013 and 2014, which was paid by the Company and considered an employee benefit.
All employees in Bermuda are eligible for this benefit.
(7) For 2014 the Lancashire Group delivered solid results in a challenging market. Bonus targets were set at the beginning of 2014 and based on a clear split between Company financial performance and personal performance on a
75:25 (70:30 for the CFO in 2013) basis. Company financial performance had two components, absolute financial performance and relative financial performance weighted 60:40 respectively. The absolute component paid out
at 138.86 per cent of target as the warrant adjusted RoE was 14.7 per cent against a warrant adjusted budget of 9.9 per cent and the relative component is provisionally cited at 0 per cent pending the final audited results of
peer companies needed in order to calculate the final bonus payable. For the personal element of Executive Directors’ bonus opportunity the pay-out ranged from 86 per cent to 75 per cent of the maximum. For full details
of Executive Directors’ bonuses and the associated performance delivered see pages 70 and 71.
(8) Richard Brindle retired from the Group and as a Director on 30 April 2014. Mr Brindle was afforded good leaver status and all RSS award interests were agreed to vest upon his departure using estimated TSR and RoE values at
the time of his retirement. The amounts in the table above reflect all awards vesting in 2014. Further particulars of the vesting appear on page 72.
(9) For 2014 this includes all payments made to Mr Brindle in lieu of his six month notice period and converted at the exchange rate of 1.6885 as at 30 April 2014. Further particulars of the vesting appear on page 72.
NON-EXECUTIVE DIRECTORS’ FEES
Current Non-Executive Directors
Peter Clarke1
Emma Duncan
Simon Fraser
Samantha Hoe-Richardson
Martin Thomas
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
Fee
$
Other
$
Total
$
98,077
–
175,000
175,000
175,000
27,178
175,000
150,096
–
–
–
–
–
–
–
–
98,077
–
175,000
175,000
175,000
27,178
175,000
150,096
325,000
100,000
425,000
325,000
100,000
425,000
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www.lancashiregroup.com
69
69
GOVERNANCE
DIRECTORS’ REMUNERATION REPORT CONTINUED
NON-EXECUTIVE DIRECTORS’ FEES CONTINUED
Former Non-Executive Directors
John Bishop2
Neil McConachie2
Ralf Oelssner2
Robert Spass3
William Spiegel3
Fee
$
Other
$
58,333
175,000
58,333
175,000
–
–
–
–
Total
$
58,333
175,000
58,333
175,000
58,333
10,000
68,333
175,000
56,000
231,000
175,000
175,000
175,000
175,000
–
–
–
–
175,000
175,000
175,000
175,000
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
(1) Peter Clarke was appointed as a Non-Executive Director with effect from 9 June 2014.
(2) John Bishop, Neil McConachie, and Ralph Oelssner retired from the Board on 30 April 2014 and were not proposed for re-election at the 2014 AGM.
(3) Robert Spass and William Spiegel retired from the Board on 31 December 2014.
2015 ANNUAL BONUS PAYMENTS IN RESPECT OF 2014 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 is 150 per cent of salary for the current CEO (it was 175 per cent for the period between 1 January 2014 to 30 April
2014, during his time as Group CUO) and CFO respectively, and the maximum payable was two times the target value. The warrant adjusted
RoE is 14.7 per cent, which reflects the total impact of warrants of 0.8 per cent on the actual 2014 RoE of 13.9 per cent. In setting the annual
bonus RoE targets for 2014 the Committee agreed that the effect of warrant exercises should be excluded for annual bonus purposes due to
the large number of warrants outstanding and potential volatile impact on the annual bonus performance metrics.
FINANCIAL PERFORMANCE
75 per cent of the 2014 bonus was based on Company performance conditions and the extent to which they were achieved is as follows:
Performance Measures
Absolute RoE
Relative RoE
Total
Weighting
(of total Company
element of 75%)
%
60
40
Threshold
%
9
50
Target
%
12
N/A
Max
%
19
75
Actual
performance
%
14.7
0
100
(75 per cent of Total Bonus)
% vesting
138.86 of Target
0 of Target
83.3 of Target payable in respect
of Company performance
For 2014, the Lancashire Group delivered solid results in a challenging market. The absolute component paid out at 138.86 per cent of target as
the warrant adjusted RoE was 14.7 per cent against a warrant adjusted target of 9.9 per cent and the relative component against the results of
peer companies is provisionally stated below median (0 per cent pay out) pending the final audited results of peer companies needed in order
to calculate the final bonus payable.
PERSONAL PERFORMANCE
25 per cent of the 2014 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 2014 personal objectives for each Executive Director.
Executive Director
Personal Performance
Alex Maloney
Effective leadership and management of the senior executive team and Group.
Development of the general business strategy.
Contribution aligned to the Lancashire Values.
Elaine Whelan
Effective leadership and management of the finance function and the Bermuda office.
Development of the general business strategy.
Contribution aligned to the Lancashire Values.
70
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Lancashire Holdings Limited | Annual Report & Accounts 2014
Lancashire Holdings Limited | Annual Report & Accounts 2014
The personal targets were broadly common among the Executive Directors, with variances being attributable to the specifics of their respective
roles and the perceived need for areas of personal development within their fields of expertise to be emphasised.
During the 2014 annual performance reviews of each Executive Director, a performance rating was assigned to determine the level of bonus pay-
out each Executive Director was eligible for.
As expected for a solid performance year in a challenging market, the Executive Directors each achieved a high performance rating against
their objectives. For the 2014 performance against personal objectives the following ratings were determined, expressed as a percentage of the
maximum award for personal performance: CEO – 86 per cent, and CFO – 75 per cent.
A table of performance measures and total 2014 bonus achievement is set out below:
Executive Director
Alex Maloney3
Elaine Whelan
Richard Brindle4
Financial
performance
(max % of
total bonus)
%
Personal
performance
(max % of
total bonus)
%
Bonus
% of maximum
awarded
for 2014
%
Total1
bonus value
$
Value of bonus
paid in cash
(75 per cent of
total bonus)
$
Value of bonus
deferred into RSS
(25 per cent of
total bonus)2
$
75
75
75
25
25
25
53
50
77
1,115,918
836,938
278,980
772,390
579,292
193,098
1,180,355
1,180,355
0
(1) For 2014 the Lancashire Group delivered solid results in a challenging market. Bonus targets were set at the beginning of 2014 and based on a clear split between Company financial performance and personal performance on a
75:25 (70:30 for the CFO in 2013) basis. Company financial performance had two components, absolute financial performance and relative financial performance weighted 60:40 respectively. The absolute component paid
out at 138.86 per cent of target as the warrant adjusted RoE was 14.7 per cent against a warrant adjusted budget of 9.9 per cent and the relative component is provisionally cited at 0 per cent pending the final audited results
of peer companies needed in order to calculate the final bonus payable. For the personal element of Executive Directors’ bonus opportunity the pay-out ranged from 86 per cent to 75 per cent of the maximum. For full details
of Executive Directors’ bonuses and the associated performance delivered see page 70.
(2) 25 per cent of total bonus award will be deferred into Lancashire shares with one third vesting annually, each year, over a three-year period with the first third becoming exercisable in February 2016, subject to the Company
being in an ‘open period’. These awards vest on the relevant dates subject to continued employment only.
(3) Alex Maloney had a split role in 2014 and his bonus was calculated based on 4 months in his former role of CUO and 8 months of the year in his role as CEO.
(4) Richard Brindle retired from the Company effective 30 April 2014. Mr Brindle’s annual bonus award was evaluated at the time of his retirement, and his 2013 performance was used as a proxy for the calculation of the 2014
bonus element and pro-rated for his time in office. Mr Brindle’s total bonus payment was made in cash with no element deferred into RSS.
LONG-TERM SHARE AWARDS WITH PERFORMANCE PERIODS ENDING IN THE YEAR – 2012 RSS AWARD
The 2012 RSS awards are based on a three year performance period ending on 31 December 2014 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 50 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)
Average annual RoE
(over 3 years in excess of 13 Week Treasury Bill Rate)
Performance required
% vesting
Performance required (%)
% vesting
Below median
Median
Upper quartile or above
0
25
100
0
Below 6
6
15 or above
16.5
0
25
100
100
Details of the performance RSS awards granted on 28 February 2012 and 4 May 2012 with a performance period of 1 January 2012 – 31 December
2014 vesting for each Director, based on the above vesting, are shown in the table below:
Executive3
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
$
187,165
73,586
93,582
36,793
93,583
36,793
391,837
1,205,919
154,055
474,119
(1) The value of the vested shares is based on the share price on the date of vesting, being $8.69 (based on the exchange rate of 1.5534) on 31 December 2014. The vested awards are subject to the claw back provision set out
on page 65.
(2) Dividends accrue on awards at the 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.
(3) Details of Mr Brindle's award can be found in the Payments for Loss of Office section.
www.lancashiregroup.com
www.lancashiregroup.com
71
71
GOVERNANCE
DIRECTORS’ REMUNERATION REPORT CONTINUED
SCHEME INTERESTS AWARDED DURING THE YEAR
The table below sets out the performance RSS share awards that were granted as nil-cost options on 19 February 2014.
Executive
Alex Maloney
Elaine Whelan
Richard Brindle
Number of awards
granted during
the year
Grant Date2
Face value
of awards
granted during
the year1,3
$
% vesting
at threshold
performance
19 February 2014
124,333
1,523,328
19 February 2014
102,989
1,261,821
19 February 2014
207,938
2,547,656
25
25
25
(1) The share price on the date of performance awards grant was $12.25, when the RSS share 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 2016 and becoming exercisable after the meeting of the Board in February 2017.
(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
RETIREMENT ARRANGEMENTS FOR RICHARD BRINDLE
Richard Brindle retired from the Group as a Director on 30 April 2014 (the “departure date”), being the date his employment ceased and the
date he relinquished his Executive Director responsibilities, although restrictive covenants based on those in his service contracts remained in
effect. The details of Mr Brindle’s retirement arrangements are included in the section below, as previously set forth in the FAQs on the Company
website since 2 June 2014. As part of the terms of his retirement arrangements, Mr Brindle was paid the GBP equivalent (after the deduction
of income tax and employee's national insurance contributions) of:
$572,887 salary in lieu of his entitlement to six months' notice as specified in his employment contract.
$57,289 in respect of his entitlement to pension contribution during the notice period.
$14,738 in respect of his entitlement to benefits during the notice period.
$1,180,355 being the pro-rated bonus for the period he was employed in 2014. The bonus amount was calculated based on the Committee’s
assessment of the extent to which the performance targets had been met for which it used as a proxy Mr Brindle’s 2013 annual bonus
(which was then pro-rated to the period of the year under review worked). Mr Brindle did not receive a performance rating in 2014 as he
was no longer an Executive Director at the end of the evaluation period.
The Company also provided assistance with legal and advisor fees, paying the advisor firms directly. The amounts paid are below a de
minimis threshold.
Mr Brindle also held interests in RSS awards. As a retiring CEO and in recognition of Mr Brindle’s significant contribution as a founder of the
Company, the Remuneration Committee agreed that Mr Brindle should be treated as a good leaver and that awards should not be prorated for
time but should be subject to performance conditions, where relevant. Accordingly, and in line with the plan rules:
176,654 vested but unexercised RSS awards and vested but unexercised Deferred Bonus RSS awards were exercisable for 12 months following
his departure date.
132,643 unvested Deferred Bonus RSS awards were released in full on the departure date.
668,910 outstanding Performance RSS awards vested early on the departure date and were tested for performance at that date. The relative
TSR condition was measured up to the departure date and the RoE condition was based on the first quarter RoE for 2014 and projected for
the rest of that financial year. The future years of vesting conditions were based on the Company’s internal projected budget. Details of the
TSR and RoE targets for Performance RSS can be found on page 75. Accordingly, awards vested as follows:
– 120,132 vested under the 2012 award – 0 per cent for the TSR element, 100 per cent for RoE; overall vesting of 50 per cent
– 156,556 vested under the 2013 award – 0 per cent for the TSR element, 94.6 per cent for RoE; overall vesting of 70.9 per cent
– 129,442 vested under the 2014 award – 0 per cent for the TSR element, 83.0 per cent for RoE; overall vesting of 62.3 per cent
Dividend equivalents up to the departure date have accrued to Mr Brindle on vested awards.
72
72
Lancashire Holdings Limited | Annual Report & Accounts 2014
Lancashire Holdings Limited | Annual Report & Accounts 2014
LEAVING ARRANGEMENTS FOR NEIL MCCONACHIE
Neil McConachie was an Executive Director in 2012 until he resigned from his Executive Director position and remained in a Non-Executive
Director capacity with the Company. No awards were made to Mr McConachie in his capacity as a Non-Executive Director. At its meeting held
on 4 February 2014 the Remuneration Committee decided that in light of Mr McConachie’s decision to resign from the Board as a Non-Executive
Director at the 2014 AGM, it was appropriate to afford him ‘good leaver’ status for all vested and unvested RSS awards, subject to a non-compete
requirement, to vest on the usual vesting date with no pro-rata calculation applied. His fees for 2014 are disclosed on page 70 and he did not
receive any payment for loss of office.
OTHER LEAVING ARRANGEMENTS
John Bishop and Ralph Oelssner retired from the Board effective from the 2014 AGM and Robert Spass and William Spiegel retired from the
Board on 31 December 2014. Their fees are disclosed on page 70 and no retiring Non-Executive Director received any payment for loss of office.
DETAILS OF ALL OUTSTANDING SHARE AWARDS
In addition to awards made during the 2014 financial year, the table below sets out details of all outstanding RSS awards held by Directors.
PERFORMANCE AND DEFERRED BONUS AWARDS UNDER THE NIL-COST OPTION RESTRICTED SHARE SCHEME (RSS)
Grant date1
Exercise
price
Awards held
at 1-Jan-14
Awards
granted
during the
period
Awards vested
during the
period
Awards lapsed
during the
period
Awards
exercised
during the
period
Awards
held at
31-Dec-14
End of
performance
period
236,198
187,165
8,969
131,969
17,543
–
–
–
–
–
–
–
124,333
29,430
236,198
–
4,484
–
5,847
–
–
–
–
–
–
–
–
–
236,198
– 31-Dec-13
–
187,165 31-Dec-14
4,484
4,485
–
131,969 31-Dec-15
5,848
11,695
–
–
124,333 31-Dec-16
29,430
581,844
153,763
246,529
– 246,530
489,077
Alex Maloney, Group
CEO
Performance RSS
Performance RSS
Total
Elaine Whelan,
Group CFO
& LICL CEO
Deferred Bonus RSS5
Performance RSS
Deferred Bonus RSS5
Performance RSS
Deferred Bonus RSS5
Performance RSS
Performance RSS
Deferred Bonus RSS5
Performance RSS
Deferred Bonus RSS5
Performance RSS –
Interim
Performance RSS
Deferred Bonus RSS5
Performance RSS
Deferred Bonus RSS5
24-Feb-11
28-Feb-12
5-Mar-12
28-Feb-13
5-Mar-13
19-Feb-14
5-Mar-14
25-Mar-10
24-Feb-11
24-Feb-11
28-Feb-12
5-Mar-12
4-May-12
28-Feb-13
5-Mar-13
19-Feb-14
5-Mar-14
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
45,581
81,313
3,005
48,586
12,897
25,000
116,087
15,120
–
–
–
–
–
–
–
–
–
–
102,989
23,956
–
81,313
–
–
5,159
–
–
5,040
–
–
Total
347,589
126,945
91,512
–
–
–
–
–
–
–
–
–
–
–
45,581
81,313
3,005
– 31-Dec-12
– 31-Dec-13
–
–
48,586 31-Dec-14
7,738
5,159
–
25,000 31-Dec-14
–
116,087 31-Dec-15
5,040
10,080
–
–
102,989 31-Dec-16
23,956
142,677
331,857
www.lancashiregroup.com
www.lancashiregroup.com
73
73
GOVERNANCE
DIRECTORS’ REMUNERATION REPORT CONTINUED
PERFORMANCE AND DEFERRED BONUS AWARDS UNDER THE NIL-COST OPTION RESTRICTED SHARE SCHEME (RSS) CONTINUED
Former Directors
Richard Brindle6,
Former Group CEO
Performance RSS
Performance RSS7
Deferred Bonus RSS5
Performance RSS8
Deferred Bonus RSS5
Performance RSS9
Deferred Bonus RSS5
Performance RSS
Performance RSS
Deferred bonus RSS5
Deferred bonus RSS5
Neil McConachie10,
Former Non-Executive
Director
Grant date1
Exercise
price
Awards held
at 1-Jan-14
Awards
granted
during the
period
Awards vested
during the
period
Awards lapsed
during the
period
Awards
exercised
during the
period
Awards
held at
30-Apr-14
End of
performance
period
24-Feb-11
28-Feb-12
5-Mar-12
28-Feb-13
5-Mar-13
19-Feb-14
5-Mar-14
24-Feb-11
28-Feb-12
5-Mar-12
5-Mar-13
–
–
–
–
–
–
–
–
–
–
–
312,741
–
176,655
136,086 31-Dec-13
120,132
120,131
–
120,132 31-Dec-14
312,741
240,263
43,414
220,709
56,584
–
–
–
–
–
43,414
–
156,556
64,153
56,584
–
–
–
207,938
129,442
78,496
73,213
73,213
–
–
–
–
–
–
43,414
156,556 31-Dec-15
56,584
129,442
73,213
873,711
281,151
892,082
262,780
176,655
715,427
261,994
146,833
17,257
7,664
433,748
–
–
–
–
–
261,994
–
8,628
2,555
273,177
–
–
–
–
–
–
–
–
–
–
261,994 31-Dec-13
146,833 31-Dec-14
17,257
7,664
433,748
(1) The market values of the common shares on the dates of grant were:
(4) The vesting dates of the RSS mainstream awards are subject to being out of a close period and, for the
25 March 2010 £4.86
24 February 2011 £6.00
28 February 2012 £7.90
5 March 2012 £7.58
4 May 2012 £7.99
28 February 2013 £9.09
5 March 2013 £9.08
19 February 2014 £7.34
5 March 2014 £7.26
2010 to 2014 performance awards, are as follows:
2010 – 21 February 2013;
2011 – 13 February 2014;
2012 – 12 February 2015;
(2) The vesting of the RSS performance awards prior to 2013 grants is subject to two performance conditions as
2013 – first open period following the release of the Company’s 2015 year-end results; and
follows:
Half 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 75 for a list
of comparator companies for each grant year), over a three-year performance period. 25 per cent of this
half of the award vests for median performance by the Company, rising to 100 per cent vesting of this
half of the award for upper quartile performance by the Company or better (with proportionate vesting
between these two points).
The other half 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 half 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.
(3) The vesting of the RSS performance awards from 2013 grants forward is subject to two performance
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 75 for a list
of comparator companies for each grant year), over a three-year performance period. 25 per cent of this
half of the award vests for median performance by the Company, rising to 100 per cent vesting of this
half 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 half 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.
2014 – first open period following the release of the Company’s 2016 year-end results.
(5) The vesting dates of the RSS Deferred Bonus awards are subject to being out of a close period and, for the
2012 to 2014 Deferred Bonus awards, are as follows:
2012 – 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 2012, 2013 and 2014;
2013 – 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 2013, 2014 and 2015; and
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 2014, 2015 and 2016.
(6) Richard Brindle retired from the Group and as a Director on 30 April 2014. Mr Brindle was afforded good
leaver status and all RSS award interests were agreed to vest upon his departure using estimated TSR and
RoE values at the time of his retirement. The amounts in the table above reflect all awards vesting in 2014.
Further particulars of the vesting appear on page 72.
(7) Mr Brindle’s 2012 performance award was vested in line with the plan rules using estimated TSR and RoE
values at the time of his retirement. Vesting was based on 0 per cent vesting for the TSR element and 100
per cent for the RoE element; an overall vesting of 50 per cent.
(8) Mr Brindle’s 2013 performance award was vested in line with the plan rules using estimated TSR and RoE
values at the time of his retirement. Vesting was based on 0 per cent vesting for the TSR element and
94.6 per cent for the RoE element; an overall vesting of 70.9 per cent.
(9) Mr Brindle’s 2014 performance award was vested in line with the plan rules using estimated TSR and RoE
values at the time of his retirement. Vesting was based on 0 per cent vesting for the TSR element and
83 per cent for the RoE element; an overall vesting of 62.3 per cent.
(10) Neil McConachie was an Executive Director until 30 June 2012. No awards have been made to Mr
McConachie in his capacity as a Non-Executive Director. At its meeting held on 4 February 2014 the
Remuneration Committee decided that in light of Mr McConachie’s decision to resign from the Board
as a Non-Executive Director at the 2014 AGM, it was appropriate to afford him ‘good leaver’ status for
all vested and unvested RSS awards, subject to a non-compete requirement. Pro-ration remains subject
to a final determination by the Remuneration Committee.
74
74
Lancashire Holdings Limited | Annual Report & Accounts 2014
Lancashire Holdings Limited | Annual Report & Accounts 2014
DIRECTORS’ REMUNERATION REPORT CONTINUED
Former Directors
Grant date1
price
at 1-Jan-14
period
period
period
period
30-Apr-14
period
Exercise
Awards held
during the
during the
during the
Awards
granted
Awards vested
Awards lapsed
Awards
exercised
during the
Awards
held at
End of
performance
Richard Brindle6,
Performance RSS
Former Group CEO
Performance RSS7
Deferred Bonus RSS5
Performance RSS8
Deferred Bonus RSS5
Performance RSS9
Deferred Bonus RSS5
Neil McConachie10,
Performance RSS
Former Non-Executive
Performance RSS
Director
Deferred bonus RSS5
Deferred bonus RSS5
24-Feb-11
28-Feb-12
5-Mar-12
28-Feb-13
5-Mar-13
19-Feb-14
5-Mar-14
24-Feb-11
28-Feb-12
5-Mar-12
5-Mar-13
–
–
–
–
–
–
–
–
–
–
–
312,741
240,263
43,414
220,709
56,584
–
–
261,994
146,833
17,257
7,664
433,748
207,938
129,442
78,496
73,213
73,213
873,711
281,151
892,082
262,780
176,655
715,427
–
–
–
–
–
–
–
–
–
–
43,414
56,584
261,994
–
8,628
2,555
273,177
312,741
–
176,655
136,086 31-Dec-13
120,132
120,131
–
120,132 31-Dec-14
156,556
64,153
156,556 31-Dec-15
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
43,414
56,584
129,442
73,213
261,994 31-Dec-13
146,833 31-Dec-14
17,257
7,664
433,748
(1) The market values of the common shares on the dates of grant were:
(4) The vesting dates of the RSS mainstream awards are subject to being out of a close period and, for the
25 March 2010 £4.86
24 February 2011 £6.00
28 February 2012 £7.90
5 March 2012 £7.58
4 May 2012 £7.99
28 February 2013 £9.09
5 March 2013 £9.08
19 February 2014 £7.34
5 March 2014 £7.26
2010 to 2014 performance awards, are as follows:
2010 – 21 February 2013;
2011 – 13 February 2014;
2012 – 12 February 2015;
(2) The vesting of the RSS performance awards prior to 2013 grants is subject to two performance conditions as
2013 – first open period following the release of the Company’s 2015 year-end results; and
follows:
Half 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 75 for a list
of comparator companies for each grant year), over a three-year performance period. 25 per cent of this
half of the award vests for median performance by the Company, rising to 100 per cent vesting of this
half of the award for upper quartile performance by the Company or better (with proportionate vesting
between these two points).
The other half 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 half 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
2014 – first open period following the release of the Company’s 2016 year-end results.
(5) The vesting dates of the RSS Deferred Bonus awards are subject to being out of a close period and, for the
2012 to 2014 Deferred Bonus awards, are as follows:
2012 – 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 2012, 2013 and 2014;
2013 – 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 2013, 2014 and 2015; and
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 2014, 2015 and 2016.
award will vest if the Company’s average RoE is equal to the more stringent criteria set out in the table
(6) Richard Brindle retired from the Group and as a Director on 30 April 2014. Mr Brindle was afforded good
on page 75. Between these two points vesting will take place on a straight-line basis from 25 per cent to
leaver status and all RSS award interests were agreed to vest upon his departure using estimated TSR and
100 per cent for RoE performance.
RoE values at the time of his retirement. The amounts in the table above reflect all awards vesting in 2014.
(3) The vesting of the RSS performance awards from 2013 grants forward is subject to two performance
Further particulars of the vesting appear on page 72.
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 75 for a list
(7) Mr Brindle’s 2012 performance award was vested in line with the plan rules using estimated TSR and RoE
values at the time of his retirement. Vesting was based on 0 per cent vesting for the TSR element and 100
per cent for the RoE element; an overall vesting of 50 per cent.
of comparator companies for each grant year), over a three-year performance period. 25 per cent of this
(8) Mr Brindle’s 2013 performance award was vested in line with the plan rules using estimated TSR and RoE
half of the award vests for median performance by the Company, rising to 100 per cent vesting of this
values at the time of his retirement. Vesting was based on 0 per cent vesting for the TSR element and
half of the award for upper quartile performance by the Company or better (with proportionate vesting
94.6 per cent for the RoE element; an overall vesting of 70.9 per cent.
between these two points).
(9) Mr Brindle’s 2014 performance award was vested in line with the plan rules using estimated TSR and RoE
The other 75 per cent of each award is subject to a performance condition based on average annual RoE
values at the time of his retirement. Vesting was based on 0 per cent vesting for the TSR element and
over a three-year performance period. 25 per cent of this half of the award will vest if average annual
83 per cent for the RoE element; an overall vesting of 62.3 per cent.
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.
(10) Neil McConachie was an Executive Director until 30 June 2012. No awards have been made to Mr
McConachie in his capacity as a Non-Executive Director. At its meeting held on 4 February 2014 the
Remuneration Committee decided that in light of Mr McConachie’s decision to resign from the Board
as a Non-Executive Director at the 2014 AGM, it was appropriate to afford him ‘good leaver’ status for
all vested and unvested RSS awards, subject to a non-compete requirement. Pro-ration remains subject
to a final determination by the Remuneration Committee.
74
Lancashire Holdings Limited | Annual Report & Accounts 2014
PERFORMANCE AND DEFERRED BONUS AWARDS UNDER THE NIL-COST OPTION RESTRICTED SHARE SCHEME (RSS) CONTINUED
TSR TARGETS FOR RSS
100%
25%
Nil
ROE TARGETS FOR RSS
100%
25%
Nil
2011
2012
2013*
2014*
2015*
75th percentile
75th percentile
75th percentile
75th percentile
75th percentile
= median
< median
= median
< median
= median
< median
= median
< median
= median
< median
2011
2012
2013*
2014*
2015*
13 week Tr + 15%
13 week Tr + 15%
13 week Tr +15%
13 week Tr +15%
13 week Tr +15%
13 week Tr + 6%
13 week Tr + 6%
13 week Tr + 6%
13 week Tr + 6%
13 week Tr + 6%
<13 week Tr + 6% <13 week Tr + 6% <13 week Tr + 6%
<13 week Tr + 6%
<13 week Tr + 6%
* From 2013 onwards the split of targets has changed from 50 per cent RoE / 50 per cent TSR to 75 per cent RoE and 25 per cent TSR.
Peer Companies
Amlin plc
Argo Limited1
Aspen Insurance Holdings Limited
Axis Capital Holdings Limited
Beazley plc
Catlin Group Ltd.
Endurance Specialty Holdings Ltd.
Flagstone Reinsurance Holdings Limited2
Hiscox Ltd.
Montpelier Re Holdings Ltd.
Renaissance Re Holdings Ltd.
Validus Holdings Ltd.
2011 awards
2012 awards
2013 awards
2014 awards
2015 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
X
X
X
X
X
X
X
(1) Argo was used as a comparator company from the fourth quarter of 2012.
(2) Flagstone was acquired by Validus with effect from 30 November 2012 and so was used as a comparator company for 2012 up to 30 September 2012.
DIRECTORS' SHAREHOLDINGS AND SHARE INTERESTS
A policy for formal shareholding guidelines was introduced in 2012. This requires the CEO to build and maintain a shareholding in the Company
worth two-times annual salary and for the CFO to build and maintain a shareholding of one times annual salary as set out in the Policy Report.
Details of the Directors' interests in shares are shown in the table below.
Director
Alex Maloney
Elaine Whelan
Peter Clarke
Emma Duncan
Simon Fraser
Samantha Hoe-Richardson
Robert Spass
William Spiegel
Martin Thomas
At 1 January 2014
At 31 December 2014
Number of Ordinary Shares
Legally owned
Legally owned
Subject to
deferral
under the RSS
Subject to
performance
conditions
under the RSS
Vested but
unexercised
awards under
other share
based plans
191,415
94,225
321,841
233,820
45,610
39,195
443,467
292,662
–
–
–
3,947
153,679
–
6,950
–
–
–
3,947
–
–
6,950
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
–
–
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Total
810,918
565,677
–
–
–
3,947
–
–
6,950
Shareholding
guideline
achieved?
Yes
Yes
N/A
N/A
N/A
N/A
N/A
N/A
N/A
www.lancashiregroup.com
www.lancashiregroup.com
75
75
GOVERNANCE
DIRECTORS’ REMUNERATION REPORT CONTINUED
Former Director
John Bishop2
Richard Brindle2
Neil McConachie2
Ralf Oelssner2
At 1 January 2014
Legally owned
Legally owned
–
–
858,022
858,022
–
–
–
–
Number of Ordinary Shares
At 30 April 2014
Subject to
deferral
under the RSS
Subject to
performance
conditions
under the RSS3
Vested but
unexercised
awards under
other share
based plans
N/A
173,211
24,921
N/A
N/A
N/A
542,216
6,413,442
7,986,891
408,827
N/A
–
433,748
N/A
–
Total
–
Shareholding
guideline
achieved?
N/A
Yes
N/A
N/A
(1) For the purpose of the shareholding guideline, legally owned shares are counted together with the net of tax value of deferred bonus and vested (but unexercised) long-term incentive awards.
(2) Richard Brindle retired from the Group and as a Director and John Bishop, Neil McConachie and Ralph Oelssner retired as Non-Executive Directors on 30 April 2014, therefore legal ownership of shares has only been tracked
and reported for the relevant period.
(3) The awards for Richard Brindle reflect the performance conditions that were applied at the time of his retirement. Further details of the vesting can be found on page 72.
Warrants over the Company's shares were awarded to the Company's founders and management prior to the admission of the Company's
shares to trading on AIM. Details of the Former CEO’s awards, which were granted on 16 December 2005, are set out as below. Other Executive
Directors had exercised their warrants prior to 2012.
Richard Brindle’s Warrants held at 1 January 20142
Warrants
exercised during
the period
Warrants
sold during
the period
Warrants held at
30 April
2014
Exercise price
$
Date from
which first
exercisable1
Expiry date
46,260
3,718,912
288,843
1,906,305
47,155
405,967
6,413,442
–
–
–
–
–
–
–
–
–
–
–
–
46,260
3,718,912
288,843
1,906,305
47,155
405,967
6,413,442
5.00
5.00
5.00
3.90
3.90
2.60
16 Dec 2005
16 Dec 2015
16 Dec 2005
16 Dec 2015
31 Dec 2007
16 Dec 2015
16 Dec 2008
16 Dec 2015
31 Dec 2008
16 Dec 2015
31 Dec 2009
16 Dec 2015
(1) There is a contractual obligation to make a dividend equivalent payment on each vested warrant. The value of dividend equivalents paid in respect of the above warrants to Richard Brindle in 2014 was £1,165,727
(2013 – £6,822,340).
(2) The market value of the common shares on 16 December 2005, the date of warrant grant, was £3.21.
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
£
400
350
300
250
200
150
100
50
0
2008
2009
2010
2011
2012
2013
2014
LRE
FTSE 250 Index
Source: Thomson Reuters
76
76
Lancashire Holdings Limited | Annual Report & Accounts 2014
Lancashire Holdings Limited | Annual Report & Accounts 2014
DIRECTORS’ REMUNERATION REPORT CONTINUED
Former Director
John Bishop2
Richard Brindle2
Neil McConachie2
Ralf Oelssner2
At 1 January 2014
Legally owned
Legally owned
under the RSS
Number of Ordinary Shares
At 30 April 2014
Subject to
performance
conditions
under the RSS3
Vested but
unexercised
awards under
other share
based plans
N/A
N/A
858,022
858,022
542,216
6,413,442
7,986,891
408,827
N/A
–
433,748
N/A
Subject to
deferral
N/A
173,211
24,921
N/A
–
–
–
Shareholding
guideline
achieved?
Total
–
–
N/A
Yes
N/A
N/A
(1) For the purpose of the shareholding guideline, legally owned shares are counted together with the net of tax value of deferred bonus and vested (but unexercised) long-term incentive awards.
(2) Richard Brindle retired from the Group and as a Director and John Bishop, Neil McConachie and Ralph Oelssner retired as Non-Executive Directors on 30 April 2014, therefore legal ownership of shares has only been tracked
and reported for the relevant period.
(3) The awards for Richard Brindle reflect the performance conditions that were applied at the time of his retirement. Further details of the vesting can be found on page 72.
Warrants over the Company's shares were awarded to the Company's founders and management prior to the admission of the Company's
shares to trading on AIM. Details of the Former CEO’s awards, which were granted on 16 December 2005, are set out as below. Other Executive
Directors had exercised their warrants prior to 2012.
Richard Brindle’s Warrants held at 1 January 20142
Warrants
exercised during
the period
Warrants
sold during
the period
Exercise price
Date from
which first
exercisable1
Expiry date
46,260
3,718,912
288,843
1,906,305
47,155
405,967
6,413,442
Warrants held at
30 April
2014
46,260
3,718,912
288,843
1,906,305
47,155
405,967
6,413,442
–
–
–
–
–
–
$
5.00
5.00
5.00
3.90
3.90
2.60
16 Dec 2005
16 Dec 2015
16 Dec 2005
16 Dec 2015
31 Dec 2007
16 Dec 2015
16 Dec 2008
16 Dec 2015
31 Dec 2008
16 Dec 2015
31 Dec 2009
16 Dec 2015
(1) There is a contractual obligation to make a dividend equivalent payment on each vested warrant. The value of dividend equivalents paid in respect of the above warrants to Richard Brindle in 2014 was £1,165,727
(2013 – £6,822,340).
(2) The market value of the common shares on 16 December 2005, the date of warrant grant, was £3.21.
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.
–
–
–
–
–
–
–
–
–
This graph shows the value, by 31 December 2014, of £100 invested in Lancashire Holdings Limited 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.
TOTAL REMUNERATION HISTORY FOR CEO
The table below sets out the total single figure remuneration for the CEOs over the last six years with the annual bonus paid as a percentage of the
maximum and the percentage of long-term share awards vesting in the year. It should be noted that the current CEO was appointed 1 May 2014.
Total remuneration ($000s)
Annual bonus (%)
LTI vesting (%)
2009
7,244
68
N/A
2010
9,945
94
99.57
2011
9,623
73
100
2012
10,460
73
99
2013
10,175
80
100
Richard Brindle
20141
Alex Maloney
20142
9,391
80
613
2,169
53
50
(1) Richard Brindle 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.
(3) Mr Brindle was afforded good leaver status and all RSS award interests were agreed to vest upon his departure, using estimated TSR and RoE values at the time of his retirement. The amounts in the table above reflect all
awards vesting in 2014. Further particulars of the vesting appear on page 72.
The table above shows the total remuneration figure for the former CEO during each of those financial years; the current CEO is reflected for
the current year only, from 1 May 2014, being the only year he has held the post to-date. 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 pay-out 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 Chief Executive from the preceding
year and the average percentage change in respect of the employees of the Company taken as a whole.
Base salary
Benefits3
Bonus
Year on
year change
CEO1
%
Average year
on year change
employees2
%
-22
-29
-44
-22
-70
-16
(1) A blended CEO rate is used for 2014 to account for CEO changes through the year.
(2) Employee numbers were calculated on a per head count basis as at 31 December 2013 and 31 December 2014. 2013 annual costs include the Lloyd’s segment of the Company’s costs from 7 November 2013 only, the date
the acquisition of Cathedral completed.
(3) Fluctuations in foreign exchange rates and the Company’s share price have attributed to the decrease in benefit costs in 2014, specifically to payroll taxes on equity compensation.
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 ending 31 December 2014 compared to the year
ending 31 December 2013. The increase in employee remuneration costs is mainly attributed to inclusion of Cathedral employee remuneration costs
being reported for the full year of 2014.
Employee remuneration costs
Dividends
2014
$m1
77.4
321.0
2013
$m
59.4
325.6
Percentage
change
%
30.3
-1.4
(1) The total employee remuneration costs for 2013 includes the Lloyd’s segment of the Company’s costs from 7 November 2013, the date the acquisition of Cathedral completed.
76
Lancashire Holdings Limited | Annual Report & Accounts 2014
www.lancashiregroup.com
www.lancashiregroup.com
77
77
GOVERNANCE
DIRECTORS’ REMUNERATION REPORT CONTINUED
COMMITTEE MEMBERS, ATTENDEES AND ADVICE
The Remuneration Committee comprised the following members during the year and to the date of this Report (all of whom are independent
Non-Executive Directors):
Remuneration Committee Members
Position
Comments
Simon Fraser
Peter Clarke
Emma Duncan
Former Members
Ralf Oelssner
William Spiegel
(1) See note 7 on page 50.
LHL Remuneration Committee Chairman
Independent; Attended 6 of a potential maximum meetings of 6 in 2014
Member from 4 November 2014
Independent; No meetings held subsequent to appointment
Member from 5 November 2010
Independent; Attended 6 of a potential maximum meetings of 6 in 2014
Retired from Committee 30 April 2014
Independent; Attended 0 of a potential maximum meetings of 4 in 20141
Retired from Committee 31 December 2014
Independent; Attended 5 of a potential maximum meetings of 6 in 2014
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 to Aon Hewitt) provides reinsurance broking services to Lancashire.
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 ending 31 December 2014 were $160,691 (2013 – $174,004).
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 and the Remuneration Policy are shown below and
any matters discussed with shareholders during the year are provided in the Implementation Report starting on page 67.
Vote to approve Directors’
Remuneration Policy
Vote to approve Annual Report
on Remuneration
Total number
of votes
% of
votes cast
Total number
of votes
% of
votes cast
132,963,855
90.1
102,131,849
14,530,236
9.9 44,035,683
147,494,091
100.0
146,167,532
554,388
1,880,947
69.9
30.1
100.0
For
Against
Total
Abstentions
Approved by the Board of Directors and signed on behalf of the Board
SIMON FRASER
LHL REMUNERATION COMMITTEE CHAIRMAN
11 February 2015
78
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Lancashire Holdings Limited | Annual Report & Accounts 2014
Lancashire Holdings Limited | Annual Report & Accounts 2014
DIRECTORS’ REPORT
OVERVIEW OF THE GROUP
Lancashire Holdings Limited (the Company) is a Bermuda incorporated company with operating subsidiaries in Bermuda, London and 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 Cathedral Capital Limited, an established Lloyd’s insurer, and in July 2013 set
up Kinesis, a third-party capital and underwriting management facility, to complement Lancashire’s longstanding specialty insurance activities.
An analysis of the Group’s business performance can be found in the Business review on pages 24 to 32.
DIVIDENDS
For the year ended 31 December 2014, the following dividends were declared:
an interim dividend of $0.05 per common share and warrant was declared on 23 July 2014 and paid on 24 September 2014 in pounds sterling
at the pound/U.S. dollar exchange rate of 1.6592 or £0.0301 per common share and warrant;
a special dividend of $1.20 per common share and warrant was declared on 4 November 2014 and paid on 19 December 2014 in pounds
sterling at the pound/U.S. dollar exchange rate of 1.5705 or £0.7641 per common share and warrant;
a final dividend of $0.10 per common share and warrant was declared on 11 February 2015; and
an additional special dividend of $0.50 per common share and warrant was declared on 11 February 2015.
Both the final dividend and the additional special dividend are to be paid on 15 April 2015 in pounds sterling at the pound/U.S. dollar
exchange rate on the record date of 20 March 2015 or approximately £0.39 in the aggregate, per common share and warrant.
DIVIDEND POLICY
Lancashire 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.
DIRECTORS
CURRENT DIRECTORS
Peter Clarke (Non-Executive Director) (appointed effective 9 June 2014)
Emma Duncan (Non-Executive Director)
Simon Fraser (Senior Independent Non-Executive Director) (appointed SID effective 30 April 2014)
Samantha Hoe-Richardson (Non-Executive Director)
Alex Maloney (Chief Executive Officer) (appointed CEO effective 30 April 2014)
Tom Milligan (Non-Executive Director) (appointed effective 3 February 2015)
Martin Thomas (Non-Executive Chairman)
Elaine Whelan (Chief Financial Officer)
DIRECTORS WHO RETIRED DURING THE YEAR
John Bishop (Non-Executive Director) (retired effective 30 April 2014)
Richard Brindle (Chief Executive Officer) (retired effective 30 April 2014)
Neil McConachie (Non-Executive Director) (retired effective 30 April 2014)
Ralf Oelssner (Senior Independent Non-Executive Director) (retired effective 30 April 2014)
Robert Spass (Non-Executive Director) (retired effective 1 January 2015)
William Spiegel (Non-Executive Director) (retired effective 1 January 2015)
www.lancashiregroup.com
www.lancashiregroup.com
79
79
GOVERNANCE
DIRECTORS’ REPORT CONTINUED
DIRECTORS’ INTERESTS
The Directors’ beneficial interests in the Company’s common shares as at 31 December 2014 and 2013 including interests held by family members
were as follows:
Details of the Directors’ remuneration are set out in the Directors’ Remuneration Report on pages 61 to 78.
Director
Peter Clarke
Emma Duncan
Simon Fraser
Samantha Hoe-Richardson
Alex Maloney1
Martin Thomas
Elaine Whelan2
Former Director
John Bishop
Richard Brindle3
Neil McConachie
Ralf Oelssner
Robert Spass4
William Spiegel
Common shares
held at
31 December 2014
Common shares
held at
31 December 2013
–
–
–
3,947
321,841
6,950
233,820
N/A
N/A
N/A
N/A
–
–
–
–
–
3,947
191,415
6,950
94,225
–
858,022
–
–
153,679
–
There have been no changes in Directors’ shareholdings between the end of the financial year and the date of this Report.
(1) Includes 100,000 shares owned by his spouse, Amanda Maloney. Alex Maloney conducted the following transactions in the Company’s shares during 2014:
7 May – exercise of 236,198 RSS awards and 10,332 deferred bonus RSS awards and related sale of 116,104 shares to cover tax liabilities, at a price of £6.68 realising £775,269.
(2) Includes 2,600 shares owned by her spouse, Kilian Whelan. Elaine Whelan conducted the following transactions in the Company’s shares during 2014:
7 May – exercise of 126,894 RSS awards and 15,783 deferred bonus RSS awards and related sale of 3,082 shares to cover tax liabilities, at a price of £6.68 realising £20,580.
(3) Richard Brindle conducted the following transactions in the Company’s shares during 2014, prior to his retirement:
13 February – exercise of 176,655 RSS awards and subsequent sale of 176,655 shares at a price of £7.29 realising £1,287,902.
(4) Robert Spass conducted the following transactions in the Company’s shares during 2014:
24/25 February – sold 153,679 shares at a price of $12.11 realising $1,860,385;
6 May – cashless exercise of 150,000 Founder warrants resulting in the acquisition of 85,536 shares; and
14 May – sold 85,536 shares at a price of £6.62 realising £566,077.
Two former Directors held warrants over the Company’s shares which were awarded prior to the Company’s admission to AIM in December
2005 along with other warrants awarded to the Company’s founders and employees. At the time of his retirement on 31 December 2014 Robert
Spass was the beneficial owner of 410,000 Founder warrants. Richard Brindle also held warrants at the time of his retirement on 30 April 2014
and further details of the Executive Directors’ warrants are included in the Directors’ Remuneration Report on page 76.
In November 2014, Richard Brindle sold the entirety of his 5.5 per cent shareholding in KCML to LHL and other existing KCML shareholders
pursuant to the terms of the KCML subscripted shareholders’ agreement. At the same time, Alex Maloney increased his shareholding in KCML
from 1.1 per cent to 1.2 per cent. Following the transaction LHL owns 92.7 per cent of KCML, with the balance of the shares owned by senior
Lancashire and KCML employees.
TRANSACTION IN OWN SHARES
The Company repurchased 2,498,433 of its own common shares from 8 September 2014 through 20 November 2014 for a total consideration
of approximately $25.0 million. These repurchases were made pursuant to resolutions of the shareholders passed at the AGM held on 30 April
2014 granting authority for the repurchase of up to 18,544,580 shares. All of the repurchased shares were initially held in treasury.
The Group’s current repurchase programme has 16,046,147 common shares remaining to be purchased at 31 December 2014 (approximately
$139.6 million at the 31 December 2014 share price). The purpose of the Company’s repurchase programme is to acquire shares to use in the
future towards satisfying its obligations under both its RSS awards and the Company's warrants. The shares repurchased have been held as
treasury shares. Further details of the share repurchase authority and programme are set out in note 23 to the consolidated financial statements
on page 153. The repurchase programme is subject to renewal at the 2015 AGM in an amount of up to 10 per cent of the then issued common
share capital.
The Company did not repurchase any of its own common shares during 2013.
80
80
Lancashire Holdings Limited | Annual Report & Accounts 2014
Lancashire Holdings Limited | Annual Report & Accounts 2014
DIRECTORS’ REMUNERATION
SUBSTANTIAL SHAREHOLDERS
Name
Invesco Limited
Setanta Asset Management Limited
Woodford Investment Management LLP
Legal & General Group Plc
Franklin Mutual Advisers, LLC
Standard Life Investments (Holdings) Limited
Alken Luxembourg S.A.
BlackRock, Inc.
the Code.
DONATIONS
in respect of 2014.
As at 11 February 2015, the Company was aware of the following interests of 3 per cent or more in the Company’s issued share capital:
Number of
shares as at
11 February
2015
27,364,567
15,225,288
13,286,694
10,457,693
9,772,203
8,655,337
6,632,554
6,279,133
% of shares
in issue
14.4
8.0
7.0
5.5
5.2
4.6
3.5
3.3
CORPORATE GOVERNANCE – COMPLIANCE STATEMENT
The Company’s compliance with the Code is summarised in the Corporate Governance section of this Report on pages 49 to 51.
The Company confirms, in accordance with the principle of ‘comply or explain’, that there are no areas of material non-compliance with
In November 2013, the Board of Directors approved a cash donation of $2,000,000 (2013 – $1,400,000) to the Lancashire Foundation, payable
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, one former employee, a subsidiary non-executive director and the Group Chairman. The Trustees make donations
following recommendations made by the Company’s Donations Committee consisting of the Group’s employees.
A summary of the work of the Lancashire Foundation during 2014 can be found in the Corporate Responsibility section on pages 38 to 41.
The Group did not make any political donations or expenditure during 2014 or 2013.
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 pages 39 to 40.
EMPLOYEES
Lancashire is an equal opportunity employer, and does not tolerate unfair discrimination 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 are available to all employees in
the staff handbook which is available on the Group’s intranet.
CREDITOR PAYMENT POLICY
The Group aims to pay all creditors promptly and in accordance with contractual and legal obligations.
www.lancashiregroup.com
81
DIRECTORS’ REPORT CONTINUED
Samantha Hoe-Richardson
were as follows:
Director
Peter Clarke
Emma Duncan
Simon Fraser
Alex Maloney1
Martin Thomas
Elaine Whelan2
Former Director
John Bishop
Richard Brindle3
Neil McConachie
Ralf Oelssner
Robert Spass4
William Spiegel
–
–
–
3,947
321,841
6,950
233,820
N/A
N/A
N/A
N/A
–
–
–
–
–
–
–
–
–
3,947
191,415
6,950
94,225
858,022
153,679
There have been no changes in Directors’ shareholdings between the end of the financial year and the date of this Report.
(1) Includes 100,000 shares owned by his spouse, Amanda Maloney. Alex Maloney conducted the following transactions in the Company’s shares during 2014:
7 May – exercise of 236,198 RSS awards and 10,332 deferred bonus RSS awards and related sale of 116,104 shares to cover tax liabilities, at a price of £6.68 realising £775,269.
(2) Includes 2,600 shares owned by her spouse, Kilian Whelan. Elaine Whelan conducted the following transactions in the Company’s shares during 2014:
7 May – exercise of 126,894 RSS awards and 15,783 deferred bonus RSS awards and related sale of 3,082 shares to cover tax liabilities, at a price of £6.68 realising £20,580.
(3) Richard Brindle conducted the following transactions in the Company’s shares during 2014, prior to his retirement:
13 February – exercise of 176,655 RSS awards and subsequent sale of 176,655 shares at a price of £7.29 realising £1,287,902.
(4) Robert Spass conducted the following transactions in the Company’s shares during 2014:
24/25 February – sold 153,679 shares at a price of $12.11 realising $1,860,385;
6 May – cashless exercise of 150,000 Founder warrants resulting in the acquisition of 85,536 shares; and
14 May – sold 85,536 shares at a price of £6.62 realising £566,077.
Two former Directors held warrants over the Company’s shares which were awarded prior to the Company’s admission to AIM in December
2005 along with other warrants awarded to the Company’s founders and employees. At the time of his retirement on 31 December 2014 Robert
Spass was the beneficial owner of 410,000 Founder warrants. Richard Brindle also held warrants at the time of his retirement on 30 April 2014
and further details of the Executive Directors’ warrants are included in the Directors’ Remuneration Report on page 76.
In November 2014, Richard Brindle sold the entirety of his 5.5 per cent shareholding in KCML to LHL and other existing KCML shareholders
pursuant to the terms of the KCML subscripted shareholders’ agreement. At the same time, Alex Maloney increased his shareholding in KCML
from 1.1 per cent to 1.2 per cent. Following the transaction LHL owns 92.7 per cent of KCML, with the balance of the shares owned by senior
Lancashire and KCML employees.
TRANSACTION IN OWN SHARES
The Company repurchased 2,498,433 of its own common shares from 8 September 2014 through 20 November 2014 for a total consideration
of approximately $25.0 million. These repurchases were made pursuant to resolutions of the shareholders passed at the AGM held on 30 April
2014 granting authority for the repurchase of up to 18,544,580 shares. All of the repurchased shares were initially held in treasury.
The Group’s current repurchase programme has 16,046,147 common shares remaining to be purchased at 31 December 2014 (approximately
$139.6 million at the 31 December 2014 share price). The purpose of the Company’s repurchase programme is to acquire shares to use in the
future towards satisfying its obligations under both its RSS awards and the Company's warrants. The shares repurchased have been held as
treasury shares. Further details of the share repurchase authority and programme are set out in note 23 to the consolidated financial statements
on page 153. The repurchase programme is subject to renewal at the 2015 AGM in an amount of up to 10 per cent of the then issued common
share capital.
The Company did not repurchase any of its own common shares during 2013.
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Lancashire Holdings Limited | Annual Report & Accounts 2014
DIRECTORS’ INTERESTS
The Directors’ beneficial interests in the Company’s common shares as at 31 December 2014 and 2013 including interests held by family members
DIRECTORS’ REMUNERATION
Details of the Directors’ remuneration are set out in the Directors’ Remuneration Report on pages 61 to 78.
Common shares
Common shares
held at
held at
31 December 2014
31 December 2013
SUBSTANTIAL SHAREHOLDERS
As at 11 February 2015, 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
Woodford Investment Management LLP
Legal & General Group Plc
Franklin Mutual Advisers, LLC
Standard Life Investments (Holdings) Limited
Alken Luxembourg S.A.
BlackRock, Inc.
Number of
shares as at
11 February
2015
27,364,567
15,225,288
13,286,694
10,457,693
9,772,203
8,655,337
6,632,554
6,279,133
% of shares
in issue
14.4
8.0
7.0
5.5
5.2
4.6
3.5
3.3
CORPORATE GOVERNANCE – COMPLIANCE STATEMENT
The Company’s compliance with the Code is summarised in the Corporate Governance section of this Report on pages 49 to 51.
The Company confirms, in accordance with the principle of ‘comply or explain’, that there are no areas of material non-compliance with
the Code.
DONATIONS
In November 2013, the Board of Directors approved a cash donation of $2,000,000 (2013 – $1,400,000) to the Lancashire Foundation, payable
in respect of 2014.
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, one former employee, a subsidiary non-executive director and the Group Chairman. The Trustees make donations
following recommendations made by the Company’s Donations Committee consisting of the Group’s employees.
A summary of the work of the Lancashire Foundation during 2014 can be found in the Corporate Responsibility section on pages 38 to 41.
The Group did not make any political donations or expenditure during 2014 or 2013.
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 pages 39 to 40.
EMPLOYEES
Lancashire is an equal opportunity employer, and does not tolerate unfair discrimination 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 are available to all employees in
the staff handbook which is available on the Group’s intranet.
CREDITOR PAYMENT POLICY
The Group aims to pay all creditors promptly and in accordance with contractual and legal obligations.
www.lancashiregroup.com
www.lancashiregroup.com
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GOVERNANCE
DIRECTORS’ REPORT CONTINUED
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
FINANCIAL INSTRUMENTS AND RISK EXPOSURES
Information regarding the Group’s risk exposure is included in the risk disclosures section on pages 100 to 126 of the consolidated financial
statements. The Group’s use of derivative financial instruments can be found on pages 115 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 the measurement of insurance products, the IFRS framework allows
reference to another comprehensive body of accounting principles. In such instances, the Board 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 2015 AGM, to be held on 29 April 2015 at the Company’s head office, 29th Floor, 20 Fenchurch Street, London EC3M 3BY,
UK, is contained in a separate circular to shareholders enclosed with 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 32 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 Lancashire can be found on pages 36
to 37. Starting on page 100 the risk disclosures section of the consolidated financial statements set out the principal risks the Group is exposed
to, 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. The three-year strategic plan was last approved by the Board on 30 April 2014. The Board receives
quarterly reports from the Chief Risk Officer and sets and approves risk tolerances for the business.
During 2014, 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. 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 2016, being the period considered under the Group’s current three-year strategic plan.
After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue its operational existence
for the foreseeable future and for a period of at least twelve months from the date of this report. Accordingly, the Board continues to adopt and
consider appropriate the going concern basis in preparing the Annual Report and Accounts.
AUDITORS
Resolutions will be proposed at the Company’s 2015 AGM to re-appoint Ernst & Young LLP as the Company’s auditors and to authorise
the Directors to set the auditors’ remuneration. Ernst & Young have served as the Company’s auditors since 2005.
The Company plans to perform an audit tender process during 2016 and to recommend an auditor to the shareholders to vote on at the
2017 AGM.
DISCLOSURE OF INFORMATION TO THE AUDITORS
Each of the persons who is a Director at the date of approval of this Annual Report 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
11 February 2015
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Lancashire Holdings Limited | Annual Report & Accounts 2014
The Directors are responsible for preparing the Annual Report 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 Company and the Group and of the profit or loss of the Group for that period. The consolidated financial statements have been prepared in
accordance with IFRS. Where IFRS is silent, as it is in respect of 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 Company and
the Group will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s and the Group’s
transactions and disclose with reasonable accuracy at any time the financial position of the Company and 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 Company’s performance, business model and strategy; and
3. the Strategy and the Business review 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
11 February 2015
www.lancashiregroup.com
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DIRECTORS’ REPORT CONTINUED
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
FINANCIAL INSTRUMENTS AND RISK EXPOSURES
Information regarding the Group’s risk exposure is included in the risk disclosures section on pages 100 to 126 of the consolidated financial
statements. The Group’s use of derivative financial instruments can be found on pages 115 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 the measurement of insurance products, the IFRS framework allows
reference to another comprehensive body of accounting principles. In such instances, the Board 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
on the Company’s website.
The notice of the 2015 AGM, to be held on 29 April 2015 at the Company’s head office, 29th Floor, 20 Fenchurch Street, London EC3M 3BY,
UK, is contained in a separate circular to shareholders enclosed with this Annual Report and Accounts. The notice of the AGM is also available
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 32 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 Lancashire can be found on pages 36
to 37. Starting on page 100 the risk disclosures section of the consolidated financial statements set out the principal risks the Group is exposed
to, 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. The three-year strategic plan was last approved by the Board on 30 April 2014. The Board receives
quarterly reports from the Chief Risk Officer and sets and approves risk tolerances for the business.
During 2014, 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. 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 2016, being the period considered under the Group’s current three-year strategic plan.
After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue its operational existence
for the foreseeable future and for a period of at least twelve months from the date of this report. Accordingly, the Board continues to adopt and
consider appropriate the going concern basis in preparing the Annual Report and Accounts.
AUDITORS
2017 AGM.
Resolutions will be proposed at the Company’s 2015 AGM to re-appoint Ernst & Young LLP as the Company’s auditors and to authorise
the Directors to set the auditors’ remuneration. Ernst & Young have served as the Company’s auditors since 2005.
The Company plans to perform an audit tender process during 2016 and to recommend an auditor to the shareholders to vote on at the
DISCLOSURE OF INFORMATION TO THE AUDITORS
Each of the persons who is a Director at the date of approval of this Annual Report 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
11 February 2015
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Lancashire Holdings Limited | Annual Report & Accounts 2014
The Directors are responsible for preparing the Annual Report 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 Company and the Group and of the profit or loss of the Group for that period. The consolidated financial statements have been prepared in
accordance with IFRS. Where IFRS is silent, as it is in respect of 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 Company and
the Group will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s and the Group’s
transactions and disclose with reasonable accuracy at any time the financial position of the Company and 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 Company’s performance, business model and strategy; and
3. the Strategy and the Business review 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
11 February 2015
www.lancashiregroup.com
www.lancashiregroup.com
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GOVERNANCE
FINANCIAL STATEMENTS
At Lancashire,
we adapt to
advance
We have taken some significant
strategic steps in response to changes
in a challenging market, both cyclical
and secular. Thanks to our foresight,
we have been able to adapt to
our environment.
PROBABLE MAXIMUM LOSS
Although it can be a simplistic measure,
and we don’t place over-reliance on
models, the PMLs are a reasonable proxy
for the relative amounts of risk we are
retaining across the cycle. In the current
depressed markets we have brought risk
levels down, largely through the use
of additional reinsurance.
$235.2m
400
300
200
100
0
2010
2011
2012
2013
2014
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Lancashire Holdings Limited | Annual Report & Accounts 2014
5 Year average
$269.1m
FINANCIAL STATEMENTS
www.lancashiregroup.com
www.lancashiregroup.com
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FINANCIAL STATEMENTS
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF LANCASHIRE HOLDINGS LIMITED
OPINION ON FINANCIAL STATEMENTS
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 2014 and of its profit for the year then ended; and
have been properly prepared in accordance with IFRSs as adopted by the European Union.
WHAT WE HAVE AUDITED
We have audited the consolidated financial statements of Lancashire Holdings Limited and its subsidiaries (collectively “the Group”)
for the year ended 31 December 2014, which comprise:
the consolidated statement of comprehensive income;
the consolidated balance sheet;
the consolidated statement of changes in shareholders’ equity;
the statement of consolidated cash flows; and
the accounting policies, the risk disclosures, and the related notes to the accounts 1 to 31.
The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting
Standards (IFRSs) as adopted by the European Union.
This report is made solely to the Company’s members, as a body, in accordance with our engagement letter dated 26 November 2013.
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 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.
OUR ASSESSMENT OF RISKS OF MATERIAL MISSTATEMENT AND RESPONSE TO THAT RISK
The table below shows the risks we identified that have had the greatest effect on the overall audit strategy, the allocation of resources
in the audit and directing the efforts of the engagement team together with our audit response to the risk.
In 2013, we identified a risk relating to the fair value adjustments recognised and the valuation of intangible assets on the acquisition
of the Cathedral Group. This year we have considered the risk of impairment of those intangible assets as we comment on below.
VALUATION OF LOSS RESERVES
Refer to page 53 (Audit Committee report), page 97 (accounting policy) and page 108 (disclosures)
Risk
Response
The valuation of loss reserves
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 the
ultimate amount paid varying
materially from the amount
estimated at this reporting date.
We understood, assessed and tested the design and operational effectiveness of the key controls
in Lancashire’s reserving process, including the review and approval of the reserves, and controls
over the extraction of data from the claims systems.
Supported by our actuarial specialists, we evaluated management’s methodology against market
practice and challenged management’s assumptions and their assessment of major sensitivities,
based on our market knowledge and industry data where available.
Using management’s data, we independently re-projected the loss and loss adjustment expense
reserves for LUK, LICL, and Cathedral on both a gross and net basis, investigating significant
differences between our projections and management’s booked reserves. Using our own valuation
we then considered whether the loss and loss adjustment expense reserves held at the year-end fall
within a reasonable range of possible estimates.
We considered the results of the third party actuarial review of the loss and loss adjustment
reserves as at the reporting date, presented to the Audit Committee, again, specifically to identify
and understand any significant differences in projections.
In light of our work outlined above, we considered the adequacy of disclosures of the judgements
and uncertainties being made by the Directors in the insurance risk note on page 108 and note 13
related to loss and loss adjustment expense reserves.
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Lancashire Holdings Limited | Annual Report & Accounts 2014
GOODWILL AND INTANGIBLE ASSETS
Refer to page 53 (Audit Committee report), page 96 (accounting policy) and page 148 (disclosures)
Risk
Response
The acquisition of Cathedral in
2013 resulted in the recognition of
goodwill and indefinite life syndicate
participation rights with a fair value
of $71.2 million and $82.6 million
respectively. During 2014 we
considered the risk that these
assets may be impaired.
In testing for impairment judgement
is applied by management in deriving:
Management’s impairment assessment of the recorded value of goodwill and the syndicate
participation rights was performed as at 30 September 2014. We evaluated and challenged
this assessment, including:
validating that the cash flows used are consistent with the three year forecast approved by
the Board;
challenging the three year plan, having regard to back testing performed by management
to support the robustness of the forecast process and having regard to market conditions;
satisfied ourselves whether the pre-tax discount rate applied is appropriate by assessing the
cost of capital for the group and comparable businesses;
the forecast cash flows; and
assessing whether long term growth assumptions are consistent with economic and industry
the pre-tax discount rates applied
to those cash flows.
forecasts; and
challenging the adequacy of sensitivity analysis performed by management, by re-performing
our own stress tests of assumptions in isolation and in combination to consider reasonably
possible alternative scenarios.
REVENUE RECOGNITION – PREMIUM ESTIMATES
Refer to page 53 (Audit Committee report) and page 96 (accounting policy)
Risk
Response
We evaluated and tested the key controls over the premium estimation process, which include
the periodic review by management of estimated premiums, taking into account any third party
information received from brokers or insureds.
For a sample of policies we verified the year end estimated premium income, including
considering the basis of estimation and corroborating evidence such as information from brokers.
We have analysed the development, during the period, of estimates recognised as at 31 December
2013 to identify if there was any indication of management bias.
For certain contracts written,
premium is initially recognised based
on estimates of ultimate premiums.
This occurs for contracts where
pricing is based on variables which
are not known with certainty at the
point of binding the contract.
Subsequent adjustments to those
estimates, which arise as updated
information relating to those pricing
variables becomes available, are
recorded in the period in which they
are determined.
These estimates are judgemental
and therefore could result in
misstatements of revenue recognised
in the financial statements.
SCOPE OF THE AUDIT OF THE FINANCIAL STATEMENTS
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable
assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an
assessment of: whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied
and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation
of the financial statements.
In addition, we read all the financial and non-financial information in the Annual Report and Accounts to identify material
inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based
on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any
apparent material misstatements or inconsistencies we consider the implications for our report.
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FINANCIAL STATEMENTS
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF LANCASHIRE HOLDINGS LIMITED CONTINUED
OUR APPLICATION OF MATERIALITY
We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of identified misstatements
on our audit and of uncorrected misstatements, if any, on the financial statements and in forming our opinion in the Audit Report.
When establishing our overall audit strategy, we determined a magnitude of uncorrected misstatements that we judged would be material
for the financial statements as a whole.
We determined materiality for the Group to be $10.0 million (2013: $10.0 million), which is approximately 5 per cent of pre-tax profit.
This provided a basis for determining the nature, timing and extent of risk assessment procedures, identifying and assessing the risk
of material misstatement and determining the nature, timings and extent of further audit procedures.
On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, our judgement is that
overall performance materiality (i.e. our tolerance for misstatement in an individual account or balance) for the Group should be
50 per cent of materiality, namely $5.0 million (2013: $5.0 million). Our objective in adopting this approach is to ensure that total
uncorrected and undetected audit differences do not exceed our materiality of $10.0 million for the financial statements as whole.
We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in the light of
other relevant qualitative considerations.
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of $0.5 million
(2013: $0.5 million), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.
OVERVIEW OF THE SCOPE OF OUR AUDIT
Following our assessment of the risk of material misstatement to the Group financial statements, our audit scope focused on the
insurance components, LUK, LICL and Cathedral, which are all subject to full scope audit procedures for the year ended 31 December
2014. These components accounted for:
100 per cent of the Group’s insurance losses for the year (refer ‘Valuation of insurance contract liabilities’ risk and related audit
response above);
100 per cent of the Group’s gross premiums written (refer ‘Revenue recognition – premium estimates’ risk and related audit response
above); and
97 per cent of the Group’s pre-tax profit.
Audits of these components are performed at a performance materiality level calculated by reference to a proportion of Group materiality
appropriate to the relative scale of the component concerned, ranging from $4.0 million to $1.2 million.
The Group audit team visited all of the full scope components, reviewing key working papers and participating in the component
teams’ planning and execution of the audit of those risks as applicable to those components.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
As explained more fully in the Directors’ Responsibilities Statement set out on page 83, the Directors are responsible for the preparation
of the consolidated financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and
express an opinion on the consolidated financial statements in accordance with applicable law and International Standards on
Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
The Company has also instructed us to audit the section of Directors’ Remuneration Report that has been described as audited
and state whether it has been properly prepared in accordance with the basis of preparation described therein.
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OPINION ON OTHER MATTERS
In our opinion the part of the Directors’ Remuneration Report that is described as having been audited has been properly prepared
in accordance with the basis of preparation as described therein.
MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION
We have nothing to report in respect of the following:
Under the ISAs (UK and Ireland), we are required to report to you if, in our opinion, information in the annual report is:
materially inconsistent with the information in the audited financial statements; or
apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course
of performing our audit; or
is otherwise misleading.
In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during
the audit and the Directors’ statement that they consider the annual report is fair, balanced and understandable and whether the
annual report appropriately discloses those matters that we communicated to the Audit Committee which we consider should have
been disclosed.
Under the Listing Rules we are required to review:
the part of the Corporate Governance Statement relating to the Company’s compliance with the nine provisions of the UK Corporate
Governance Code specified for our review.
ERNST & YOUNG LLP
London
11 February 2015
(1) The maintenance and integrity of the Lancashire Holdings Limited website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters
and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.
(2) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
www.lancashiregroup.com
www.lancashiregroup.com
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FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2014
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 (losses) gains and impairments
Share of profit of associates
Other income
Net foreign exchange (losses) 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
Profit before tax
Tax credit
Profit for the year
Profit (loss) for the year attributable to:
Equity shareholders of LHL
Non-controlling interests
Profit for the year
Other comprehensive loss to be reclassified to
profit or loss in subsequent periods
Net change in unrealised gains/losses on investments
Tax provision on net change in unrealised gains/losses on investments
Other comprehensive loss
Total comprehensive income for the year
Total comprehensive income (loss) attributable to:
Equity shareholders of LHL
Non-controlling interests
Total comprehensive income for the year
Earnings per share
Basic
Diluted
90
90
Lancashire Holdings Limited | Annual Report & Accounts 2014
Lancashire Holdings Limited | Annual Report & Accounts 2014
Notes
2
2
2
2
3
3
3
17
27
2, 13
2, 13
2, 4
2, 4
5, 6, 25
6
7
8
3, 10
10
10
2014
$m
907.6
(164.8)
742.8
(37.0)
9.8
715.6
28.6
1.4
(5.9)
5.9
19.3
(0.1)
764.8
237.9
(11.4)
226.5
161.8
(8.4)
111.3
23.3
514.5
250.3
23.8
226.5
3.1
229.6
229.3
0.3
229.6
(2.2)
0.1
(2.1)
227.5
227.2
0.3
227.5
26
26
$1.24
$1.16
2013
$m
679.7
(122.1)
557.6
24.3
(13.8)
568.1
25.4
1.4
12.6
9.2
4.1
21.8
642.6
250.0
(61.9)
188.1
135.1
(9.3)
85.0
16.7
415.6
227.0
8.9
218.1
3.8
221.9
222.5
(0.6)
221.9
(33.3)
0.8
(32.5)
189.4
190.0
(0.6)
189.4
$1.31
$1.17
CONSOLIDATED BALANCE SHEET
As at 31 December 2014
Assets
Cash and cash equivalents
Accrued interest receivable
Investments
Reinsurance assets
– Unearned premiums on premiums ceded
– Reinsurance recoveries
– Other receivables
Deferred acquisition costs
Other receivables
Inwards premiums receivable from insureds and cedants
Corporation tax receivable
Investment in associates
Property, plant and equipment
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
Deferred tax liability
Interest rate swap
Long-term debt
Total liabilities
Shareholders’ equity
Share capital
Own shares
Share premium
Contributed surplus
Accumulated other comprehensive income
Other reserves
Retained earnings
Total shareholders' equity attributable to equity shareholders of LHL
Non-controlling interests
Total shareholders’ equity
Total liabilities and shareholders' equity
Notes
9, 22
10, 11, 22
2014
$m
2013
$m
303.5
7.7
1,986.9
403.0
8.9
2,016.0
12
13
12, 14
15
14
11, 17
18
19, 28
13
20
20, 21
12, 21
15
21
16
22
22
23
23
10
24
27
24.7
112.4
5.3
104.6
36.6
316.2
4.3
52.7
9.1
153.8
14.9
183.0
10.8
73.8
18.7
288.4
5.6
64.7
2.8
177.2
3,117.8
3,267.8
752.6
479.1
40.8
34.2
0.1
83.5
38.7
4.9
326.6
1,760.5
96.1
(43.3)
–
855.9
0.8
31.2
416.1
1,356.8
0.5
1,357.3
3,117.8
853.4
442.1
28.9
30.9
0.2
80.7
38.7
0.2
332.3
1,807.4
92.7
(36.8)
192.2
645.7
2.9
55.2
507.8
1,459.7
0.7
1,460.4
3,267.8
The consolidated financial statements were approved by the Board of Directors on 11 February 2015 and signed on its behalf by:
MARTIN THOMAS
DIRECTOR/CHAIRMAN
ELAINE WHELAN
DIRECTOR/CFO
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91
91
FINANCIAL STATEMENTS
Accumulated
other
comprehensive
income
$m
35.4
(32.5)
–
–
–
–
–
–
–
–
–
–
2.9
(2.1)
–
–
–
–
–
–
–
–
–
–
–
–
2.4
–
189.8
–
–
–
–
–
–
–
–
–
654.4
–
–
–
(38.7)
12.8
–
–
(1.1)
–
18.3
–
–
(0.6)
(28.3)
8.1
–
–
33.1
(9.8)
–
15.5
–
–
–
–
–
–
–
–
–
–
–
–
–
855.9
0.8
Shareholders’
equity
attributable
to equity
shareholders
of LHL
$m
Non-
controlling
interests
$m
Total
shareholders’
equity
$m
Other
reserves
$m
Retained
earnings
$m
57.1
610.9
1,387.4
–
1,387.4
–
–
–
–
–
–
–
(1.9)
1.6
(18.3)
16.7
55.2
–
–
–
–
–
–
–
–
(27.4)
–
(4.4)
(15.5)
23.3
31.2
222.5
–
–
–
–
190.0
198.2
–
(8.6)
–
(276.7)
(276.7)
(48.9)
(48.9)
–
–
–
–
–
1.6
–
16.7
507.8
1,459.7
229.3
227.2
–
–
–
–
–
–
(25.0)
(0.6)
(6.7)
–
(288.9)
(288.9)
(32.1)
(32.1)
–
–
–
–
–
14.1
(9.8)
(4.4)
–
23.3
(0.6)
–
1.3
–
–
–
–
–
–
–
–
189.4
198.2
1.3
(8.6)
–
(276.7)
(48.9)
–
1.6
–
16.7
0.7
0.3
–
–
1,460.4
227.5
–
(25.0)
(0.5)
–
–
–
–
–
–
–
–
–
(1.1)
(6.7)
–
(288.9)
(32.1)
14.1
(9.8)
(4.4)
–
23.3
416.1
1,356.8
0.5
1,357.3
92.7
(36.8)
192.2
645.7
–
–
–
–
(192.2)
192.2
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
For the year ended 31 December 2014
Share
capital
$m
Own
shares
$m
Share
premium
$m
Contributed
surplus
$m
Notes
Balance as at 31 December 2012
84.3
(57.1)
Total comprehensive income for the year
Issue of shares
Issue of shares to non-controlling
interests
Distributed by trust
Shares donated to trust
Dividends on common shares
Dividend equivalents on warrants
Warrant exercises – Founder
Equity based compensation – tax
10
23
27
23
23, 27
23
24
24
8
Equity based compensation – exercises 6, 23, 24
Equity based compensation – expense
Balance as at 31 December 2013
Total comprehensive income for the year
Share premium reclassification
Share repurchases
Purchase of shares from non-controlling
interests
Distributed by trust
Shares donated to trust
Dividends on common shares
Dividend equivalents on warrants
Warrant exercises
RSS compensation
Equity based compensation – tax
6
10
29
23
27
23
23, 27
23
24
6
8
Equity based compensation – exercises 6, 23, 24
Equity based compensation – expense
6
–
8.4
–
–
–
–
–
–
–
–
–
–
–
–
30.1
(12.8)
–
–
3.0
–
–
–
–
–
–
–
–
–
–
–
(25.0)
–
21.6
(8.1)
–
–
–
–
–
–
–
–
–
–
23, 24
3.4
5.0
Balance as at 31 December 2014
96.1
(43.3)
92
92
Lancashire Holdings Limited | Annual Report & Accounts 2014
Lancashire Holdings Limited | Annual Report & Accounts 2014
STATEMENT OF CONSOLIDATED CASH FLOWS
For the year ended 31 December 2014
Cash flows from operating activities
Profit before tax
Tax paid
Depreciation
Amortisation of intangible asset
Interest expense on long-term debt
Interest and dividend income
Net amortisation of fixed income securities
Equity based compensation
Foreign exchange losses (gains)
Share of profit of associates
Net other investment income
Net realised losses (gains) and impairments
Net unrealised losses (gains) on interest rate swaps
Changes in operational assets and liabilities
– Insurance and reinsurance contracts
– Other assets and liabilities
Net cash flows from operating activities
Cash flows from investing activities
Interest and dividends received
Net purchase of property, plant and equipment
Investment in associates
Acquisition of subsidiaries, net of cash acquired
Purchase of investments
Proceeds on sale of investments
Net cash flows from investing activities
Cash flows used in financing activities
Interest paid
Proceeds from issue of shares, net of share issue costs
Dividends paid
Share repurchases
Warrant exercises
RSS compensation
Distributions by trust
(Repurchase) issue of shares to non-controlling interests
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
5
19
7
6
17
3
3
28
23
23
27
9
2014
$m
226.5
1.0
2.1
23.4
15.5
(50.5)
9.9
23.3
7.3
(5.9)
(1.4)
5.9
4.7
(35.5)
(13.8)
212.5
52.0
(8.7)
17.9
–
(2,153.7)
2,159.0
66.5
(15.5)
–
(321.0)
(25.0)
14.1
(9.8)
(6.7)
(1.1)
(365.0)
(86.0)
403.0
(13.5)
303.5
2013
$m
218.1
(0.4)
1.4
13.2
13.2
(43.9)
12.9
16.7
(11.8)
(9.2)
(1.4)
(12.6)
(7.8)
(26.1)
5.4
167.7
44.4
(0.1)
26.6
(227.2)
(1,277.9)
1,521.2
87.0
(12.0)
198.2
(325.6)
–
–
–
(8.6)
1.3
(146.7)
108.0
295.8
(0.8)
403.0
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93
93
FINANCIAL STATEMENTS
ACCOUNTING POLICIES
For the year ended 31 December 2014
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The basis of preparation, consolidation principles and significant accounting policies adopted in the preparation of LHL and the Group’s
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 the measurement of insurance products, the IFRS framework allows reference to another
comprehensive body of accounting principles. In such instances, the Group 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.
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 been issued there are no standards issued that have had a material
impact on the Group.
IFRS 4, Insurance Contracts, issued in March 2004, specifies the financial reporting for insurance contracts by an insurer. The current
standard is Phase I in the IASB’s insurance contract project and, as noted above, does not specify the recognition or measurement of
insurance contracts. This will be addressed in Phase II of the IASB’s project and is expected to include a number of significant changes
regarding the measurement and disclosure of insurance contracts. The Group will continue to monitor the progress of the project in
order to assess the potential impacts 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
income and equity securities as AFS or FVTPL. The new standard is effective for annual periods beginning on or after 1 January 2018 and
is not expected to have a material impact on the results and disclosures reported in the consolidated financial statements. It will, however,
result in a reclassification of fixed income securities from AFS to FVTPL and a reclassification of the net change in unrealised gains and
losses on investments from accumulated other comprehensive income to profit or loss.
IFRS 10, Consolidated Financial Statements, issued in May 2011, redefines the principle of control and establishes control as the basis
for determining which entities are consolidated in an entity’s financial statements. IFRS 12, Disclosure of Involvement with Other Entities,
was issued concurrently and sets out the disclosure requirements for consolidated financial statements. Both standards were effective from
1 January 2014 and did not have a material impact on the Group’s results or disclosure requirements.
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 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 97.
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 19.
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Lancashire Holdings Limited | Annual Report & Accounts 2014
Lancashire Holdings Limited | Annual Report & Accounts 2014
BASIS OF CONSOLIDATION
The consolidated financial statements comprise the financial statements of the Group and its subsidiaries as at 31 December 2014. 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. 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. The Group participates on the 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 income. Similarly, the Group’s
proportion of the syndicates’ assets and liabilities has been reflected in its 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.
ASSOCIATES
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 statement of comprehensive income for the period. Adjustments are made to associates’ 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 income. Non-monetary assets and liabilities carried at historical cost
denominated in a foreign currency are translated at historic rates. Non-monetary assets and liabilities carried at estimated fair value
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 accumulated other comprehensive income in shareholders’ equity.
BUSINESS COMBINATIONS
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the fair
value of consideration transferred at the acquisition date. On acquisition of a business the Group assesses the financial assets acquired and
liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and
pertinent conditions at the acquisition date. Unpaid loss reserves and loss reserves recoverable assumed through a business combination
are initially measured at fair value, using an applicable risk-free discount rate and having regard to the expected settlement dates of the
claims. Unearned premiums and unearned premiums ceded acquired through a business combination are initially measured in
accordance with the Group’s existing accounting policies. The difference between the acquired amount and the fair value of these assets
and liabilities is recognised as a separately identifiable intangible asset and recorded as the value of in-force business. Other identifiable
assets acquired and liabilities and contingent liabilities assumed, which meet the conditions for recognition under IFRS 3, Business
Combinations, are recognised at their fair value at the acquisition date. The excess of the fair value of consideration transferred over
the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. Costs directly related to an acquisition
are expensed in the consolidated statement of comprehensive income when incurred.
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95
95
FINANCIAL STATEMENTS
ACCOUNTING POLICIES CONTINUED
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 the 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 and the related net assets.
Such intangibles 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 circumstance 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 impairment. 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.
VALUE OF IN-FORCE BUSINESS
The value of in-force business acquired in a business combination is initially recognised as the difference between the fair value of the
net unearned premiums acquired and the measurement of the net unearned premiums acquired using the Group’s existing accounting
policies. The value of in-force business has a finite useful life and subsequent to initial recognition it is carried at cost less accumulated
amortisation and is amortised over the remaining life of the acquired insurance contracts. The portion of the value of in-force business
which replaced the deferred acquisition costs carried on Cathedral’s historical balance sheet was amortised in net acquisition costs in
the statement of comprehensive income. The remaining amortisation was charged to other operating expenses.
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 which do not relate to a specific loss event.
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Lancashire Holdings Limited | Annual Report & Accounts 2014
Lancashire Holdings Limited | Annual Report & Accounts 2014
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 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 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, 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.
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 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.
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97
97
FINANCIAL STATEMENTS
ACCOUNTING POLICIES CONTINUED
INVESTMENTS
The Group’s fixed income and equity securities are quoted investments that are classified as AFS or at FVTPL and are carried at estimated
fair value. The classification is determined at the time of initial purchase and depends on the category of investment. Fixed income
investments in principal protected equity linked notes are designated as at FVTPL.
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 transaction costs on the trade date and
are subsequently carried at estimated fair value. The estimated fair values of quoted investments are determined based on bid prices
from recognised exchanges, broker-dealers, recognised indices or pricing vendors. Investments are derecognised when the Group
has transferred substantially all of the risks and rewards of ownership. Realised gains and losses are included in income in the period
in which they arise. Unrealised gains and losses from changes in estimated fair value of AFS investments are included in accumulated
other comprehensive income in shareholders’ equity.
On derecognition of an investment, previously recorded unrealised gains and losses are removed from accumulated other comprehensive
income in shareholders’ equity and included in current period income. Changes in estimated fair value of investments classified as at
FVTPL are recognised in current period income.
Amortisation and accretion of premiums and discounts on AFS fixed income 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 revenue 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 income in shareholders’ equity and charged to current period income. Impairment
losses on fixed income securities may be subsequently reversed through income while impairment losses on equity securities are not
subsequently reversed through income.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives 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 that do not qualify for hedge accounting are recognised
in current period income. The Group does currently not 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
Managing agent’s fees and commissions and underwriting service fees are recognised in line with services provided. Contingent
profit commissions 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.
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Lancashire Holdings Limited | Annual Report & Accounts 2014
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 income. Costs for repairs and maintenance are charged
to income as incurred.
LEASES
Rentals payable under operating leases are charged to income 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 Group has also operated a management
warrant plan and an LTIP option plan in the past. 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 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 income and the actual cost
to the Group, if any, is transferred to contributed surplus. Where new shares are issued, the proceeds received are credited to share
capital and share premium.
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 income in the period to which they relate.
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. Taxable profit for the period can differ from that reported in the consolidated statement of comprehensive income due
to 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.
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 exceeds 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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99
FINANCIAL STATEMENTS
RISK DISCLOSURES
For the year ended 31 December 2014
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 is to ensure that the capital resources held are matched to the risk profile of the Group and
that the balance between risk and reward 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 rewards 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 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 BLAST in order to assess modeled potential losses against risk tolerances and ensure that risk
levels are managed in accordance with them.
RISK AND RETURN COMMITTEE
The RRC seeks to optimise risk-adjusted return and facilitate the appropriate use of the Internal Model, 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 coordinating 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
and members from the finance, actuarial and underwriting functions and includes representation from Cathedral. The CRO attends the
meetings and reports on the RRC’s activities to the Group and individual entity Boards of Directors and the Risk Committee of Cathedral.
CHIEF RISK OFFICER
The primary role of the CRO is to facilitate the effective operation of ERM throughout the Group at all levels. The role includes but
is not limited to the following responsibilities:
drive ERM culture, ownership and execution on three levels: Board, executive management, and operationally within the business;
facilitate the identification, assessment and evaluation of existing and emerging risks by management and the Board;
ensure that these risks are given due consideration and are embedded within management’s and the Board’s oversight and decision
making process;
be consulted, and opine on, policy in areas such as, but not limited to, underwriting, claims, investments, operations and capital
management; and
provide timely, accurate, reliable, factual, objective and accessible information and analysis to guide, coach and support
decision making.
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 BLAST. The 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 Boards of Directors of the Group and the individual
operating entities in this regard including the Risk Committee of Cathedral. The CRO ultimately has the right to report directly to the
Group and entity regulators if he feels that management is not appropriately addressing areas of concern.
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Lancashire Holdings Limited | Annual Report & Accounts 2014
INTERNAL AUDIT
Internal Audit plays a key role in the Group’s ERM by providing an independent opinion regarding the accuracy and completeness
of risks, in addition to verification of the effectiveness of controls and the consistency of their operation. Internal Audit’s roles and
responsibilities are clearly defined through the Internal Audit Charter. The Head of Internal Audit reports directly to the Group
Audit Committee. The CRO receives a copy of each Internal Audit report and considers the findings and agreed actions in the context
of the risk appetites and tolerances, plus the risk policies and risk management strategy of each area. The integration of Internal Audit
and ERM into the business helps facilitate the Group’s protection of its assets and reputation.
ECONOMIC CAPITAL MODEL
The foundation of the Lancashire Companies and Kinesis’ risk-based capital approach to decision making is its 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 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 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.
BLAST covers the risks for LICL, LUK and Kinesis but does not cover Cathedral’s risk. Owing 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 using Lancashire’s
proprietary internal models.
The six primary risk categories, insurance risk, market risk, liquidity risk, credit risk, operational risk and strategic risk, are discussed
in detail on pages 102 to 126.
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www.lancashiregroup.com
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FINANCIAL STATEMENTS
RISK DISCLOSURES CONTINUED
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 sector 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 principle 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 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 Budget Forecast and Business Plan are subject to review and approval by Lloyd’s;
BLAST and SHARP are used to measure occurrence risks, aggregate risks and correlations between classes and other non-insurance
risks, and the outputs and assumptions 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 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 associates.
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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 in the investment in associates is included in the figures below.
As at 31 December 2014
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 2013
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
254.2
254.0
154.8
133.2
116.0
61.2
39.5
16.6
16.6
10.1
8.7
7.6
4.0
2.6
377.2
455.8
247.5
205.0
184.8
94.6
123.3
24.7
29.8
16.2
13.4
12.1
6.2
8.1
100 year return period estimated net loss
250 year return period estimated net loss
$m % of tangible capital
$m % of tangible capital
307.6
227.8
130.6
210.7
154.8
132.9
49.4
19.0
14.1
8.1
13.0
9.6
8.2
3.1
440.2
451.4
239.0
319.3
266.9
249.0
176.4
27.3
28.0
14.8
19.8
16.5
15.4
10.9
Perils
Hurricane
Hurricane
Earthquake
Windstorm
Earthquake
Typhoon
Earthquake
Perils
Hurricane
Hurricane
Earthquake
Windstorm
Earthquake
Typhoon
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:
Worldwide offshore
Europe
U.S. and Canada
Far East
Middle East
Worldwide, including the U.S. and Canada1
Worldwide, excluding the U.S. and Canada2
Rest of world
Total
2014
$m
287.4
221.7
172.5
59.6
42.7
23.2
9.5
91.0
907.6
%
31.7
24.4
19.0
6.6
4.7
2.6
1.0
10.0
100.0
2013
$m
253.3
38.4
101.5
39.9
16.7
151.0
19.4
59.5
679.7
%
37.3
5.6
14.9
5.9
2.5
22.2
2.9
8.7
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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FINANCIAL STATEMENTS
RISK DISCLOSURES CONTINUED
Details of annual gross premiums written by business segment are provided below:
Lloyd’s
Property
Energy
Marine
Aviation
Total
2014
$m
284.3
263.0
239.4
67.7
53.2
907.6
%
31.3
28.9
26.4
7.5
5.9
100.0
2013
$m
24.5
333.4
209.9
63.0
48.9
679.7
%
3.6
49.0
30.9
9.3
7.2
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
Marine cargo
Aviation and satellite
Energy
Contingency
Terrorism
Total
2014
$m
104.3
80.7
37.5
27.6
25.9
4.8
3.5
284.3
2013
$m
3.4
13.0
5.0
2.6
–
0.5
–
24.5
Property reinsurance predominantly includes property catastrophe excess of loss, per risk excess of loss and property retrocession lines of
business. Property catastrophe excess of loss and 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.
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.
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.
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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 underwriters.
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.
Contingency focuses on the sports, leisure and entertainment industries, with a significant emphasis on the music industry. It provides
coverage for non-appearance and event cancellation. Generally business is written on a full value basis.
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 and biological 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.
II. PROPERTY
Gross premiums written, for the year:
Property catastrophe excess of loss
Terrorism
Property political risk
Property retrocession
Property direct and facultative
Other property
Total
2014
$m
124.2
55.2
44.4
18.1
1.0
20.1
2013
$m
97.5
67.8
66.4
80.8
10.0
10.9
263.0
333.4
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 and biological 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 (Confiscation, Expropriation, Nationalisation, and Deprivation) 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 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.
A small number of property direct and facultative risks continue to be written with modest lines mostly to support client relationships
in other classes of business. Cover is generally provided to medium to large commercial and industrial enterprises with high-value
locations for non-elemental perils, including fire and explosion, and elemental (natural catastrophe) perils which can include flood,
windstorm, earthquake, brush fire, tsunami and tornado.
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FINANCIAL STATEMENTS
RISK DISCLOSURES CONTINUED
The Group is exposed to large natural catastrophe losses, such as windstorm and earthquake loss, 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 102 and 103.
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
Energy liabilities
Construction energy
Other energy
Total
2014
$m
149.9
69.9
8.5
6.5
4.6
239.4
2013
$m
149.2
34.4
8.8
12.9
4.6
209.9
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 underwriters.
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 102 and 103.
The Group also 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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Lancashire Holdings Limited | Annual Report & Accounts 2014
IV. MARINE
Gross premiums written, for the year:
Marine hull and total loss
Marine P&I clubs
Marine builders risk
Marine hull war
Other marine
Total
2014
$m
29.6
12.8
12.2
10.3
2.8
67.7
2013
$m
24.8
10.7
10.3
15.0
2.2
63.0
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
P&I clubs is mostly the reinsurance of the International Group of Protection and Indemnity Clubs and covers marine liabilities. Marine
builders risk covers the building of ocean going vessels in specialised yards worldwide and their testing and commissioning. 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
2014
$m
25.9
24.8
2.5
53.2
2013
$m
26.5
16.8
5.6
48.9
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. Coverage for in-orbit can be provided on an annual or multi-year basis and both launch and in-orbit
can cover loss of earnings as well as physical damage.
Reinsurance may be purchased to mitigate exposures to an AV52 event loss. Reinsurance is typically purchased on a treaty excess
of loss basis.
www.lancashiregroup.com
www.lancashiregroup.com
107
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FINANCIAL STATEMENTS
RISK DISCLOSURES CONTINUED
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 RRC has defined limits by reinsurer by rating. The RRC 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 RRC monitors the creditworthiness of 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 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. There is no guarantee that reinsurance coverage will be available to meet all
potential loss circumstances, as it is possible that the cover purchased is not sufficient 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 loss and
loss adjustment expense reserves. 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 generally accepted accounting principles, 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.
Loss and loss adjustment expense reserves 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 corroborative review by independent actuaries, using U.S. generally accepted actuarial principles. This 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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Lancashire Holdings Limited | Annual Report & Accounts 2014
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. The claims count on the types of insurance and reinsurance that the Group
writes, which are low frequency and high severity in nature, is generally low.
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 2014, management’s estimates for IBNR represented 31.6 per cent of total net loss reserves (31 December
2013 – 31.8 per cent). The majority of the estimate relates to potential claims on non-elemental risks where timing delays in insured
or cedant reporting may mean losses could have occurred which the Group was not made aware of by the balance sheet date.
www.lancashiregroup.com
www.lancashiregroup.com
109
109
FINANCIAL STATEMENTS
RISK DISCLOSURES CONTINUED
B. MARKET RISK
The Group is at risk of loss due to movements in market factors. The main risks include:
Insurance risk;
i.
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 which may cause a limit in the availability of cover, including unusual inflation in rates, 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; and
changes in regulation including capital, governance or licensing requirements.
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 RDS; and
holds regular documented 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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Lancashire Holdings Limited | Annual Report & Accounts 2014
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 assets, 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 IRRC and the Board of Directors.
The Group’s fixed income portfolios are managed by four external investment managers. The Group also has a diversified portfolio of
multi-strategy low volatility 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 income securities, fixed income 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 income securities and cash and cash equivalents. The surplus portfolio is invested in fixed income
securities, principal protected equity linked notes, derivative instruments, cash and cash equivalents, equity securities and hedge funds.
The assets in the core plus and surplus portfolios are not matched to specific insurance liabilities. In general, the duration of the surplus
portfolio is slightly longer than the core or core plus portfolio, while maintaining a focus on high quality assets.
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 at least 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.
www.lancashiregroup.com
www.lancashiregroup.com
111
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FINANCIAL STATEMENTS
RISK DISCLOSURES CONTINUED
The investment mix of the fixed income portfolios is as follows:
Core
Core plus
Surplus
Total
As at 31 December 2014
– Short-term investments
– Fixed income 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
– Agency commercial mortgage
backed securities
– Non-agency commercial
mortgage backed securities
– Bank loans
– Corporate bonds
Total fixed income securities – AFS
Fixed income securities – at FVTPL
Total fixed income securities
As at 31 December 2013
– Short-term investments
– Fixed income 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
– Agency commercial mortgage
backed securities
– Non-agency commercial
mortgage backed securities
– Bank loans
– Corporate bonds
Total fixed income securities – AFS
Fixed income securities – at FVTPL
Total fixed income securities
$m
0.1
15.4
145.3
49.5
0.9
1.4
89.1
40.6
9.5
–
4.6
–
307.9
664.3
–
664.3
Core
$m
145.4
26.3
98.7
45.5
2.3
11.0
66.6
39.3
3.8
1.6
7.1
–
271.7
719.3
–
719.3
%
–
0.8
8.0
2.7
–
0.1
4.9
2.2
0.5
–
0.3
–
17.0
36.5
–
36.5
%
7.3
1.3
4.9
2.3
0.1
0.5
3.3
2.0
0.2
0.1
0.4
–
13.6
36.0
–
36.0
112
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Lancashire Holdings Limited | Annual Report & Accounts 2014
Lancashire Holdings Limited | Annual Report & Accounts 2014
$m
30.3
–
129.0
1.7
0.3
–
28.8
41.9
4.0
0.3
14.3
–
153.5
404.1
–
404.1
%
1.7
–
7.1
0.1
–
–
1.6
2.3
0.2
–
0.8
–
8.5
22.3
–
22.3
$m
–
–
88.7
32.8
27.7
16.1
66.2
85.5
7.3
2.1
20.7
127.9
243.7
718.7
31.2
749.9
Core plus
Surplus
$m
75.8
–
53.1
13.6
3.4
3.5
30.6
71.3
1.8
0.9
11.8
–
173.4
439.2
–
439.2
%
3.8
–
2.7
0.7
0.2
0.2
1.5
3.6
0.1
–
0.6
–
8.7
22.1
–
22.1
$m
9.8
–
65.5
48.8
15.7
83.7
54.2
141.4
3.2
1.7
19.0
107.8
256.8
807.6
29.6
837.2
%
–
–
4.9
1.8
1.5
0.9
3.6
$m
30.4
15.4
363.0
84.0
28.9
17.5
184.1
4.7
168.0
0.4
0.1
1.1
7.0
13.5
39.5
1.7
41.2
%
0.5
–
3.3
2.4
0.8
4.2
2.7
7.0
0.2
0.1
0.9
5.4
12.9
40.4
1.5
41.9
20.8
2.4
39.6
127.9
705.1
1,787.1
31.2
1,818.3
Total
$m
231.0
26.3
217.3
107.9
21.4
98.2
151.4
252.0
8.8
4.2
37.9
107.8
701.9
1,966.1
29.6
1,995.7
%
1.7
0.8
20.0
4.6
1.5
1.0
10.1
9.2
1.1
0.1
2.2
7.0
39.0
98.3
1.7
100.0
%
11.6
1.3
10.9
5.4
1.1
4.9
7.5
12.6
0.5
0.2
1.9
5.4
35.2
98.5
1.5
100.0
Corporate bonds, fixed income securities at FVTPL, bank loans and other government bonds by country are as follows:
As at 31 December 2014
United States
United Kingdom
Canada
Australia
France
Netherlands
Germany
Norway
Japan
Switzerland
Sweden
Luxembourg
Mexico
Hong Kong
United Arab Emirates
Other
Total
As at 31 December 2013
United States
Canada
United Kingdom
Australia
France
Germany
Norway
Netherlands
Sweden
Switzerland
Belgium
Supranationals
Japan
Emerging market corporates
Emerging market sovereign
Emerging market agency
Other
Total
Financials
$m
141.5
49.8
29.7
34.1
10.3
13.2
2.8
15.5
10.2
15.6
13.9
–
–
–
–
4.6
341.2
Financials
$m
121.3
53.8
41.3
22.9
7.4
3.8
29.0
14.1
19.8
11.7
–
7.2
2.6
4.8
–
–
14.2
864.2
12.3
84.0
26.5
948.2
Other
industries
$m
382.5
Total
corporate bonds
and bank loans
$m
524.0
37.4
19.7
7.5
14.6
11.4
15.8
0.8
7.7
0.7
–
7.2
3.0
4.9
0.2
9.6
523.0
Other
industries
$m
331.4
16.0
52.2
9.7
24.4
13.3
0.8
10.9
–
4.2
7.4
–
2.6
11.3
–
–
87.2
49.4
41.6
24.9
24.6
18.6
16.3
17.9
16.3
13.9
7.2
3.0
4.9
0.2
Total
corporate bonds
and bank loans
$m
452.7
69.8
93.5
32.6
31.8
17.1
29.8
25.0
19.8
15.9
7.4
7.2
5.2
16.1
–
–
Other
government
bonds
$m
Total corporate
bonds, bank loans
and other
government bonds
$m
–
0.4
24.6
9.8
8.4
6.4
9.8
5.0
–
–
0.2
–
3.6
–
3.5
524.0
87.6
74.0
51.4
33.3
31.0
28.4
21.3
17.9
16.3
14.1
7.2
6.6
4.9
3.7
Other
government
bonds
$m
Total corporate
bonds, bank loans
and other
government bonds
$m
–
26.1
0.4
10.0
6.6
15.3
2.0
5.8
1.3
–
–
–
–
–
9.9
26.9
3.6
107.9
452.7
95.9
93.9
42.6
38.4
32.4
31.8
30.8
21.1
15.9
7.4
7.2
5.2
16.1
9.9
26.9
19.0
947.2
www.lancashiregroup.com
www.lancashiregroup.com
113
113
4.0
343.7
11.4
495.6
15.4
839.3
FINANCIAL STATEMENTS
RISK DISCLOSURES CONTINUED
The sector allocation of the corporate bonds, fixed income securities at FVTPL and bank loans is as follows:
As at 31 December
Industrial
Financial
Utility
Supranationals
Total
2014
$m
487.3
338.3
35.7
2.9
864.2
%
56.5
39.1
4.1
0.3
100.0
2013
$m
452.8
336.5
42.8
7.2
839.3
%
53.9
40.1
5.1
0.9
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 income securities and cash and cash equivalents. The fixed income 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 income securities. The Group also has a small equity portfolio. The estimated fair value
of the Group’s fixed income portfolio is generally inversely correlated to movements in market interest rates. If market interest rates fall,
the fair value of the Group’s fixed income securities would tend to rise and vice versa.
The sensitivity of the price of fixed income 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 income
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)
2014
$m
(30.6)
(22.9)
(15.3)
(7.6)
7.6
15.1
22.7
30.2
%
(1.7)
(1.3)
(0.8)
(0.4)
0.4
0.8
1.2
1.7
2013
$m
(23.3)
(18.3)
(12.7)
(6.6)
6.8
14.0
21.3
28.9
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 durations of the externally managed portfolios are as follows:
As at 31 December
Core portfolio
Core plus portfolio
Surplus portfolio
Overall portfolio (including duration overlay)
2014
years
1.7
1.9
1.8
1.5
%
(1.2)
(0.9)
(0.6)
(0.3)
0.3
0.7
1.1
1.4
2013
years
1.2
1.2
1.9
1.1
The overall duration for fixed income, managed cash and cash equivalents and certain derivatives is 1.5 years (2013 – 1.0 year).
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 market standard 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.
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Lancashire Holdings Limited | Annual Report & Accounts 2014
The principal VaR measure that is produced is an annual VaR at the 99th percentile confidence level. The annual VaR, at the 99th
percentile confidence level, measures the minimum amount the assets should be expected to lose over a one year time horizon,
under normal conditions, 1 per cent of the time.
The Group’s annual VaR calculations are as follows:
As at 31 December
99th percentile confidence level
2014
2013
$m
38.1
% of shareholders’
equity
2.8
$m
32.6
% of shareholders’
equity
2.2
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 internally
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;
d. Swaps; and
e. Swaptions;
The net gains or losses on the Group’s derivative financial instruments recognised in the consolidated statement of comprehensive
income are as follows:
As at 31 December 2014
Treasury futures
Forward foreign currency contracts
Interest rate swaps – investments
Interest rate swaps – debt
Swaptions
Total
As at 31 December 2013
Eurodollar futures
Treasury futures
Forward foreign currency contracts
Interest rate swaps – investments
Interest rate swaps – debt
Credit default swaps
Swaptions
Total
Net other
investment loss
$m
Net realised
losses
$m
Net foreign
exchange
losses
$m
–
–
(0.1)
–
(2.2)
(2.3)
(6.0)
–
(0.1)
–
(2.1)
(8.2)
–
(0.7)
–
–
–
(0.7)
Net other
investment income
$m
Net realised
gains (losses)
$m
Net foreign
exchange
gains
$m
–
–
–
(0.1)
–
(0.3)
2.2
1.8
0.3
4.8
–
(0.3)
–
0.2
–
5.0
–
–
12.0
–
–
–
–
12.0
Financing
costs
$m
–
–
–
(7.4)
–
(7.4)
Financing
gain
$m
–
–
–
–
5.2
–
–
5.2
www.lancashiregroup.com
www.lancashiregroup.com
115
115
FINANCIAL STATEMENTS
RISK DISCLOSURES CONTINUED
The estimated fair values of the Group’s derivative instruments are as follows:
As at 31 December
Forward foreign currency
contracts
Interest rate swaps – investments
Interest rate swaps – debt
Swaptions
Credit default swaps
Total
2014
Other
investments
$m
Other
receivables
$m
Other
payables
$m
Interest
rate swaps
$m
Other
investments
$m
2013
Other
receivables
$m
Interest
rate swaps
$m
0.7
3.8
(1.8)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(4.9)
–
–
0.7
3.8
(1.8)
(4.9)
–
(0.1)
–
4.9
(0.1)
4.7
0.1
–
–
–
–
0.1
–
–
(0.2)
–
–
(0.2)
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 income 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
89.1
89.1
2014
Notional
short
$m
169.9
169.9
Net notional
long (short)
$m
(80.8)
(80.8)
Notional
long
$m
80.5
80.5
2013
Notional
short
$m
86.2
86.2
Net notional
long (short)
$m
(5.7)
(5.7)
A Eurodollar futures contract is an exposure to 3 month LIBOR, based on a commitment to a $1.0 million deposit. The estimated fair
value is based on expectations of 3 month LIBOR, is determined using exchange-traded prices and was negligible as at 31 December
2014 and 2013. The contracts currently held by the Group will expire in 2015.
The sensitivity of the Group’s Eurodollar futures position to interest rate movements is not material as at 31 December 2014 and 2013.
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 not material as at 31 December 2014 and 2013.
The investment guidelines also restrict the maximum notional options exposure as a percentage of the investment portfolio’s estimated
fair value.
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Lancashire Holdings Limited | Annual Report & Accounts 2014
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
Australian Dollar
British Pound
Brazilian Real
Chinese Renminbi
Malaysian Ringgit
Euro
Japanese Yen
Other(1)
Total
Notional
long
$m
0.4
10.0
–
–
–
3.7
43.2
5.1
–
62.4
2014
Notional
short
$m
Net notional
long (short)
$m
Notional
long
$m
2013
Notional
short
$m
Net notional
long (short)
$m
20.7
26.3
8.1
–
–
–
26.4
5.1
–
86.6
(20.3)
(16.3)
(8.1)
–
–
3.7
16.8
–
–
(24.2)
0.5
10.5
–
3.9
0.3
3.9
52.6
–
0.3
72.0
–
28.5
9.4
6.6
0.3
–
24.5
–
0.3
69.6
0.5
(18.0)
(9.4)
(2.7)
–
3.9
28.1
–
–
2.4
(1) Individual currencies included in ‘other’ have a notional payable and receivable of less than $2.0 million for 2013.
D. SWAPS
The Group’s investment guidelines permit the use of interest rate swaps and credit default swaps which are primarily traded OTC. Swaps
are recorded at estimated fair value at the end of each period with unrealised gains and losses recorded in the consolidated statement
of comprehensive income.
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 2014 and 2013. The notional
amount of interest rate swaps held internally for the purposes of hedging the interest rate exposure on the Group’s subordinated loan notes as at
31 December 2014 is $252.3 million (31 December 2013 – $259.8 million)
The Group uses credit default swaps as a way to add or reduce credit risk to an individual issuer, or a basket of issuers, without investing
directly in their securities. As at 31 December 2014, the maximum amount of loss the Group could incur on its open credit default swaps
was the notional value of $nil (31 December 2013 – $4.1 million).
www.lancashiregroup.com
www.lancashiregroup.com
117
117
FINANCIAL STATEMENTS
RISK DISCLOSURES CONTINUED
E. SWAPTIONS
The Group uses swaptions, options on interest rate swaps, to manage interest rate risk exposure and portfolio and yield curve duration.
The Group, as the purchaser of a swaption, is subject to the credit risk of the counterparty but is only subject to market risk to the extent
of the premium paid. As a swaption writer, the Group is not subject to credit risk but is subject to market risk, due to its obligation to make
payments under the terms of the contract. These risks are mitigated through maximum allowable notional exposures as a percentage of
the investment portfolio’s estimated fair value. The estimated fair value of these instruments is $nil as at 31 December 2014 (31 December
2013 – $4.9 million).
III. DEBT RISK
The Group has issued long-term debt as described in note 22. The LHL issued 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 by entering into interest rate swap
contracts as follows:
Subordinated loan notes $97.0 million
Subordinated loan notes €24.0 million
Maturity date
Interest hedged
15 December 2035
15 June 2035
100%
100%
The interest rate swaps expire on 15 December 2020, therefore the Group currently has no interest rate risk on the LHL issued
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 interest rate risk on this long-term debt.
On the acquisition of Cathedral, the Group assumed subordinated loan notes as described in note 22. The Group is subject to
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 $0.8 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 income.
The Group hedges 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 long-term debt liabilities discussed in
note 22. These positions may not be hedged depending on the currency outlook. See page 117 for a listing of the Group’s open
forward foreign currency contracts.
118
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Lancashire Holdings Limited | Annual Report & Accounts 2014
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
Reinsurance assets
Deferred acquisition costs
Other receivables
Inwards premiums receivable from insureds and
cedants
Corporation tax receivable
Investment in associates
Property, plant and equipment
Intangible assets
Total assets as at 31 December 2014
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 2014
U.S. $
$m
173.4
7.7
1,885.7
119.8
81.8
10.8
263.5
–
52.7
0.3
153.8
2,749.5
U.S. $
$m
550.1
379.6
34.8
30.0
0.1
46.5
17.4
1.6
284.4
1,344.5
Sterling
$m
42.8
–
18.8
15.3
4.8
25.1
15.9
4.3
–
8.8
–
Euro
$m
27.2
–
41.2
3.9
10.9
–
27.6
–
–
–
–
Japanese Yen
$m
28.6
–
–
–
0.6
–
0.2
–
–
–
–
Other
$m
31.5
–
41.2
3.4
6.5
0.7
9.0
–
–
–
–
135.8
110.8
29.4
92.3
Sterling
$m
51.9
20.2
1.4
2.4
–
36.8
21.3
–
–
134.0
Euro
$m
65.6
48.4
2.2
1.0
–
0.1
–
3.3
42.2
162.8
Japanese Yen
$m
43.3
4.8
0.3
–
–
–
–
–
–
Other
$m
41.7
26.1
2.1
0.8
–
0.1
–
–
–
48.4
70.8
Total
$m
303.5
7.7
1,986.9
142.4
104.6
36.6
316.2
4.3
52.7
9.1
153.8
3,117.8
Total
$m
752.6
479.1
40.8
34.2
0.1
83.5
38.7
4.9
326.6
1,760.5
www.lancashiregroup.com
www.lancashiregroup.com
119
119
FINANCIAL STATEMENTS
RISK DISCLOSURES CONTINUED
Assets
Cash and cash equivalents
Accrued interest receivable
Investments
Reinsurance assets
Deferred acquisition costs
Other receivables
Inwards premiums receivable from insureds and
cedants
Corporation tax receivable
Investment in associates
Property, plant and equipment
Intangible assets
U.S. $
$m
227.6
8.7
1,897.6
170.3
57.4
8.7
232.1
–
64.7
1.0
177.2
Sterling
$m
63.8
0.1
39.8
34.6
2.2
10.0
18.0
5.6
–
1.8
–
Euro
$m
44.9
0.1
45.9
2.3
7.1
–
26.7
–
–
–
–
Japanese Yen
$m
39.4
–
–
0.3
0.8
–
0.6
–
–
–
–
Other
$m
27.3
–
32.7
1.2
6.3
–
11.0
–
–
–
–
Total
$m
403.0
8.9
2,016.0
208.7
73.8
18.7
288.4
5.6
64.7
2.8
177.2
Total assets as at 31 December 2013
2,845.3
175.9
127.0
41.1
78.5
3,267.8
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 2013
U.S. $
$m
569.9
348.4
24.2
25.3
0.1
47.7
19.4
(1.4)
284.4
1,318.0
Sterling
$m
74.1
22.8
0.1
5.2
–
32.9
17.2
–
–
152.3
Euro
$m
91.1
35.3
2.6
0.3
–
0.1
–
1.6
47.9
178.9
Japanese Yen
$m
77.7
7.4
–
–
0.1
–
–
–
–
Other
$m
40.6
28.2
2.0
0.1
–
–
2.1
–
–
85.2
73.0
Total
$m
853.4
442.1
28.9
30.9
0.2
80.7
38.7
0.2
332.3
1,807.4
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 $3.8 million (2013 – $2.3 million).
The 31 December 2014 losses and loss adjustment expenses include the equivalent of $21.0 million (2013 – $57.2 million) of Japanese
Yen denominated insurance liabilities that are contained within the Group’s outwards reinsurance programme which limits the Group’s
net liability to $30.0 million. The Group has therefore not hedged the foreign currency exposure in relation to these losses.
The Group uses forward foreign currency contracts for the purposes of managing currency exposures. See page 117 for details
of the Group’s open forward foreign currency contracts.
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Lancashire Holdings Limited | Annual Report & Accounts 2014
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.
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;
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 income portfolio are as follows:
As at 31 December 2014
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 income securities
As at 31 December 2013
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 income securities
Core
$m
Core plus
$m
103.7
168.1
200.0
20.9
21.9
5.9
143.8
664.3
Core
$m
265.9
162.2
123.4
30.7
15.1
3.6
118.4
719.3
58.9
117.1
80.6
19.6
29.1
9.5
89.3
404.1
Core plus
$m
153.2
68.7
30.2
34.3
23.2
13.2
116.4
439.2
Surplus
$m
43.6
42.4
75.5
65.3
97.5
243.8
181.8
749.9
Surplus
$m
56.7
101.5
57.6
153.5
54.3
194.1
219.5
837.2
Total
$m
206.2
327.6
356.1
105.8
148.5
259.2
414.9
1,818.3
Total
$m
475.8
332.4
211.2
218.5
92.6
210.9
454.3
1,995.7
www.lancashiregroup.com
www.lancashiregroup.com
121
121
FINANCIAL STATEMENTS
RISK DISCLOSURES CONTINUED
The maturity profile of the financial liabilities of the Group is as follows:
As at 31 December 2014
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 2013
Losses and loss adjustment expenses
Insurance contracts – other payables
Amounts payable to reinsurers
Other payables
Interest rate swap
Long-term debt
Total
Years until liability becomes due – undiscounted values
Balance sheet
$m
Less than one
$m
One to three
$m
Three to five
$m
752.6
40.8
34.2
83.5
4.9
326.6
1,242.6
299.0
30.5
34.2
83.5
2.5
13.2
462.9
270.0
9.6
–
–
2.2
35.3
317.1
102.2
0.7
–
–
0.4
38.0
141.3
Years until liability becomes due – undiscounted values
Balance sheet
$m
Less than one
$m
One to three
$m
Three to five
$m
853.4
28.9
30.9
80.7
0.2
332.3
1,326.4
381.2
26.6
30.9
80.7
2.5
13.3
535.2
312.4
1.5
–
–
3.5
34.0
351.4
96.7
0.8
–
–
(1.2)
41.8
138.1
Over five
$m
81.4
–
–
–
(0.2)
546.6
627.8
Over five
$m
63.1
–
–
–
(4.6)
629.7
688.2
Total
$m
752.6
40.8
34.2
83.5
4.9
633.1
1,549.1
Total
$m
853.4
28.9
30.9
80.7
0.2
718.8
1,712.9
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. The prepayment options for the Group’s long-term debt are discussed in note 22.
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 outlooks and reallocates assets as deemed necessary.
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Lancashire Holdings Limited | Annual Report & Accounts 2014
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 income 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 income 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 income 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,
require the posting of margins and settle unrealised gains and losses daily. Credit risk on OTC derivatives is mitigated by monitoring
the creditworthiness of the counterparties and by requiring collateral to be posted for positions which have accrued gains by amounts
exceeding predetermined thresholds.
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 by the RRC, as discussed on page 108.
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 2014
AAA
AA+, AA, AA-
A+, A, A-
BBB+, BBB, BBB-
Other1
Total
(1) Reinsurance recoveries classified as “other” include $4.2 million of reserves that are fully collateralised.
As at 31 December 2013
AAA
AA+, AA, AA-
A+, A, A-
BBB+, BBB, BBB-
Other1
Total
Other investments
$m
Cash and
fixed income
securities
$m
Inwards
premiums
receivable and
other receivables
$m
–
–
0.7
–
–
0.7
385.9
765.8
642.4
193.1
134.6
2,121.8
–
–
85.0
–
273.1
358.1
Other investments
$m
Cash and
fixed income
securities
$m
Inwards
premiums
receivable and
other receivables
$m
–
–
4.9
(0.2)
–
4.7
568.8
865.9
665.8
186.8
111.4
2,398.7
–
–
97.0
–
220.9
317.9
Reinsurance
recoveries
$m
–
–
103.0
0.1
9.3
112.4
Reinsurance
recoveries
$m
–
–
148.1
0.3
34.6
183.0
(1) Reinsurance recoveries classified as “other” include $33.2 million of reserves that are fully collateralised; $26.8 million of these are with ARL.
The two counterparties to the Group’s long-term debt interest rate swaps are currently rated A+ and A- by S&P respectively.
www.lancashiregroup.com
www.lancashiregroup.com
123
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FINANCIAL STATEMENTS
RISK DISCLOSURES CONTINUED
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
2014
$m
23.6
6.7
3.2
33.5
2013
$m
13.5
2.2
3.6
19.3
Provisions of $1.2 million (2013 – $0.2 million) have been made for impaired or irrecoverable balances and $1.0 million (2013 – $0.3
million) was released from the consolidated statement of comprehensive income in respect of bad debts. No provisions have been made
against balances recoverable from reinsurers.
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 BLAST.
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 CRO’s quarterly report to the LHL and Entity Boards and the Cathedral
Risk 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 three
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 as strategic risks.
The Group has maintained elevated risk scores in the risk register relating to the integration of Cathedral into the Group’s financial
and actuarial reporting, but these will be reviewed in 2015.
I. BUSINESS PLAN RISKS
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, including the Cathedral team;
evaluation of 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.
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Lancashire Holdings Limited | Annual Report & Accounts 2014
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
2014
$m
1,356.8
326.6
1,683.4
(153.8)
1,529.6
2013
$m
1,459.7
332.3
1,792.0
(177.2)
1,614.8
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 Underwriters 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 operating entities also conduct capital requirement assessments under internal measures and local regulatory
requirements. Refer to note 30 for a discussion of the regulatory capital requirements of the Group’s operating entities.
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 insurance cycle. 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.
www.lancashiregroup.com
www.lancashiregroup.com
125
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FINANCIAL STATEMENTS
RISK DISCLOSURES CONTINUED
IRR achieved is as follows:
31 December 20051
31 December 2006
31 December 2007
31 December 2008
31 December 2009
31 December 2010
31 December 2011
31 December 2012
31 December 2013
31 December 2014
(1) The returns shown are for the period from the date of incorporation, 12 October 2005, to 31 December 2005.
IRR achieved in excess of the three-month treasury yield is as follows:
31 December 20051
31 December 2006
31 December 2007
31 December 2008
31 December 2009
31 December 2010
31 December 2011
31 December 2012
31 December 2013
31 December 2014
Annual
return
%
(3.2)
17.8
31.4
7.8
26.5
23.3
13.4
16.7
18.9
13.9
Annual
return
%
(3.4)
13.0
26.9
6.4
26.4
23.2
13.3
16.6
18.9
13.9
Compound
annual return
%
Inception to
date return
%
n/a
14.0
22.4
17.9
19.8
20.3
19.5
19.2
19.2
18.9
(3.2)
14.0
50.3
63.7
105.8
152.4
191.2
242.7
308.0
375.3
Compound
annual return
%
Inception to
date return
%
n/a
9.2
17.8
14.3
17.1
18.2
17.7
17.7
17.9
17.7
(3.4)
9.2
40.8
52.7
94.6
141.1
179.9
231.3
296.6
363.8
(1) The returns shown are for the period from the date of incorporation, 12 October 2005, to 31 December 2005.
III. RETENTION RISKS
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;
identification of key team profit generators and function holders with targeted retention packages;
documented recruitment procedures, position descriptions and employment contracts; and
resource monitoring and the provision of appropriate compensation, including equity based compensation which vests over
a defined time horizon, and training schemes.
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Lancashire Holdings Limited | Annual Report & Accounts 2014
NOTES TO THE ACCOUNTS
1. GENERAL INFORMATION
The Group is a provider of global specialty insurance and reinsurance products with operations in the United Kingdom, Bermuda
and Canada. 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 at Level 29, 20 Fenchurch Street, London, EC3M
3BY, United Kingdom.
The consolidated financial statements for the year ended 31 December 2014 include the Group’s subsidiary companies, the Group’s
interest in associates, and the Group’s share of syndicate assets and liabilities and income and expenses. A full listing of the Group’s
related parties can be found in note 27.
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 segment 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 104 to 107. 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 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. Results
included in the Lloyd’s segment are from the date of completion of the Cathedral acquisition.
www.lancashiregroup.com
www.lancashiregroup.com
127
127
FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
2. SEGMENTAL REPORTING CONTINUED
REVENUE AND EXPENSE BY OPERATING SEGMENT
For the year ended 31 December 2014
Gross premium written by geographical region
Worldwide offshore
Europe
U.S. and Canada
Far East
Middle East
Worldwide, including the U.S. and Canada1
Worldwide, excluding the U.S. and Canada2
Rest of world
Total
Outwards reinsurance premiums
Change in unearned premiums
Change in unearned 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
Energy
$m
Marine
$m
Aviation
$m
Lloyd’s
$m
Total
$m
0.1
92.3
33.4
34.6
33.8
14.4
8.0
46.4
263.0
(34.3)
(9.9)
2.7
221.5
(12.0)
(9.6)
(26.7)
0.5
173.7
9.8%
11.8%
–
21.6%
220.2
67.0
12.5
3.7
0.9
(0.1)
0.4
0.5
1.3
239.4
(47.8)
(22.5)
0.6
169.7
(55.2)
13.3
(53.1)
0.7
75.4
–
–
–
–
–
–
0.7
67.7
(9.7)
(0.3)
–
57.7
(27.6)
–
(17.9)
0.2
12.4
0.1
–
53.1
–
–
–
–
–
53.2
(8.1)
4.7
2.8
52.6
(32.9)
–
(9.7)
0.1
10.1
–
116.9
82.3
24.1
9.0
8.4
1.0
42.6
284.3
(64.9)
(9.0)
3.7
214.1
(110.2)
7.7
(47.7)
0.2
64.1
24.7%
30.9%
–
47.8%
30.7%
–
62.5%
18.3%
–
47.9%
22.2%
–
55.6%
78.5%
80.8%
70.1%
287.4
221.7
172.5
59.6
42.7
23.2
9.5
91.0
907.6
(164.8)
(37.0)
9.8
715.6
(237.9)
11.4
(155.1)
1.7
335.7
(109.2)
226.5
31.7%
21.4%
15.6%
68.7%
(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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Lancashire Holdings Limited | Annual Report & Accounts 2014
Property
$m
Energy
$m
Marine
$m
Aviation
$m
Lloyd’s
$m
Total
$m
REVENUE AND EXPENSE BY OPERATING SEGMENT
For the year ended 31 December 2013
Gross premium written by geographical region
Worldwide offshore
Europe
U.S. and Canada
Far East
Middle East
Worldwide, including the U.S. and Canada1
Worldwide, excluding the U.S. and Canada2
Rest of world
Total
Outwards reinsurance premiums
Change in unearned premiums
Change in unearned premiums ceded
Net premiums earned
Insurance losses and loss adjustment expenses
–
36.4
84.9
39.1
16.5
16.5
85.4
18.7
52.4
333.4
(66.9)
(39.9)
(7.8)
218.8
(47.1)
Insurance losses and loss adjustment expenses recoverable
16.9
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
(37.8)
8.4
159.2
13.8%
13.4%
–
27.2%
191.9
0.4
6.5
0.3
0.2
0.2
7.2
0.4
3.0
209.9
(38.5)
27.8
3.9
203.1
(63.2)
9.3
(56.9)
0.7
93.0
61.3
0.1
–
–
–
–
0.9
–
0.7
63.0
(11.2)
9.9
–
61.7
(99.2)
34.2
(21.7)
0.2
(24.8)
0.1
–
–
–
–
–
48.8
–
–
48.9
(3.8)
(0.4)
–
44.7
(20.0)
–
(10.1)
–
14.6
–
1.5
10.1
0.5
–
–
8.7
0.3
3.4
24.5
(1.7)
26.9
(9.9)
39.8
(20.5)
1.5
(8.6)
–
12.2
26.5%
27.7%
–
105.3%
34.8%
–
54.2%
140.1%
44.7%
22.6%
–
67.3%
47.7%
21.6%
–
69.3%
253.3
38.4
101.5
39.9
16.7
16.7
151.0
19.4
59.5
679.7
(122.1)
24.3
(13.8)
568.1
(250.0)
61.9
(135.1)
9.3
254.2
(36.1)
218.1
33.1%
22.1%
15.0%
70.2%
(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
www.lancashiregroup.com
129
129
FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
3. INVESTMENT RETURN
The total investment return for the Group is as follows:
For the year ended 31 December 2014
Fixed income securities – AFS
Fixed income securities – at FVTPL
Equity securities – AFS
Hedge funds – at FVTPL
Other investments
Cash and cash equivalents
Total investment return
For the year ended 31 December 2013
Fixed income securities – AFS
Fixed income securities – at FVTPL
Equity securities – AFS
Other investments
Cash and cash equivalents
Total investment return
Net investment
income
and net other
investment income
$m
Net realised
gains (losses)
and impairments
$m
Net change
in unrealised
gains /losses
$m
Total investment
return excluding
foreign exchange
$m
Foreign exchange
gains (losses)
$m
Total investment
return including
foreign exchange
$m
27.7
1.6
0.5
2.1
(2.3)
0.4
30.0
2.7
–
(0.4)
–
(8.2)
–
(5.9)
(1.8)
–
(0.4)
–
–
–
(2.2)
28.6
1.6
(0.3)
2.1
(10.5)
0.4
21.9
(9.5)
–
–
–
1.9
(0.6)
(8.2)
19.1
1.6
(0.3)
2.1
(8.6)
(0.2)
13.7
Net investment
income
and net other
investment income
$m
Net realised
gains (losses)
and impairments
$m
Net change
in unrealised
gains /losses
$m
Total investment
return excluding
foreign exchange
$m
Foreign exchange
gains (losses)
$m
Total investment
return including
foreign exchange
$m
24.5
(0.4)
0.1
1.8
0.8
26.8
7.6
–
–
5.0
–
12.6
(33.8)
–
0.5
–
–
(33.3)
(1.7)
(0.4)
0.6
6.8
0.8
6.1
(3.1)
–
–
2.6
(0.1)
(0.6)
(4.8)
(0.4)
0.6
9.4
0.7
5.5
Net realised gains (losses) and impairments includes impairment losses of $0.1 million (2013 – $nil) recognised on fixed income securities
and $0.2 million (2013 – $nil) recognised on equity securities held by the Group.
Refer to page 116 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. The net impact of TBAs is $nil for
all reporting periods.
Included in investment income is $5.7 million (2013 – $5.5 million) of investment management, accounting and custodian fees.
4. NET INSURANCE ACQUISITION EXPENSES
Insurance acquisition expenses
Amortisation of value of in-force business acquired
Changes in deferred insurance acquisition expenses
Insurance acquisition expenses ceded
Changes in deferred insurance acquisition expenses ceded
Total net insurance acquisition expenses
2014
$m
177.6
15.0
(30.8)
(8.3)
(0.1)
153.4
2013
$m
132.4
8.5
(5.8)
(8.7)
(0.6)
125.8
A portion of the amortisation expense relating to the value of in-force business acquired has been allocated to insurance acquisition
expenses, in line with the run-off profile of that business.
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Lancashire Holdings Limited | Annual Report & Accounts 2014
5. RESULTS OF OPERATING ACTIVITIES
Results of operating activities are stated after charging the following amounts:
Depreciation on owned assets
Operating lease charges
Amortisation of value of in-force business
Auditors’ remuneration
– Group audit fees
– Other services
Total
2014
$m
2.1
3.8
8.4
1.7
0.3
16.3
2013
$m
1.4
2.4
4.7
1.3
0.3
10.1
During 2014, EY provided non-audit services in relation to taxation services, capital management projects, Cathedral group restructuring
and services pursuant to the KCML subscription and shareholders’ agreement. All fees paid to the Group’s auditors for non-audit services
are approved by the Group’s Audit Committee.
In addition to the auditors’ remuneration above, $0.5 million of fees were paid to the Group’s auditors during the year ended 31
December 2013 in relation to their work performed in their role as Reporting Accountant for LHL’s share issuance on 7 August 2013.
The share issuance is discussed further in note 23. These fees are included in the Group’s consolidated balance sheet as a deduction
to share premium.
6. EMPLOYEE BENEFITS
Wages and salaries
Pension costs
Bonus and other benefits
Total cash compensation
RSS – ordinary
RSS – bonus deferral
RSS – Cathedral acquisition grant
Total equity based compensation
Total employee benefits
2014
$m
27.4
3.0
23.7
54.1
12.6
3.2
7.5
23.3
77.4
2013
$m
19.8
1.8
21.1
42.7
13.9
2.8
–
16.7
59.4
EQUITY BASED COMPENSATION
The Group’s primary equity based compensation scheme is its RSS. Previously the Group also issued options to employees pursuant
to an LTIP, which has been closed to further issues, and also authorised and issued warrants at its formation in 2005 and 2006. Further
details of the warrants can be found in note 24.
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131
131
FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
6. EMPLOYEE BENEFITS CONTINUED
RSS
On 22 December 2010, LHL’s shareholders, in a Special General Meeting, voted in favour of the LHL Board’s proposal to modify
the existing RSS awards programme to a nil-cost options programme. The modification introduced an exercise period of ten years from
the grant date for all outstanding and future RSS grants. Previously, all awards were automatically converted to shares on the vesting 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
2014 and 2013:
Assumptions
Dividend yield
Expected volatility1
Risk-free interest rate2
Expected average life of options
Share price
2014
0.0%
22.0%
1.0%
3 years
$12.16
2013
0.0%
23.2%
0.40%
3 years
$13.79
(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 3 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.
RSS – ORDINARY
The ordinary RSS options vest after a three-year period and are dependent on certain performance criteria. A maximum of 75.0 per cent
of the ordinary RSS options will vest only on the achievement of an LHL RoE in excess of a required amount. A maximum of 25.0 per cent
of the ordinary RSS options will vest only on the achievement of an LHL 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 2012
Granted
Exercised
Forfeited
Lapsed
Outstanding as at 31 December 2013
Granted
Exercised1
Forfeited
Lapsed1
Outstanding as at 31 December 2014
Exercisable as at 31 December 2014
Number of
employee
restricted stock
Number of
non-employee
restricted stock
Total number of
restricted stock
4,914,823
1,236,971
561,327
–
5,476,150
1,236,971
(1,443,649)
(150,975)
(1,594,624)
(369,810)
(17,574)
4,320,761
1,157,761
–
(1,525)
(369,810)
(19,099)
408,827
4,729,588
–
1,157,761
(1,894,668)
(186,994)
(2,081,662)
(166,857)
(262,781)
3,154,216
1,316,281
–
–
221,833
221,833
(166,857)
(262,781)
3,376,049
1,538,114
(1) Richard Brindle, the Group’s former CEO, retired on 30 April 2014. He was treated as a good leaver and in line with RSS plan rules his outstanding unvested performance awards were tested for performance
at cessation. Based on the agreed upon vesting conditions 406,129 awards vested and 262,781 lapsed. Mr Brindle exercised these awards plus an additional 138,086 vested awards and opted to receive
payment in cash. These vested awards have been treated as cash-settled under IFRS 2.
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2014
2013
Employee
restricted stock
Non-employee
restricted stock
Total
restricted stock
Employee
restricted stock
Non-employee
restricted stock
Total
restricted stock
Weighted average remaining contractual life
7.9 years
6.8 years
7.9 years
7.9 years
7.5 years
7.9 years
Weighted average fair value at date of grant during
the year
Weighted average share price at date of exercise
during the year
$12.25
–
$12.25
$11.80
–
$11.80
$11.35
$10.66
$11.29
$12.80
$12.44
$12.76
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 2012
Granted
Exercised
Forfeited
Outstanding as at 31 December 2013
Granted
Exercised1
Forfeited
Outstanding as at 31 December 2014
Exercisable as at 31 December 2014
Number of
employee
restricted stock
Number of
non-employee
restricted stock
Total number of
restricted stock
657,343
179,633
103,639
7,664
760,982
187,297
(470,410)
(86,382)
(556,792)
(11,345)
355,221
278,608
(266,228)
(3,991)
363,610
74,079
–
(11,345)
24,921
–
380,142
278,608
(11,183)
(277,411)
–
(3,991)
13,738
–
377,348
74,079
(1) Richard Brindle, the Group’s former CEO, retired on 30 April 2014. He was treated as a good leaver and in line with RSS plan rules his 132,643 outstanding bonus deferral awards vested in full at cessation.
Mr Brindle exercised these awards plus an additional 40,568 vested awards and opted to receive payment in cash. These vested awards have been treated as cash-settled under IFRS 2.
2014
2013
Employee
restricted stock
Non-employee
restricted stock
Total
restricted stock
Employee
restricted stock
Non-employee
restricted stock
Total
restricted stock
Weighted average remaining contractual life
8.4 years
7.6 years
8.4 years
8.4 years
8.5 years
8.4 years
Weighted average fair value at date of grant during
the year
Weighted average share price at date of exercise
during the year
$12.14
–
$12.14
$13.84
$12.71
$13.85
$11.40
$11.08
$11.39
$12.59
$12.48
$12.57
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133
133
FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
6. EMPLOYEE BENEFITS CONTINUED
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 only 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 will vest only 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 awards are not exercisable as at 31 December 2014.
Outstanding as at 31 December 2012
Granted
Outstanding as at 31 December 2014 and 2013
Weighted average remaining contractual life
Weighted average fair value at date of grant
Total number of
restricted stock
–
2,307,157
2,307,157
Total restricted stock
8.9 years
$13.01
LTIP
The LTIP plan was closed on 4 January 2008. 25.0 per cent of LTIP options vested on each of the first, second, third and fourth
anniversary of the grant date. There were no associated performance criteria. All outstanding LTIP options were exercised during 2013.
Outstanding as at 31 December 2013 and 2012
Exercised
Outstanding and exercisable as at 31 December 2014 and 2013
Weighted average remaining contractual life
Weighted average share price at date of exercise during the year
Number
Weighted average
exercise price
133,836
(133,836)
–
2014
–
–
$0.98
$0.80
–
2013
–
$13.23
As approved by the Remuneration Committee on 18 November 2009, all option exercise prices were automatically adjusted on
the dividend record date to neutralise the devaluing impact of dividends payments.
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Lancashire Holdings Limited | Annual Report & Accounts 2014
MANAGEMENT TEAM ORDINARY WARRANTS
Ordinary warrants were all fully vested by 31 December 2008. All ordinary warrants will expire ten years from the date of issue. The fair
value of all ordinary warrants granted was $2.62 per warrant. Ordinary warrants granted and outstanding are:
Outstanding as at 31 December 2013 and 2012
Exercised
Outstanding and exercisable as at 31 December 2014
Weighted average remaining contractual life
Weighted average share price at date of exercise during the year
Number
Weighted average
exercise price
6,184,399
(5,625,217)
559,182
$4.64
$4.63
$4.72
2014
2013
1.0 year
$10.55
2.0 years
–
MANAGEMENT TEAM PERFORMANCE WARRANTS
Performance warrants were all fully vested by 31 December 2009. All performance warrants will expire ten years from the date of
issue. Vesting was dependent on achieving certain performance criteria. The fair value of all warrants granted was $2.62 per warrant.
The exercise price of warrants was automatically adjusted for dividends declared prior to their vesting dates.
Performance warrants granted and outstanding are:
Outstanding as at 31 December 2013 and 2012
Exercised
Outstanding and exercisable as at 31 December 2014
Weighted average remaining contractual life
Weighted average share price at date of exercise during the year
Refer to note 24 for further disclosure on non-management warrants outstanding.
7. FINANCING COSTS
Interest expense on long-term debt
Net losses (gains) on interest rate swaps
Other financing costs
Total
Refer to note 22 for details of long-term debt and financing arrangements.
Number
Weighted average
exercise price
859,445
(741,965)
117,480
$3.62
$3.62
$3.62
2014
2013
1.0 year
$11.07
2.0 years
–
2014 $m
2013 $m
15.5
7.4
0.9
23.8
13.2
(5.2)
0.9
8.9
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135
135
FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
8. TAX CHARGE
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 28 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.
Tax charge
Corporation tax charge (credit) for the period
Adjustments in respect of prior period corporation tax
Deferred tax (credit) charge for the period
Tax rate change adjustment
Adjustments in respect of prior period deferred tax
Total tax credit
Tax reconciliation
Profit before tax
UK corporation tax at 21.5% (2013 – 23.3%)
Non-taxable 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
Total tax credit
2014
$m
0.4
0.2
(2.9)
(0.8)
–
(3.1)
2014
$m
226.5
48.7
(59.8)
0.2
(8.5)
2.2
(0.8)
14.9
(3.1)
2013
$m
(2.6)
(1.1)
3.8
(2.9)
(1.0)
(3.8)
2013
$m
218.1
50.7
(51.0)
(2.1)
0.1
1.4
(2.9)
–
(3.8)
Due to the different taxpaying jurisdictions throughout the Group, the current tax charge as a percentage of the Group’s profit before
tax is 0.3 per cent (2013 – negative 1.7 per cent).
A corporation tax credit of $nil (2013 – $1.1 million) was recognised in other reserves which relates to tax deductions for equity based
compensation award exercises in excess of the cumulative expense at the reporting date. Refer to note 16 for further details of tax credits
included in other reserves.
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 income within shareholders’ equity.
The UK corporation tax rate as at 31 December 2014 was 21.0 per cent (effective from 1 April 2014). Until 1 April 2014 the UK
corporation tax rate of 23.0 per cent applied. On 17 July 2013 reductions to 21.0 per cent from 1 April 2014 and to 20.0 per cent
from 1 April 2015 were enacted. These rates have been reflected in the closing deferred tax position on the balance sheet.
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Lancashire Holdings Limited | Annual Report & Accounts 2014
9. CASH AND CASH EQUIVALENTS
Cash at bank and in hand
Cash equivalents
Total cash and cash equivalents
2014
$m
210.6
92.9
303.5
2013
$m
297.2
105.8
403.0
Cash equivalents have an original maturity of three months or less. The carrying amount of these assets approximates their fair
value. Refer to note 22 for the cash and cash equivalent balances on deposit as collateral.
10. INVESTMENTS
As at 31 December 2014
Fixed income securities – AFS
– Short-term investments
– Fixed income 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
– Agency commercial mortgage backed securities
– Non-agency commercial mortgage backed securities
– Bank loans
– Corporate bonds
Total fixed income securities – AFS
Fixed income securities – at FVTPL
Equity securities – AFS
Hedge funds – at FVTPL
Other investments
Total investments
Cost or
amortised cost
$m
Gross
unrealised gain
$m
Gross
unrealised loss
$m
Estimated
fair value
$m
30.4
17.1
363.0
88.5
28.6
17.3
185.1
165.9
20.9
2.4
39.0
131.2
707.0
1,796.4
30.0
15.8
150.0
–
1,992.2
–
0.5
1.0
0.8
0.4
0.3
0.3
2.8
0.3
–
0.6
0.1
3.4
10.5
1.2
2.0
4.3
0.7
18.7
–
(2.2)
(1.0)
(5.3)
(0.1)
(0.1)
(1.3)
(0.7)
(0.4)
–
–
(3.4)
(5.3)
(19.8)
–
(2.0)
(2.2)
–
30.4
15.4
363.0
84.0
28.9
17.5
184.1
168.0
20.8
2.4
39.6
127.9
705.1
1,787.1
31.2
15.8
152.1
0.7
(24.0)
1,986.9
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137
137
FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
10. INVESTMENTS CONTINUED
As at 31 December 2013
Fixed income securities – AFS
– Short-term investments
– Fixed income 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
– Agency commercial mortgage backed securities
– Non-agency commercial mortgage backed securities
– Bank loans
– Corporate bonds
Total fixed income securities – AFS
Fixed income securities – at FVTPL
Equity securities – AFS
Other investments
Total investments
Cost or
amortised cost
$m
Gross
unrealised gain
$m
Gross
unrealised loss
$m
Estimated
fair value
$m
231.0
26.4
218.5
111.1
21.3
99.0
150.4
252.5
8.7
4.1
36.9
107.3
698.0
1,965.2
30.0
15.1
2.6
2,012.9
0.1
0.4
0.1
0.8
0.3
–
1.1
3.5
0.1
0.1
1.0
0.6
6.0
14.1
–
0.8
3.5
18.4
(0.1)
(0.5)
(1.3)
(4.0)
(0.2)
(0.8)
(0.1)
(4.0)
–
–
–
(0.1)
(2.1)
(13.2)
(0.4)
(0.3)
(1.4)
(15.3)
231.0
26.3
217.3
107.9
21.4
98.2
151.4
252.0
8.8
4.2
37.9
107.8
701.9
1,966.1
29.6
15.6
4.7
2,016.0
2013
$m
14.9
(13.5)
1.8
(0.3)
2.9
Accumulated other comprehensive income is in relation to the Group’s AFS fixed income and equity securities and is as follows:
Gross unrealised gains
Gross unrealised losses
Net foreign exchange losses on fixed income – AFS
Tax provision
Accumulated other comprehensive income
2014
$m
12.5
(21.8)
10.3
(0.2)
0.8
Fixed income maturities are presented in the risk disclosures section on page 121. Refer to note 22 for the investment balances in trusts
in favour of ceding companies and on deposit as collateral.
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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Lancashire Holdings Limited | Annual Report & Accounts 2014
LEVEL (II)
Level (ii) investments are securities with quoted prices in active markets for similar assets or liabilities or 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 such as:
Non-U.S. 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;
Bank loans;
Corporate bonds; and
OTC derivatives, including futures, options, forward foreign exchange contracts, interest rate swaps, credit default swaps and swaptions.
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www.lancashiregroup.com
139
139
FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
10. INVESTMENTS CONTINUED
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. 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.
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 index providers, 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’ and custodian’s 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 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:
Level (i)
$m
Level (ii)
$m
Level (iii)
$m
Total
$m
30.3
–
363.0
–
–
–
–
–
–
–
–
–
–
0.1
15.4
–
84.0
28.9
17.5
184.1
168.0
20.8
2.4
39.6
127.9
705.1
393.3
1,393.8
–
–
–
–
31.2
15.8
–
0.7
393.3
1,441.5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
152.1
–
152.1
30.4
15.4
363.0
84.0
28.9
17.5
184.1
168.0
20.8
2.4
39.6
127.9
705.1
1,787.1
31.2
15.8
152.1
0.7
1,986.9
As at 31 December 2014
Fixed income securities – AFS
– Short-term investments
– Fixed income 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
– Agency commercial mortgage backed securities
– Non-agency commercial mortgage backed securities
– Bank loans
– Corporate bonds
Total fixed income securities – AFS
Fixed income securities – at FVTPL
Equity securities – AFS
Hedge funds – at FVTPL
Other investments
Total investments
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Lancashire Holdings Limited | Annual Report & Accounts 2014
As at 31 December 2013
Fixed income securities – AFS
– Short-term investments
– Fixed income 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
– Agency commercial mortgage backed securities
– Non-agency commercial mortgage backed securities
– Bank loans
– Corporate bonds
Total fixed income securities – AFS
Fixed income securities – at FVTPL
Equity securities – AFS
Other investments
Total investments
Level (i)
$m
Level (ii)
$m
Level (iii)
$m
Total
$m
153.5
–
217.3
–
–
–
–
–
–
–
–
–
–
77.5
26.3
–
107.9
21.4
98.2
151.4
252.0
8.8
4.2
37.9
107.8
701.9
370.8
1,595.3
–
15.6
–
29.6
–
4.7
386.4
1,629.6
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
231.0
26.3
217.3
107.9
21.4
98.2
151.4
252.0
8.8
4.2
37.9
107.8
701.9
1,966.1
29.6
15.6
4.7
2,016.0
2014
$m
–
150.0
2.1
152.1
There have been no transfers between Levels (i) and (ii), therefore no reconciliations have been presented.
The table below analyses the movements in assets classified as Level (iii) investments during the year ended 31 December 2014:
As at 31 December 2013
Purchases
Total net gains recognised in other investment income in profit or loss
As at 31 December 2014
During the year ended 31 December 2014, the Group recognised $4.3 million of unrealised gains in other investment income in profit
or loss for Level (iii) investments held at the reporting date. During the year ended 31 December 2013, the Group did not hold any
Level (iii) investments.
11. INTERESTS IN STRUCTURED ENTITIES
A. CONSOLIDATED STRUCTURED ENTITIES
The Group’s only consolidated structured entity is the EBT. 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.
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 December 2014, the Group’s total interest
in unconsolidated structured entities was $619.7 million. The Group does not sponsor any of the unconsolidated structured entities.
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www.lancashiregroup.com
141
141
FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
11. INTERESTS IN STRUCTURED ENTITIES CONTINUED
As at 31 December 2014, a summary of the Group’s interest in unconsolidated structured entities is as follows:
As at 31 December 2014
Fixed income securities
– Asset backed securities
– U.S. government agency mortgage backed securities
– Non-agency mortgage backed securities
– Agency commercial mortgage backed securities
– Non-agency commercial mortgage backed securities
Total fixed income securities
Investment funds
– Hedge funds
Total investment funds
Specialised investment vehicles
– KHL (see note 17)
Total
Investments
$m
Interest in associates
$m
Total
$m
184.1
168.0
20.8
2.4
39.6
414.9
152.1
152.1
–
567.0
–
–
–
–
–
–
–
–
52.7
52.7
184.1
168.0
20.8
2.4
39.6
414.9
152.1
152.1
52.7
619.7
The fixed income securities 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 income 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 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 disclosure for these financial
instruments and other investments is provided on pages 111 to 123. The total assets of these 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 2014. 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 continually through the holding period for the security.
The Group has not provided any other financial or other support in relation to any other to that described above as at the reporting
date, and there are no intentions to provide support in relation to any other unconsolidated structured entities in the foreseeable future.
12. REINSURANCE ASSETS AND LIABILITIES
As at 31 December 2012
Acquired in the Cathedral acquisition
Net deferral for prior years1
Net deferral for current year
Other
As at 31 December 2013
Net deferral for prior years
Net deferral for current year
Other
As at 31 December 2014
(1) Includes movement in deferral for reinsurance assets and liabilities acquired in the acquisition of Cathedral.
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Lancashire Holdings Limited | Annual Report & Accounts 2014
Unearned
premiums ceded
$m
Amounts payable
to reinsurers
$m
Other
receivables
$m
11.5
17.2
(23.3)
9.5
–
14.9
(14.9)
24.7
–
24.7
(30.6)
(22.0)
–
–
21.7
(30.9)
–
–
(3.3)
(34.2)
4.5
13.7
–
–
(7.4)
10.8
–
–
(5.5)
5.3
Total
$m
(14.6)
8.9
(23.3)
9.5
14.3
(5.2)
(14.9)
24.7
(8.8)
(4.2)
13. LOSSES AND LOSS ADJUSTMENT EXPENSES
As at 31 December 2012
Assumed in the Cathedral acquisition
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 2013
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 2014
Losses and
loss adjustment
expenses
$m
537.4
331.5
41.9
208.1
(13.6)
236.4
200.3
51.6
251.9
853.4
(40.8)
278.7
(11.8)
226.1
265.8
61.1
326.9
752.6
Reinsurance
recoveries
$m
(73.0)
(107.3)
(57.8)
(4.1)
(0.7)
(62.6)
(59.8)
(0.1)
(59.9)
(183.0)
6.4
(17.8)
0.8
(10.6)
(76.4)
(4.8)
(81.2)
(112.4)
Net losses and
loss adjustment
expenses
$m
464.4
224.2
(15.9)
204.0
(14.3)
173.8
140.5
51.5
192.0
670.4
(34.4)
260.9
(11.0)
215.5
189.4
56.3
245.7
640.2
Further information on the calculation of loss reserves and the risks associated with them is provided in the risk disclosures section from
page 108. 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 $150.5 million (2013 – $170.7
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, additional case reserves assessed by management and IBNR is shown below:
As at 31 December
Outstanding losses
Additional case reserves
Losses incurred but not reported
Total
2014
$m
369.3
159.7
223.6
752.6
%
49.1
21.2
29.7
100.0
2013
$m
501.1
115.0
237.3
853.4
%
58.7
13.5
27.8
100.0
The Group’s reserve for unpaid losses and loss adjustment expenses as at 31 December 2014 and 2013 had an estimated duration
of approximately two years.
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143
143
FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
13. LOSSES AND LOSS ADJUSTMENT EXPENSES CONTINUED
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, the Group has assumed
loss reserves relating to 2001 and subsequent years.
Accident year
Group gross losses1
Estimate of ultimate liability2
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
2006
and prior
$m
39.1
34.7
32.0
27.6
27.2
24.4
24.0
60.6
58.6
2007
$m
2008
$m
2009
$m
2010
$m
2011
$m
2012
$m
2013
$m
2014
$m
Total
$m
274.8
280.0
259.8
250.3
350.4
338.8
397.0
371.9
447.0
450.4
297.4
209.4
204.2
235.8
229.4
163.3
107.8
73.1
66.0
89.1
81.7
444.6
417.4
377.5
345.1
340.8
355.6
350.9
154.8
131.2
103.5
94.8
83.5
81.0
87.6
87.8
Current estimate of cumulative liability
58.6
87.8
350.9
81.7
229.4
450.4
338.8
259.8
274.8
2,132.2
Payments made
(26.0)
(78.9)
(337.6)
(57.0)
(188.6)
(262.1)
(233.3)
(135.0)
(61.1) (1,379.6)
Total Group gross liability
32.6
8.9
13.3
24.7
40.8
188.3
105.5
124.8
213.7
752.6
(1) Balances at 31 December 2013 include the addition of losses assumed in the Cathedral acquisition on 7 November 2013.
(2) Adjusted for revaluation of foreign currencies at the exchange rate as at 31 December 2014.
Accident year
Reinsurance1
Estimate of ultimate recovery2
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
Current estimate of cumulative recovery
Payments made
Total Group gross recovery
2006
and prior
$m
–
–
–
–
–
–
–
25.1
25.1
25.1
(2.3)
22.8
2007
$m
2008
$m
2009
$m
2010
$m
2011
$m
2012
$m
2013
$m
2014
$m
Total
$m
17.8
9.9
8.9
48.9
121.8
122.0
56.2
52.6
92.4
88.9
33.8
23.6
24.1
33.5
34.4
1.6
1.3
0.7
0.7
10.0
7.0
40.7
47.1
43.1
40.9
38.1
40.7
39.8
3.6
6.2
4.0
3.5
3.3
3.1
4.0
4.1
4.1
39.8
7.0
34.4
88.9
122.0
8.9
17.8
348.0
(3.5)
(38.7)
(1.9)
(28.0)
(42.2)
(110.6)
(3.6)
(4.8)
(235.6)
0.6
1.1
5.1
6.4
46.7
11.4
5.3
13.0
112.4
(1) Balances at 31 December 2013 include the addition of losses assumed in the Cathedral acquisition on 7 November 2013.
(2) Adjusted for revaluation of foreign currencies at the exchange rate as at 31 December 2014.
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Lancashire Holdings Limited | Annual Report & Accounts 2014
Accident year
Net Group losses1
Estimate of ultimate liability2
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
2006
and prior
$m
39.1
34.7
32.0
27.6
27.2
24.4
24.0
35.5
33.5
2007
$m
2008
$m
2009
$m
2010
$m
2011
$m
2012
$m
2013
$m
2014
$m
Total
$m
257.0
270.1
250.9
201.4
228.6
216.8
340.8
319.3
354.6
361.5
263.6
185.8
180.1
202.3
195.0
161.7
106.5
72.4
65.3
79.1
74.7
403.9
370.3
334.4
304.2
302.7
314.9
311.1
151.2
125.0
99.5
91.3
80.2
77.9
83.6
83.7
Current estimate of cumulative liability
33.5
83.7
311.1
74.7
195.0
361.5
216.8
250.9
257.0
1,784.2
Payments made
(23.7)
(75.4)
(298.9)
(55.1)
(160.6)
(219.9)
(122.7)
(131.4)
(56.3) (1,144.0)
Total Group net liability
9.8
8.3
12.2
19.6
34.4
141.6
94.1
119.5
200.7
640.2
(1) Balances at 31 December 2013 include the addition of losses assumed in the Cathedral acquisition on 7 November 2013.
(2) Adjusted for revaluation of foreign currencies at the exchange rate as at 31 December 2014.
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:
2006 accident year and prior
2007 accident year
2008 accident year
2009 accident year
2010 accident year
2011 accident year
2012 accident year
2013 accident year
Total favourable development
2014
$m
1.8
(0.3)
3.6
4.3
5.7
(6.1)
11.1
14.3
34.4
2013
$m
(0.7)
(0.9)
(4.1)
2.0
1.4
(4.1)
22.3
–
15.9
The favourable prior year development in 2014 arose primarily from IBNR releases due to lower than expected reported losses and
releases on settlement of outstanding losses, offset by adverse development on prior accident year mid-sized marine and energy claims.
The favourable prior year development in 2013 arose primarily from IBNR releases due to fewer than expected reported losses, a benefit
from the settlement on our North East ILW in relation to Sandy and releases on the settlement of outstanding losses. This favourable
development was offset to an extent by unfavourable development of $33.5 million after reinsurance on the Costa Concordia marine loss.
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145
145
FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
13. LOSSES AND LOSS ADJUSTMENT EXPENSES CONTINUED
During 2012 the Group was impacted by significant losses in relation to the total loss of the Costa Concordia. Management’s current best
estimate of the ultimate net loss in relation to this event is $100.7 million. The 90th percentile of the loss distribution for this estimate is
$103.3 million with the 95th percentile being $104.2 million. Significant uncertainty exists on the eventual ultimate loss in relation to
this event.
During 2012 the Group was also impacted by significant losses in relation to Sandy. Management’s current best estimate of the ultimate
net loss in relation to this event is $24.7 million. The 90th percentile of the loss distribution for this estimate is $48.7 million with the
95th percentile being $50.6 million. Significant uncertainty exists on the eventual ultimate loss.
The Group’s estimated ultimate net losses, after reinstatement premiums, for these significant events are as follows:
Costa Concordia
$m
59.2
–
67.7
(34.2)
4.4
97.1
3.9
–
(0.3)
100.7
Net
$m
67.2
123.7
(117.3)
73.6
169.3
(138.4)
104.5
Net ultimate losses as at 31 December 2012
Assumed in the Cathedral acquisition
Change in insurance losses and loss adjustment expenses
Change in insurance losses and loss adjustment expenses recoverable
Change in reinstatement premium
Net ultimate losses as at 31 December 2013
Change in insurance losses and loss adjustment expenses
Change in insurance losses and loss adjustment expenses recoverable
Change in reinstatement premium
Net ultimate losses as at 31 December 2014
Sandy
$m
44.5
6.8
3.4
(23.6)
(0.4)
30.7
(6.3)
–
0.3
24.7
14. INSURANCE, REINSURANCE AND OTHER RECEIVABLES
All receivables are considered current other than $71.3 million (2013 – $52.1 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.
15. DEFERRED ACQUISITION COSTS AND DEFERRED ACQUISITION COSTS CEDED
The reconciliation between opening and closing deferred acquisition costs incurred and ceded is shown below:
As at 31 December 2012
Net deferral during the year
(Expense) income for the year
As at 31 December 2013
Net deferral during the year
(Expense) income for the year
As at 31 December 2014
Incurred
$m
68.0
132.4
(126.6)
73.8
177.6
(146.8)
104.6
Ceded
$m
(0.8)
(8.7)
9.3
(0.2)
(8.3)
8.4
(0.1)
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Lancashire Holdings Limited | Annual Report & Accounts 2014
16. 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
2014
$m
3.2
(15.1)
(13.3)
(16.0)
(0.2)
2.7
(38.7)
2013
$m
8.5
(16.7)
(11.2)
(16.4)
(5.1)
2.2
(38.7)
A deferred tax charge of $4.4 million (2013 – $0.5 million credit) was recognised in other reserves which relates to deferred tax credits
for unexercised equity based compensation awards where the estimated market value is in excess of the cumulative expense at the
reporting date.
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 2015 and subsequent years to utilise the deferred tax
assets recognised when the underlying temporary differences reverse.
A deferred tax asset of $18.7 million (2013 – $3.2 million) has not been recognised in relation to unused tax losses carried forward
in LHL, as at present the related tax benefit is not expected to be realised through future taxable profits.
All deferred tax assets and liabilities are classified as non-current.
17. INVESTMENT IN ASSOCIATES
KHL
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 2014, the carrying value of the Group’s investment in KHL was $52.7 million
(31 December 2013 – $20.1 million). The Group’s share of comprehensive income for KHL for the period was $4.7 million
(31 December 2013 – $nil). Key financial information for KHL is as follows:
Assets
Liabilities
Shareholders’ equity
Gross premium earned
Comprehensive income
(1) From the date of incorporation, 4 June 2013.
2014
$m
551.2
24.6
526.6
79.8
47.0
20131
$m
201.2
–
201.2
–
–
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 27 for details of transactions between the Group, KHL, KRL and KCML.
During the year ended 31 December 2014, AHL, ARL, SHL and SRL were placed in member’s voluntary liquidation. As at 31 December
2014, remaining assets and liabilities in AHL, ARL, SHL and SRL were negligible. As at 31 December 2014, the carrying value of the
Group’s investment in AHL is $nil (31 December 2013 – $32.4 million). As at 31 December 2014, the carrying value of the Group’s
investment in SHL is $nil (31 December 2013 – $12.2 million). The Group’s share of comprehensive income for AHL for the year
ended was $1.1 million (31 December 2013 – $6.6 million). The Group’s share of comprehensive income for SHL for the year ended
was $0.1 million (31 December 2013 – $2.6 million).
Refer to note 27 for details of transactions between the Group, AHL, ARL, SHL and SRL.
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147
147
FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
18. PROPERTY, PLANT AND EQUIPMENT
Cost
Accumulated depreciation
Net book value
19. INTANGIBLE ASSETS
Net book value at 1 January 2013
Acquired in the Cathedral acquisition
Amortisation charge for the year through insurance acquisition expenses
Amortisation charge for the year through other operating expenses
Net book value at 31 December 2013
Amortisation charge for the year through insurance acquisition expenses
Amortisation charge for the year through other operating expenses
Net book value at 31 December 2014
2014
$m
19.3
(10.2)
9.1
Value of
in-force business
$m
Syndicate
participation
rights
$m
Goodwill
$m
–
36.6
(8.5)
(4.7)
23.4
(15.0)
(8.4)
–
–
82.6
–
–
82.6
–
–
82.6
–
71.2
–
–
71.2
–
–
71.2
2013
$m
14.3
(11.5)
2.8
Total
$m
–
190.4
(8.5)
(4.7)
177.2
(15.0)
(8.4)
153.8
Syndicate participation rights and goodwill are deemed to have 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. The value of
in-force business was amortised over the remaining life of the acquired insurance contracts, which was approximately one year.
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 3 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 discount rate of 8.0 per cent has been used to discount the projected post tax 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 of the unit beyond the 3 year period is 2.0 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 asset’s carrying value for both the syndicate
participation rights and goodwill and would not be sensitive to any reasonably possible changes in assumptions. Therefore no impairment
has been recognised during the year ended 31 December 2014 (2013 – $nil).
20. INSURANCE LIABILITIES
As at 31 December 2012
Acquired in the Cathedral acquisition
Net deferral for prior years1
Net deferral for current year
Other
As at 31 December 2013
Net deferral for prior years
Net deferral for current year
Other
As at 31 December 2014
(1) Includes movement in deferral for insurance liabilities acquired in the Cathedral acquisition.
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Lancashire Holdings Limited | Annual Report & Accounts 2014
Unearned
premiums
$m
343.3
123.1
(275.9)
251.6
–
442.1
(330.5)
367.5
–
479.1
Other payables
$m
23.5
6.3
–
–
(0.9)
28.9
–
–
11.9
40.8
Total
$m
366.8
129.4
(275.9)
251.6
(0.9)
471.0
(330.5)
367.5
11.9
519.9
21. INSURANCE, REINSURANCE AND OTHER PAYABLES
Other payables
Accrued interest payable
Total other payables
Insurance contracts – other payables
Amounts payable to reinsurers
Total payables
2014
$m
81.2
2.3
83.5
40.8
34.2
2013
$m
78.5
2.2
80.7
28.9
30.9
158.5
140.5
Other payables include unsettled investment trades, accrued interest and other accruals. Insurance payables relate to amounts due
to policyholders for profit commission, return premiums and claims payable. All payables are considered current. The carrying value
approximates fair value due to the short-term nature of the payables.
22. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
LONG-TERM DEBT
On 5 October 2012, the Group issued U.S. $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 rate 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 rate and is payable quarterly. On 21 October 2011, the Cayman Islands Stock Exchange admitted to the official
list the Group’s 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 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 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 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 three month LIBOR.
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149
149
FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
22. LONG-TERM DEBT AND FINANCING ARRANGEMENTS CONTINUED
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 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
2014
$m
130.0
97.0
29.2
13.0
10.0
23.7
23.7
2013
$m
130.0
97.0
33.0
14.9
10.0
23.7
23.7
326.6
332.3
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 118.
The fair value of the long-term debt is estimated as $347.2 million (2013 – $341.2 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 (2013 – $2.2 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 117 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 a $4.9 million liability. Further information is provided on
pages 115 and 117. The Group has the right to net settle these instruments. Cash settlements are completed on a quarterly basis and the
total of the next cash settlement in the first quarter of 2015 on these instruments is $0.7 million. The net impact from cash settlement and
changes in estimated fair value is 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.
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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. LHL and LICL have the following facilities in place as at 31 December 2014:
(i) a $350.0 million syndicated collateralised credit facility with a $75.0 million loan sub-limit that has been in place since 5 April 2012
and will expire on 5 April 2017. There was no outstanding debt under this facility as at 31 December 2014 and 2013; and
(ii) a $50.0 million bi-lateral uncommitted LOC facility with Citibank Europe PLC.
The facilities are available for the issue of LOCs to ceding companies. The facilities are also available for LICL to issue LOCs to LUK
to collateralise certain insurance balances.
The terms of the $350.0 million LOC facility include standard default and cross-default provisions which require certain covenants
to be adhered to. These include the following:
(i) an A.M. Best financial strength rating of at least B++; and
(ii) a maximum debt to capital ratio of 30.0 per cent, where the subordinated loan notes are excluded from this calculation.
As at all reporting dates the Group was in compliance with all covenants under these facilities. The $50.0 million bi-lateral uncommitted
LOC facility does not contain default provisions or covenants.
The following LOCs have been issued:
As at 31 December
Issued to third parties
LOCs are required to be fully collateralised.
2014
$m
31.8
2013
$m
20.1
SYNDICATE BANK FACILITIES
As at 31 December 2014, 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 $50.0 million can be utilised by way of an LOC
to assist Syndicate 2010’s gross funding requirements.
As at 31 December 2014, Syndicate 3010 had in place a $40.0 million catastrophe facility with Barclays Bank plc. The facility is available
to assist in paying claims and the gross funding of catastrophes for Syndicate 3010. Up to $20.0 million can be utilised by way of an LOC
to assist gross funding requirements of Syndicate 3010.
There are no balances outstanding under either of the syndicate bank facilities as at 31 December 2014 or 2013. The syndicate 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 31 December
2014, LICL had been granted authorised or trusteed reinsurer status in all States (31 December 2013 – 45 States). The MBRT is subject
to the rules and regulations of the aforementioned States and the respective deed 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 2014 and 2013, the Group was in compliance with all covenants under its trust facilities.
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FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
22. LONG-TERM DEBT AND FINANCING ARRANGEMENTS CONTINUED
The Group is required to hold a portion of its assets as FAL to support the underwriting capacity 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 note 30 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 claims and expenses
of the syndicate to their policyholders. See note 30 for more information regarding 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
In various other trust accounts for policyholders
In favour of LOCs
In favour of derivative contracts
FAL
Syndicate accounts
Total
23. SHARE CAPITAL
Authorised ordinary shares of $0.50 each
As at 31 December 2014 and 2013
Cash and cash
equivalents
$m
2014
Fixed income
securities
$m
Equity
securities
$m
Cash and cash
equivalents
$m
0.3
0.7
8.0
1.5
6.9
6.9
24.3
31.3
22.9
25.3
1.7
167.5
89.6
338.3
–
–
–
–
15.8
–
15.8
1.0
3.8
6.3
0.7
14.2
16.4
42.4
2013
Fixed income
securities
$m
20.0
9.7
20.0
0.8
152.6
123.9
327.0
Equity
securities
$m
–
–
–
–
14.9
–
14.9
Number
$m
3,000,000,000
1,500.0
Allocated, called up and fully paid
As at 31 December 2012
Shares issued
As at 31 December 2013
Shares issued
As at 31 December 2014
Own shares
As at 31 December 2012
Shares distributed
Shares donated to trust
As at 31 December 2013
Shares distributed
Shares repurchased
Shares donated to trust
Number
168,602,427
16,843,382
185,445,809
6,666,789
192,112,598
Number held
in treasury
5,810,583
(435,120)
(1,862,138)
3,513,325
(666,434)
2,498,433
(2,394,377)
$m
40.7
(3.0)
(13.1)
24.6
Number held
in trust
1,320,486
(2,276,285)
1,862,138
906,339
$m
16.4
(30.1)
25.9
12.2
Total number
of own shares
7,131,069
(2,711,405)
–
4,419,664
(5.0)
(1,643,647)
(21.6)
(2,310,081)
25.0
–
–
2,498,433
(16.8)
2,394,377
24.9
–
$m
84.3
8.4
92.7
3.4
96.1
$m
57.1
(33.1)
12.8
36.8
(26.6)
25.0
8.1
As at 31 December 2014
The number of common shares in issue with voting rights (allocated share capital less shares held in treasury) as at 31 December 2014
was 189,161,651 (31 December 2013 – 181,932,484).
4,608,016
2,950,947
1,657,069
15.5
27.8
43.3
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Lancashire Holdings Limited | Annual Report & Accounts 2014
On 7 August 2013, LHL issued 16,843,382 new common shares. As a result of these shares being issued, a total of $203.5 million
was raised, $8.4 million of which was included in share capital and $195.1 million of which was included in share premium, net of
$5.3 million of offering expenses.
During 2014, the Group issued new common shares to satisfy the cashless exercises of warrants as follows:
Shares issued
23 May 2014
13 June 2014
3 July 2014
Total
Number of shares
issued
2,077,605
1,759,974
2,829,210
6,666,789
$m
1.1
0.9
1.4
3.4
Of the shares issued on 23 May 2014 and 13 June 2014, per the table above 3,837,579 were issued to satisfy Richard Brindle’s
warrant exercises (refer to note 27 for further information on related party transactions).
SHARE REPURCHASES
At the AGM held on 30 April 2014, the Group’s shareholders approved a renewal of the Repurchase Programme authorising the
repurchase of a maximum of 18,544,580 shares, with such authority to expire on the conclusion of the 2015 AGM or, if earlier,
fifteen months from the date the resolution approving the Repurchase Programme was passed.
Shares have been repurchased by the Group under share repurchase authorisation as follows:
Own shares
As at 31 December 2012
Shares distributed
Shares donated to trust
As at 31 December 2013
Repurchased
Shares distributed
Shares donated to trust
As at 31 December 2014
Number of shares
cancelled
Number of shares
transferred to
treasury shares
Weighted average
share price
27,541,552
5,810,583
–
–
(435,120)
(1,862,138)
27,541,552
3,513,325
–
–
–
2,498,433
(666,434)
(2,394,377)
27,541,552
2,950,947
£4.30
£4.30
£4.27
£4.31
£6.27
£4.77
£4.61
£4.43
At the balance sheet date $nil (31 December 2013 – $nil) remained to be settled.
In 2014, the trustees of the EBT acquired nil shares (2013 – nil) in accordance with the terms of the trust and distributed 1,643,647
(2013 – 2,276,285). There were no unsettled balances in relation to EBT purchases at either balance sheet date.
DIVIDENDS
The Board of Directors have authorised the following dividends:
$m
244.5
(3.0)
(13.1)
228.4
25.0
(5.0)
(16.8)
231.6
$m
19.2
201.4
10.5
94.5
21.1
42.1
10.4
Per share amount
Record date
Payment date
$0.10
$1.05
$0.05
$0.45
$0.10
$0.20
$0.05
22 Mar 2013
17 Apr 2013
22 Mar 2013
17 Apr 2013
23 Aug 2013
25 Sep 2013
29 Nov 2013
20 Dec 2013
21 Mar 2014
16 Apr 2014
21 Mar 2014
16 Apr 2014
29 Aug 2014
24 Sep 2014
$1.20
28 Nov 2014
19 Dec 2014
247.4
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153
Type
Final
Special
Interim
Special
Final
Special
Interim
Special
FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
24. OTHER RESERVES
Other reserves represent the Group’s restricted shares, options and warrants. Changes in the number of restricted shares, options
and management warrants held by employees are disclosed in note 6. The changes in the number of warrants held by non-employees
are as follows:
Outstanding at 31 December 2012
Exercised
Outstanding and exercisable as at 31 December 2013
Exercised
Outstanding and exercisable as at 31 December 2014
Weighted average exercise price as at 31 December 2014
Weighted average remaining contractual life
Weighted average share price at date of exercise during the year
Number of
Founder warrants
Number of
Lancashire
Foundation warrants
Number of
ordinary
warrants
19,803,572
648,143
2,350,000
(728,785)
–
–
19,074,787
648,143
2,350,000
(4,042,108)
–
–
15,032,679
648,143
2,350,000
$5.00
$4.73
$5.00
2014
2013
1.0 year
$11.25
2.0 years
$12.17
The fair value of all warrants granted was $2.62 per warrant. The exercise price of the Lancashire Foundation warrants was automatically
adjusted for dividends declared prior to the vesting date. Refer to note 6 for further details. This did not apply to the Founder warrants
as they were fully vested at the date of grant and exercisable upon issuance.
25. 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 $3.8 million (2013 – $2.4 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
2014
$m
1.1
11.4
41.2
53.7
2013
$m
2.9
6.9
–
9.8
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 the Group.
26. EARNINGS PER SHARE
The following reflects the profit and share data used in the basic and diluted earnings per share computations:
Profit for the year attributable to equity shareholders of LHL
Basic weighted average number of shares
Dilutive effect of RSS
Dilutive effect of warrants
Diluted weighted average number of shares
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2014
$m
229.3
2014
Number
of shares
2013
$m
222.5
2013
Number
of shares
185,558,086
169,270,681
2,442,255
3,431,739
10,112,990
17,788,368
198,113,331
190,490,788
Earnings per share
Basic
Diluted
2014
$1.24
$1.16
2013
$1.31
$1.17
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. In addition, where options are anti-dilutive,
they are not included in the number of potentially dilutive shares.
27. RELATED PARTY DISCLOSURES
The consolidated financial statements include LHL and the entities listed below:
Name
Subsidiaries1
LICL
SML2
KCML3
Lutine4
KCMMSL
LIHL
LIMSL
LISL
LUK
LMSCL
CCIL5
CCHL
CCL
CCL 1998
CCL 1999
CCL 20005
CCML5
CCSL
CUL
Associates
AHL6
AHL II7
SHL8
KHL
Other controlled entities
LHFT
EBT
Principal Business
Domicile
General insurance business
Insurance management services
Insurance management services
Non trading
Support services
Holding company
Insurance mediation activities
Support services
General insurance business
Support services
Holding company
Investment company
Holding company
Lloyd’s corporate member
Non trading
Holding company
Non trading
Support services
Lloyd’s managing agent
Holding company
Holding company
Holding company
Holding company
Trust
Trust
Bermuda
Bermuda
Bermuda
Bermuda
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Canada
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Bermuda
Bermuda
Bermuda
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.
(2) SML was liquidated on 12 August 2014.
(3) 92.68 per cent owned by the Group.
(4) Lutine was dissolved on 29 May 2014.
(5) The entities were formally placed in members’ voluntary liquidation on 11 December 2014.
(6) AHL was liquidated on 15 October 2014.
(7) AHL II was liquidated on 25 November 2014.
(8) SHL was liquidated on 15 October 2014.
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155
FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
27. RELATED PARTY DISCLOSURES CONTINUED
The Group has issued subordinated loan notes via a trust vehicle – LHFT, refer to note 22. 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, 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, 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 trustees 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 of $60.0 million. The Facility may only be used by the Trustees for the purpose of achieving the objectives of the
EBT. During the year ended 31 December 2014, the Group had made advances of $5.0 million (2013 – $10.7 million) to the EBT under
the terms of the Facility.
During the year ended 31 December 2014, the Group donated 2,394,377 (2013 – 1,862,138) treasury shares to the EBT at the prevailing
market rate. The total value of the treasury share donation was $24.9 million (2013 – $25.9 million).
LICL holds $346.1 million (2013 – $302.8 million) of cash and cash equivalents and fixed income securities in trust for the benefit of
LUK relating to intra-group reinsurance agreements.
In 2013, members of the Group’s senior management team contributed 12.57 per cent of the share capital in KCML. During 2014, LHL
and the Group’s senior management team purchased shares in KCML from Richard Brindle (see other transactions below). The senior
management team shareholding now represents a minority interest of 7.32 per cent. This investment represents the non-controlling
interest listed in the Group’s consolidated balance sheet.
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 compensation1
Equity based compensation
Directors' fees and expenses
Total
2014
$m
3.3
7.5
2.2
13.0
2013
$m
8.1
6.7
2.1
16.9
(1) Includes a credit of $2.3 million relating to the decrease in the UK National Insurance contribution provision in respect of Richard Brindle’s warrants. This is a result of the reduction in the Group’s share price
prior to the exercise of his warrants during 2014.
The table above includes short-term compensation of $1.8 million and an equity based compensation charge of $3.5 million relating to
the retirement of Richard Brindle, the Group’s former CEO. His retirement package also included a cash settlement of RSS awards
amounting to $8.2 million. Dividend equivalents that have been accrued on the RSS awards amounted to $1.6 million. The settlement of
the RSS awards and the dividend equivalent payment are reflected in contributed surplus within shareholders’ equity.
The Directors’ fees and expenses includes $0.4 million (2013 – $0.4 million) paid to significant founding shareholders. Non-Executive
Directors do not receive any benefits in addition to their agreed fees and expenses and do not participate in any of the Group’s incentive,
performance or pension plans. Neil McConachie left the Company as an employee on 30 June 2012, relinquishing his executive
responsibilities and became a Non-Executive Director effective 1 July 2012. He subsequently relinquished his role as a Non-Executive
Director on 30 April 2014. He is able to exercise previously granted RSS awards when they have vested, subject to the performance
conditions being met.
TRANSACTIONS WITH LANCASHIRE FOUNDATION
Cash donations to the Lancashire Foundation have been approved by the Board of Directors as follows:
Date
23 May 2013
5 November 2013
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$m
1.4
2.0
TRANSACTIONS WITH ASSOCIATES
In relation to transactions with ARL, the following amounts were included in the consolidated statement of comprehensive income
and the consolidated balance sheet:
As at 31 December
Consolidated statement of comprehensive income
Outwards reinsurance premiums
Insurance loss and loss adjustment expenses recoverable
Insurance acquisition expenses ceded
Consolidated balance sheet
Reinsurance recoveries
Amounts payable to reinsurers
2014
$m
0.6
(6.9)
6.8
–
–
2013
$m
47.9
9.1
7.1
26.8
(5.5)
During 2014, AHL returned $33.5 million of capital to the Group and ARL paid a final profit commission to the Group in the amount
of $6.7 million following a commutation of the Group’s quota share agreement with ARL.
During 2014, SHL returned $12.2 million of capital to the Group and SRL paid a final profit commission to the Group in the amount
of $3.0 million and was placed in to run-off and subsequently liquidated.
During 2014, the Group committed an additional $27.8 million of capital to KHL.
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 2014,
the Group recognised $6.2 million (31 December 2013 – $nil) of service fees in other income in relation to this agreement. Contingent
profit commission may be payable to KCML on the ultimate performance of KRL.
Refer to note 17 for further details on the Group’s investment in associates.
OTHER TRANSACTIONS
On 2 June 2014, Richard Brindle sold his shares in KCML to LHL and certain of the minority shareholders of KCML (being members of
the Group’s senior management team) for an amount of $1.2 million, of which $1.1 million was received from LHL. The sale was a direct
result of the provisions outlined in the subscription and shareholders’ agreement of KCML and the valuation was externally determined
by a valuation expert.
28. BUSINESS COMBINATIONS
On 7 November 2013, LHL acquired the entire issued share capital of Cathedral together with manager and investor loan notes and
preference shares issued by CCIL and CCL respectively. The acquisition has enabled the Group to benefit from direct participation
in Lloyd’s, the world’s leading specialist insurance market.
Total consideration paid for the entire issued share capital of Cathedral
Net assets acquired at fair value
Excess of total consideration over net fair value of assets acquired allocated to goodwill
Notes
19
$m
230.4
159.2
71.2
Intangible assets recognised on the acquisition of Cathedral relate to syndicate participation rights and the value of in-force business.
These are discussed further in note 19. The goodwill recognised arose from the premium paid for strengthening the Group’s market
position and acquiring a skilled workforce with an existing book of business and long standing business relationships. The goodwill is
not deductible for tax purposes.
29. NON-CASH TRANSACTIONS
On 25 June 2014, following shareholder approval on 30 April 2014, LHL transferred $192.2 million from share premium to contributed
surplus. During 2014, the Group issued new common shares to satisfy the cashless exercises of warrants in the amount of $3.4 million.
Refer to note 23 for further details.
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FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
30. STATUTORY REQUIREMENTS AND DIVIDEND RESTRICTIONS
The primary source of capital used by the Group is equity shareholders’ funds and borrowings. 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.
For LICL and LUK, these regulatory restrictions are based principally on the amount of premiums written and reserves for losses and loss
adjustment expenses, subject to overall minimum solvency requirements. LICL and LUK’s statutory capital and surplus are different from
shareholder’s equity due to certain items that are capitalised under IFRS but expensed or have a different valuation basis for regulatory
reporting, or are not admitted under insurance regulations.
Annual statutory capital and surplus reported to regulatory authorities by LICL and LUK is as follows:
As at 31 December
Statutory capital and surplus
Minimum required statutory capital and surplus
2014
LICL
$m
1,009.5
233.7
LUK
£m
117.3
23.9
2013
LICL
$m
1,210.2
235.5
LUK
£m
118.9
23.9
LICL is required to maintain a minimum liquidity ratio, whereby relevant assets, as defined in the regulations, must exceed 75.0 per cent
of relevant liabilities. As at 31 December 2014 and 2013 the liquidity ratio was met. LICL is also required to perform various capital
calculations under the BMA’s regulatory framework. An assessment is made of LICL’s capital needs and a target capital amount is
determined. The BMA may require a further capital loading on the target capital amount in certain circumstances. The BMA considers
that a decrease in capital below the target level represents a regulatory intervention point.
For LUK, various capital calculations are performed and an ICA is presented to the PRA. The PRA then considers the capital calculations
and issues an ICG, reflecting the PRA’s own view as to the level of capital required. The PRA considers that a decrease in an insurance
company’s capital below the level of its ICG represents a regulatory intervention point. As the Solvency II regime is adopted by the PRA
the capital measures will change, but the principles and restrictions on capital release will remain.
The Group’s underwriting capacity as a member of Lloyd’s 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, a process known as ICA. Solvency II internal models and the uSCR have been used to determine capital
requirements for Syndicate 2010 and Syndicate 3010. The uSCR of each syndicate at Lloyd’s is regarded as the minimum regulatory capital
requirement for the business. Lloyd’s has the discretion to take into account other factors at member level to uplift the calculated uSCR,
including the need to maintain the market’s overall security rating. Any uplift by Lloyd’s is added to the uSCR to produce the ECA.
Lloyd’s then uses each syndicate’s ECA as a basis for determining member level ECR. For the 2015 calendar year the Group’s initial
FAL requirement was set at 53.9 per cent (2014 – 61.0 per cent) of underwriting capacity supported. Further adjustments can be made
by Lloyd’s to allow for open year profits and losses of the syndicates on which the corporate member participates. The Group has sufficient
capital to meet its FAL requirement of £149.3 million as at 31 December 2014 (31 December 2013 – £115.1 million).
As at 31 December 2014 and 2013 the capital requirements of all the regulatory jurisdictions were met.
31. SUBSEQUENT EVENTS
DIVIDEND
On 11 February 2015 the Board of Directors declared the payment of an ordinary dividend of $0.10 per common share and a special
dividend of $0.50 per share to shareholders of record on 20 March 2015, with a settlement date of 15 April 2015. The ordinary dividend
payable will be approximately $20.6 million and the special dividend payable will be approximately $102.8 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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Lancashire Holdings Limited | Annual Report & Accounts 2014
SHAREHOLDER INFORMATION
ANNUAL GENERAL MEETING
The Company’s AGM is scheduled for 29 April 2015. Notice of this
year’s AGM and the form of proxy 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”, “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 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 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, Standard & Poor’s, 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
income investments; the impact of swings in market interest rates
and securities prices; 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 the UK government or the UK government
policy which impacts the CFC regime or other tax changes; and the
negative impact in any material way of the change in tax residence
of the Company on its stakeholders. 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 statements 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.
www.lancashiregroup.com
www.lancashiregroup.com
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159
GLOSSARY
ABS
Asset backed securities
CATHEDRAL; CATHEDRAL GROUP
Refers to CCL and all direct and indirect subsidiaries of CCL
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
AHL
Accordion Holdings Limited
AHL II
Accordion Holdings II Limited
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
ARL (ACCORDION)
Accordion Reinsurance Limited
BAM
Bathwater aggregate model
BEST LANCASHIRE ASSESSMENT OF SOLVENCY OVER TIME (BLAST)
The Group’s economic internal capital model
BMA
Bermuda Monetary Authority
BOARD OF DIRECTORS
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
BSX
Bermuda Stock Exchange
CATASTROPHE REINSURANCE
A form of excess of loss reinsurance which, subject to a specified
limit, indemnifies the reinsured company for the amount of loss
in excess of a specified retention with respect to an accumulation
of losses resulting from a catastrophic event or series of events
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CCHL
Cathedral Capital Holdings Limited
CCIL
Cathedral Capital (Investments) Limited
CCL
Cathedral Capital Limited
CCL 1998
Cathedral Capital (1998) Limited
CCL 1999
Cathedral Capital (1999) Limited
CCL 2000
Cathedral Capital (2000) Limited
CCML
Cathedral Capital Management Limited
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
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 Financial
Reporting Council
COMBINED RATIO
Ratio, in per cent, of the sum of net insurance losses, net
acquisition expenses and other operating expenses to net
premiums earned
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
CUL
Cathedral Underwriting Limited
GLOSSARY
ABS
Asset backed securities
ACTIVE UNDERWRITER
AFS
Available for sale
AGGREGATE
Annual General Meeting
Accordion Holdings Limited
Accordion Holdings II Limited
A sub-market of the LSE
AIR Worldwide
insurance sector
ARL (ACCORDION)
Accordion Reinsurance Limited
Bathwater aggregate model
of loss
AGM
AHL
AHL II
AIM
AIR
BAM
BMA
Bermuda Monetary Authority
BOARD OF DIRECTORS
BSX
Bermuda Stock Exchange
CATASTROPHE REINSURANCE
CCHL
CCIL
CCL
CCL 1998
CCL 1999
CCL 2000
CCML
CCSL
CEDED
CEO
CFC
CFO
CGU
CMBS
Cathedral Capital Limited
Cathedral Capital (1998) Limited
Cathedral Capital (1999) Limited
Cathedral Capital (2000) Limited
Cathedral Capital Management Limited
Cathedral Capital Services Limited
Chief Executive Officer
Controlled Foreign Company
Chief Financial Officer
Cash generating unit
To transfer insurance risk from a direct insurer to a reinsurer
and/or from a reinsurer to a retrocessionaire
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
BEST LANCASHIRE ASSESSMENT OF SOLVENCY OVER TIME (BLAST)
The Group’s economic internal capital model
THE CODE
Commercial mortgage backed securities
UK Corporate Governance Code published by the UK Financial
Reporting Council
COMBINED RATIO
Unless otherwise stated refers to the LHL Board of Directors
Ratio, in per cent, of the sum of net insurance losses, net
acquisition expenses and other operating expenses to net
BOOK VALUE PER SHARE (BVS)
Calculated by dividing the value of the total shareholders’ equity
by the sum of all common voting shares outstanding
premiums earned
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
A form of excess of loss reinsurance which, subject to a specified
CRO
limit, indemnifies the reinsured company for the amount of loss
Chief Risk Officer
in excess of a specified retention with respect to an accumulation
of losses resulting from a catastrophic event or series of events
CUL
Cathedral Underwriting Limited
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CATHEDRAL; CATHEDRAL GROUP
Refers to CCL and all direct and indirect subsidiaries of CCL
CUO
Chief Underwriting Officer
The individual at a Lloyd’s syndicate with principal authority to
Cathedral Capital Holdings Limited
accept insurance and reinsurance risk on behalf of the syndicate
ADDITIONAL CASE RESERVES (ACR)
Cathedral Capital (Investments) Limited
Additional reserves deemed necessary by management
Accumulations of insurance loss exposures which result from
underwriting multiple risks that are exposed to common causes
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
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
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
FAL
Funds at Lloyd’s
FCA
Financial Conduct Authority
FDIC CORPORATE BONDS
Corporate bonds protected by the Federal Deposit Insurance
Corporation, an agency of the U.S. government
FPSO
Floating production storage and offloading
DIVIDEND YIELD
Calculated by dividing the annual dividends per share by the share
price on the last day of the given year
FSMA
The Financial Services and Markets Act 2000 (as amended from
time to time)
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
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
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
ECR
Economic Capital Requirement
EMD
Emerging Market Debt
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
FVTPL
Fair value through profit or loss
G10
Belgium, Canada, Germany, France, Italy, Japan, the Netherlands,
Sweden, the United Kingdom, and the United States
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
LHL and its subsidiaries
HMRC
Her Majesty's Revenue & Customs
ICA
Individual capital assessment
ICSA
Institute of Chartered Secretaries and Administrators
ICG
Individual capital guidance
IFRIC
International Financial Reporting Interpretations Committee
IFRS
International Financial Reporting Standard(s)
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
www.lancashiregroup.com
www.lancashiregroup.com
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GLOSSARY CONTINUED
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.
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
ISE
Irish Stock Exchange
KCML
Kinesis Capital Management Limited
KCMMSL
KCM Marketing Services Limited
KHL (KINESIS HOLDINGS)
Kinesis Holdings I Limited
KINESIS
The Group’s third party capital management division
encompassing KCML, KCMMSL and the management of KHL
and KRL
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
LANCASHIRE UK GROUP OF COMPANIES
Includes LHL, LUK, LIHL, LISL and LIMSL
LHFT
Lancashire Holdings Financing Trust I
LHL
Lancashire Holdings Limited
LIBOR
London Interbank Offered Rate
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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
LUTINE
Lutine Limited
MBRT
Multi-beneficiary reinsurance trust
MBS
Mortgage backed securities
MGA’S
Managing general agents
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.
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
GLOSSARY CONTINUED
INDUSTRY LOSS WARRANTY (ILW)
A type of reinsurance or derivative contract through which one
Lancashire Insurance Company Limited
party will purchase protection based on the total loss arising
from an event to the entire insurance industry rather than their
own losses.
INTERNAL AUDIT CHARTER
Is a formal written document that sets out the mission, scope,
responsibilities, authority, professional standards and the
LISL
Lancashire Insurance Holdings (UK) Limited
Lancashire Insurance Marketing Services Limited
LICL
LIHL
LIMSL
relationship with the external auditors / regulatory bodies of
Lancashire Insurance Services Limited
the internal audit function (“internal audit”) with the company
and its subsidiaries
LISTING RULES
The listing rules made by the FCA under part VI of FSMA
INTERNATIONAL ACCOUNTING STANDARD(S) (IAS)
(as amended from time to time)
Standards, created by the IASB, for the preparation and
presentation of financial statements
LLOYD’S
The Society of Lloyd’s
INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB)
An international panel of accounting experts responsible for
LMSCL
Lancashire Management Services (Canada) Limited
Investment Risk and Return Committee
Demand by an insured for indemnity under an insurance contract
developing IAS and IFRS
Internal rate of return
Irish Stock Exchange
Kinesis Capital Management Limited
KCMMSL
KCM Marketing Services Limited
KHL (KINESIS HOLDINGS)
Kinesis Holdings I Limited
IRR
IRRC
ISE
KCML
KINESIS
and KRL
London Stock Exchange
Lancashire Insurance Company (UK) Limited
LOC
Letter of credit
LOSSES
LSE
LUK
MBRT
MBS
LUTINE
Lutine Limited
Multi-beneficiary reinsurance trust
Mortgage backed securities
Managing general agents
The Group’s third party capital management division
encompassing KCML, KCMMSL and the management of KHL
MGA’S
KRL (KINESIS RE)
Kinesis Reinsurance I Limited
LANCASHIRE COMPANIES
Refers to the Group excluding Cathedral and Kinesis
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
LANCASHIRE FOUNDATION OR FOUNDATION
analysis and financial risk management.
The Lancashire Foundation is a charity registered in England
and Wales
LANCASHIRE UK GROUP OF COMPANIES
Includes LHL, LUK, LIHL, LISL and LIMSL
Lancashire Holdings Financing Trust I
LHFT
LHL
LIBOR
Lancashire Holdings Limited
London Interbank Offered Rate
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Net asset value
NAV
NBS
premiums earned
NET LOSS RATIO
New Bridge Street (a trading name of Aon Hewitt Limited)
NET ACQUISITION COST RATIO
Ratio, in per cent, of net acquisition expenses to net
Ratio, in per cent, of net insurance losses to net premiums earned
NET OPERATING PROFIT
Profit before tax excluding realised gains and losses and foreign
exchange gains and losses
NET PREMIUMS WRITTEN
Net premiums written is equal to gross premiums written less
outwards reinsurance premiums written
ORSA
Own Risk and Solvency Assessment
OTC
Over the counter
PML
Probable maximum loss
PRA
Prudential Regulation Authority
SML
Saltire Management Limited
SRL
Saltire Re I Limited
STANDARD & POOR’S (S&P)
Standard & Poor’s 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
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 reinsured or insured shares a
proportional part of the original premiums and losses of the
reinsured or insured
THE SYNDICATES
Syndicate 2010 and 3010
TBAS
Mortgage backed “to be announced” securities
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
RMBS
Residential mortgage backed securities
RMS
Risk Management Solutions
RPI
Renewal Price Index
RRC
Risk and Return Committee
RSS
Restricted share scheme
TOTAL SHAREHOLDER RETURN (TSR)
The IRR of the increase 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
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. GAAP
Accounting principles generally accepted in the United States
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
VALUE AT RISK (VAR)
A measure of the risk of loss of a specific portfolio of
financial assets
SHARP
Lancashire’s in house aggregation system
SHL
Saltire Holdings I Limited
SIDECAR
A specialty reinsurance company designed to provide additional
capital to another (re)insurance company. Investors invest
in a sidecar to reinsure specific risks for a specific
(re)insurance company
www.lancashiregroup.com
www.lancashiregroup.com
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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
CityPoint
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
Ernst & Young LLP
1 More London Place
London SE1 2AF
United Kingdom
REGISTRAR
Capita Registrars (Jersey) Limited
PO Box 532
St Helier
Jersey JE4 5UW
Channel Islands
DEPOSITARY
Capita IRG Trustees Limited
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
United Kingdom
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 2014
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