Annual Report & Accounts 2015
Stickingto our
game plan
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In this report
Highlights
STRATEGIC REPORT
OVERVIEW
8 Lancashire Group at a glance
10 Chairman’s statement
14 Our business model
STRATEGY
16 Chief Executive’s review
19 Strategy
PERFORMANCE
24 Financial review
26 Key performance indicators
28 Underwriting review
30 Business review
37 Cathedral
38 Kinesis and third-party capital
39 Enterprise risk management
42 Principal risks
44 Corporate responsibility
GOVERNANCE
52 Chairman’s introduction
54 Board of Directors
59 Corporate governance report
62 Committee reports
71 Directors’ remuneration report
89 Directors’ report
93 Statement of Directors’ responsibilities
FINANCIAL STATEMENTS
96 Independent auditors’ report
102 Consolidated primary statements
106 Accounting policies
112 Risk disclosures
139 Notes to the accounts
ADDITIONAL INFORMATION
171 Shareholder information
172 Glossary
176 Contact information
RETURN ON EQUITY*
10.9%
(2014: 13.9%)
COMBINED RATIO
72.1%
(2014: 68.7%)
PROFIT AFTER TAX
$181.1m
(2014: $229.3m)
DIVIDEND YIELD
17.3%
(2014: 17.8%)
TOTAL INVESTMENT RETURN
0.7%
(2014: 1.0%)
TOTAL SHAREHOLDER RETURN
25.9%
(2014: -24.2%)
KPI
KPI
KPI
KPI
Visit our corporate website for more information:
http://www.lancashiregroup.com
* RoE excluding the impact of warrants in 2015 was 13.5% (2014: 14.7%)
Success is about reading the field
of play and knowing when to
attack or play for position.
Our three consistent strategic
priorities guide and govern
our game...
Underwriting comes first
Effectively balance risk and return
Operate nimbly through the cycle
Underwriting comes first
Creativity
In rugby, getting the balance right between the discipline
of the forwards and the creativity of the backs is key. For
us, maintaining underwriting discipline in challenging
markets means we continue to produce a leading combined
ratio. We remain creative in being able to provide tailored
insurance and reinsurance products to our clients across
the three platforms of our business.
COMBINED RATIO
The Group's combined ratio
has always been below 100%,
despite the softening market
rates of recent years, and
Lancashire has consistently
achieved combined ratios
which have led the market.
72.1%
2
.
0
7
7
.
8
6
1
.
2
7
5 year average
67.7%
7
.
3
6
9
.
3
6
11
12
13
14
15
2
Lancashire Holdings Limited | Annual Report & Accounts 2015
Discipline
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www.lancashiregroup.com
3
Effectively balance risk and return
Sticking to our game plan means not seeking top line
growth for the sake of it in markets where we do not
believe the right opportunities exist. We work hard
to maintain the profitability on our core book of
business. Effective capital management also allows
us to deliver meaningful returns to our shareholders.
PROFIT AFTER TAX
We aim to be profitable four
years out of five, but in fact we
have made a profit in each of
the ten years of our existence.
$181.1m
DIVIDEND YIELD
We pay annual ordinary
dividends, and when we cannot
utilise our profits by retaining
them as additional capital we
return them to shareholders
by way of special dividends.
17.3%
Dividend
yield
2
.
2
1
2
9
.
4
3
2
5
.
2
2
2
3
.
9
2
2
Profit after tax
5 year average
1
.
1
8
1
$216m
%
8
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%
3
.
7
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3
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4
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8
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3
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8
11
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14
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Lancashire Holdings Limited | Annual Report & Accounts 2015
Profit after tax
5 year average
$216m
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www.lancashiregroup.com
5
Operate nimbly through the cycle
Strength
Our outwards reinsurance programme provides a breadth
and depth of cover which has helped us to strengthen our
position and manage volatility. This helps us to continue
to underwrite our core portfolio through the challenges
posed by the cycle.
6
Lancashire Holdings Limited | Annual Report & Accounts 2015
PROBABLE MAXIMUM LOSS
PMLs are a reasonable proxy for
the relative amounts of risk we are
retaining across the cycle. In the
current environment we have
continued to bring risk levels down,
largely through the use of additional
reinsurance. The table shows our
1 in 100 year Gulf of Mexico expected
net loss at 1 January in each year.
$198.7m
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.
7
8
2
3
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3
7
8
2
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6
9
4
2
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2
5
3
2
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7
8
9
1
12
13
14
15
16
as at 1 January
Agility
www.lancashiregroup.com
7
LANCASHIRE GROUP AT A GLANCE
OUR STRONG AND CLEAR
INVESTMENT PROPOSITION
Even in difficult markets, the Lancashire Group continues to deliver strong
and consistent returns. Our goal remains to provide a relatively attractive,
risk-adjusted return to shareholders over the long term. We achieve this by
focusing on underwriting risk selection, maintaining our underwriting
discipline and managing our capital to suit market opportunities.
Through all the significant market events since its establishment ten years ago, the Lancashire
Group remains a top-performing specialty, short-tail insurer and reinsurer delivering leading
combined ratios and returns on equity. Our message of “underwriting comes first” remains as
relevant today as it did when we began; and our continued discipline and commitment to
focus on drivers of profitability allow us to remain as a strong and relevant counterparty for
our clients and brokers and to continue to deliver strong returns for our shareholders.
Performance incentives for management and staff are aligned to shareholders’ interests so
our focus remains on maintaining profitability and returning capital to shareholders in the
right market conditions. We seek to optimise capital and are well positioned to take advantage
of the market in a post loss scenario.
OPERATING HIGHLIGHTS
• Maintained our core portfolio despite difficult
market conditions and trading environment.
• Able to buy broader and deeper reinsurance protection
FINANCIAL HIGHLIGHTS
• Combined ratio of 72.1 per cent, yet again one of the
leading combined ratios in our peer group, reflecting
solid underwriting and expense control.
across the Group to protect our core book.
• Loss ratio for 2015 of 27.5 per cent, another strong
performance in a year with a number of medium-sized
risk and catastrophe losses.
• Favourable loss reserve development on prior year
losses totalled $107.7 million for the year.
• Gross premiums written of $641.1 million with
a contribution of $247.7 million from Cathedral.
• Kinesis deployment of $299.5 million of limits
with capital raised on two occasions during the year.
• Investment return of 0.7 per cent reflecting emphasis
on limiting risk in volatile markets.
• Our investment portfolio has produced a positive return
and has remained resilient in the face of turbulent
financial markets during the course of 2015.
• As we continue with work on the development and
integration of our three business platforms we have
benefitted from a greater financial contribution from
Cathedral during the year. There were no acquisition
costs to amortise in 2015, with both syndicates performing
well and having large prior year reserve releases.
• Kinesis has continued to expand its “investor club”
and has completed further capital raises during
the course of the year.
• The Group was fully prepared for the introduction
of the Solvency II regime in 2016 and Group Supervision
from the PRA.
8
Lancashire Holdings Limited | Annual Report & Accounts 2015
LANCASHIRE IS A BESPOKE SPECIALTY
INSURER/REINSURER OPERATING ACROSS
THREE PLATFORMS
OUR THREE PLATFORMS
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.
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 licences.
KINESIS
A third-party capital and underwriting
manager in Bermuda, leveraging the
Group's expertise, infrastructure and
track record to offer unique multi-class
products to clients and investors, with
scope to develop more products as the
market evolves.
D
F
E
$393.4m
Gross premiums written
D
A
C
$247.7m
$299.5m
Gross premiums written
Limits deployed
A
C
B
B
Portfolio breakdown
Portfolio breakdown
A: Property: 50.1%
B: Energy: 28.5%
C: Marine: 12.1%
D: Aviation: 9.3%
D: Marine: 11.9%
A: Property Re: 37.5%
B: Property Direct: 26.7% E: Aviation: 11.5%
C: Energy: 8.1%
F: Other: 4.3%
Page 30
Read about the Lancashire companies
Page 37
Read about Cathedral
Page 38
Read about Kinesis
www.lancashiregroup.com
9
OVERVIEW
CHAIRMAN’S STATEMENT
INTERVIEW WITH
MARTIN THOMAS
Lancashire has faced yet another year of challenging
underwriting conditions. Against this background
our strategic priorities have been essentially defensive
in nature, and consistent with what we have done in
the past – to maintain a core book of business and to
focus on the fundamentals of good underwriting.
25.9%
Total shareholder return
17.3%
Dividend yield
10
Lancashire Holdings Limited | Annual Report & Accounts 2015
Q What have been the strategic
challenges for 2015?
Achieving the right balance of risk and return
is important when taking any strategic decision.
Lancashire has faced yet another year of
challenging underwriting conditions. Against
this background our strategic priorities have
been essentially defensive in nature, and
consistent with what we have done in the past
– i.e. to maintain a core book of business and to
Lancashire believes that
its relevance to its clients
and brokers is not due
to the complexity of its
administration and structure
or the size of its capital base,
but rather its expertise and
commitment to excellence
in underwriting.
focus on the
fundamentals of good
underwriting. The
Board has not
required management
to seek out top-line
growth through
speculative new
products or structures,
as some businesses
have done in this
market. As is
described elsewhere
in this report, our priorities have been to
provide excellent underwriting products and
services to our core insurance and reinsurance
clients, and their brokers, and to support the
relationships that we have built up over many
years. In this environment, where insurance and
reinsurance pricing has been falling, as a Board
we have been comfortable witnessing Alex and
the management team de-risking the business,
in particular through the purchase of additional
and better priced outwards reinsurance
coverage. In doing this we have had one eye
on the cyclical nature of the insurance and
reinsurance markets. The Group operates a
lean business, with a global headcount of less
than 200 employees, and we have the ability to
shrink and grow our capital base in line with
market opportunities. The Board has been
happy to adopt this more defensive strategy
during 2015, secure in the knowledge that
when opportunities do arise we will have the
expertise, relationships and the resources
at hand to capitalise on them.
The Group operates a lean
business, with a global
headcount of less than 200
employees, and we have the
ability to shrink and grow
our capital base in line
with market opportunities.
Q Have the 2015 financial results been in
line with expectations?
Given the difficult trading environment, I am pleased with
our RoE of 10.9 per cent, warrant adjusted 13.5 per cent, for
2015. Net earned premium for the Group was $567.1 million
for 2015, which compares with $715.6 million for 2014. This
decrease is principally a reflection of reduced pricing and
lower renewals in a number of our core classes of business,
in particular the energy lines, as we focus on underwriting
profitable business rather than top line growth. Despite
the volatile financial markets of 2015, the Group's total
investment return for the year was $14.4 million. Although
down from $22.0 million in 2014, this reflects our
conservative investment positioning across asset classes,
which has paid off in difficult markets. The combined ratio
of 72.1 per cent is an excellent result. I am also pleased with
the performance of Cathedral, which contributed 3.5 per cent
to RoE during 2015 and has demonstrated an impressive
resilience in tough markets.
Kinesis has recently underwritten its third January cycle
of multi-class reinsurance products and has now established
a high calibre portfolio of cedants and investors. Kinesis
remains well-placed to capitalise on any changes in the
reinsurance markets at such time as the opportunity
may arise.
www.lancashiregroup.com
11
OVERVIEW
CHAIRMAN’S STATEMENT CONTINUED
It remains a core part of the Board's
strategy to flex the Group's capital
base in such a way that capital
which we cannot deploy profitably
is returned to shareholders.
Q What is the Board’s approach to dividend payments
and capital management?
The Board is pleased to have declared ordinary and
special dividends in respect of 2015 amounting in total to
$1.10 per common share. It has for some years now been
our mantra that Lancashire tailors its capital requirements
to the underwriting and business opportunities available to
it. This year we have returned a total of $316.0 million to
shareholders, which significantly exceeds the Group’s profit
after tax for the year of $181.1 million. It remains a core part
of the Board’s strategy to flex the Group’s capital base in
such a way that capital which we cannot deploy profitably
is returned to shareholders. An important element to this
active capital management strategy employed by the Board
is the flexibility afforded to us by shareholders to issue up
to 15 per cent of Lancashire’s shares on a non pre-emptive
basis. The best opportunities in the insurance and
reinsurance sectors arise following major loss events,
and the flexibility afforded to the Board, which would
allow it to issue shares quickly to raise capital so as to
maximise such opportunities for the business, is a central
pillar of our business strategy. Once again the Company
is seeking shareholder support for a resolution at the 2016
AGM allowing this capital management flexibility, and
I would encourage all shareholders to vote in favour.
12
Lancashire Holdings Limited | Annual Report & Accounts 2015
Q What differentiates Lancashire
from its peers?
During the last year we witnessed a wave of
mergers and acquisitions within the insurance
and reinsurance sector. The rationale for many
of these appears to have been to create cost and
capital efficiencies for businesses, most of which
have had complex international networks and
operations and, in the current market, have found
themselves struggling to make meaningful returns.
Lancashire believes that its relevance to its clients
and brokers is not due to the complexity of its
administration and structure or the size of its
capital base, but rather its expertise and
commitment to excellence in underwriting.
Within the classes of business in which we
operate, Lancashire provides leadership and
technical underwriting skills which ensure its
relevance to clients and brokers alike. We remain
committed to this business model, and for this
reason we believe that Lancashire need not
participate in the mergers and acquisitions
roundabout, since it does not suffer from the
structural problems which have driven the latest
round of consolidation within our sector.
Within the classes of
business in which we
operate, Lancashire
provides leadership and
technical underwriting
skills which ensure its
relevance to clients
and brokers alike.
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Q What plans does the business have for
Board planning and succession?
In last year’s Annual Report and Accounts I was
able to report the appointment of two new
Directors to the Board, namely Peter Clarke and
Tom Milligan. Consequently, 2015 was a year for
consolidation on the Board, and I have been
pleased with the mix of skills and perspectives
which we now have in the Boardroom. Of all our
Board members, I am now the longest serving,
having been first appointed to the Board in 2006,
becoming Chairman in 2007. Having served the
Board and the business since the early days
following its foundation in 2005, I have decided
that the time is now right for me to step down from
my role as Chairman and Director. The Board as
a whole has considered the matter of succession
to the Chairmanship, and I am delighted to report
that Peter Clarke, with the full support of the
Board, has agreed to become Chairman following
the 2016 AGM, at which point I will retire from the
Board. The business will be in excellent hands with
Peter as Chairman of the Board and Alex as CEO
and I wish them well. I would also like to thank all
those people within the Group with whom I have
worked over many years. The exceptional success
of Lancashire as a business is principally due to
the expertise and dedication of its people, and
it has been a privilege and a pleasure for me to
share in that common enterprise.
Q What challenges and opportunities do you see for the
year ahead?
On a personal level I am delighted to be able to take over
the leadership of the Board of a business which has achieved
sector beating results over the last decade. The Group is well
positioned to weather the challenges of a difficult underwriting
and macroeconomic environment. Against this backdrop the
principal challenge for the Board and the business is to ensure
that we maintain a dynamic culture capable of maximising
the right opportunities in the market at such time as they
may arise. This will require patience and a tight focus on our
strategic priorities of a balanced approach to risk and return,
a commitment to excellence in underwriting and the flexibility
and nimbleness to address the changing challenges of the
underwriting cycle. I look forward to working with the
Board, the management team and everyone working
in the business over the years ahead.
Martin Thomas
Non-Executive Chairman
Peter Clarke
Non-Executive Chairman designate
www.lancashiregroup.com
13
OUR BUSINESS MODEL
THREE PLATFORMS, ONE COMMON GOAL
We leverage our deep underwriting expertise with efficient management
of capital and resources across our three platforms to provide our
clients and brokers with excellent solutions for their insurance and
reinsurance needs. We always focus on the risk-adjusted return.
LANCASHIRE
Pages 30 to 36
To find out more information
UNDERWRITING
AND CAPITAL
MANAGEMENT
CATHEDRAL
Page 37
To find out more information
KINESIS
Page 38
To find out more information
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 the Lancashire Foundation, we make
substantial financial contributions and provide human support to a number of good causes
in the places we operate and around the world (for further details see pages 44 to 49).
14
Lancashire Holdings Limited | Annual Report & Accounts 2015
RESPONSIBILITYRETURNRISK LANCASHIRE
Key Strengths
CATHEDRAL
KINESIS
• Strong brand with clients and brokers
• Strong brand with core 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
• A lean business operation allows us to remain
nimble and make decisions efficiently
• Recognised for long-term consistency
of relationships
• 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 overheads
• Ability to leverage Group data, relationships
and reputation with investors and clients
• Experienced, fully dedicated 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 and deploy capital very quickly
• A profitable core book of business and
• Use of world’s oldest insurance third-party
disciplined underwriting allows us to produce
an excellent combined ratio
capital – the Names – who pay underwriting
fees, costs and profit commission
• Expanding investor base following a strong
underwriting performance since the first
capital raise for 2014 risks
• Strong record of capital management actions
to optimise and adjust capital and navigate
market cycles
• Experienced management team with
proven ability
Goals
• Operates two active syndicates, following
• Proven track record with Kinesis
the build out of Syndicate 3010
now in its third year
• Maintain key client, broker and reinsurer
• Maintain core portfolios in the syndicates
in a climate of increased competition
• Continue to look for new opportunities for
bolt on business lines in both syndicates
• Leverage the Group’s balance sheet and
cross sell where opportunities arise
relationships to ensure the continued flow
of business and maintenance of capabilities
• Continue to improve use of reinsurance and
retrocession to uphold risk-adjusted balance
in softening markets
• Retain “underwriting comes first” culture
and discipline without being tempted into
innovation or diversification for its own sake
Risk
• Ensure product is correctly calibrated to meet
clients' needs in terms of responding to events
and capital relief
• Deliver returns in line with expectations
for modeled ranges given market losses
and pricing
• Continue to increase investor club members
• Source reinsurance opportunities and provide
bespoke and flexible products to match
investor appetite
• Continued influx of new capacity, some from
naïve or inexperienced capital, and further
development of broker facilities with less
robust underwriting controls
• Pressure on signings and participation
• Increased competition from traditional
given relatively small line sizes
although counterbalanced by strength
of broker and client relationships
and collateralised markets being displaced
from property retrocession, with attempts
to replicate the Kinesis product
• Expanded burden of regulatory oversight
or overlapping regulation from Lloyd’s,
the PRA and the FCA
• Waning of investor interest in insurance
allocations if interest rates begin to increase
and yields return to capital markets
• Client resistance to complex products, given
cheap availability of traditional products
• Continuing rate pressures in
softening markets
• Widening terms and conditions being
accepted by the insurance market without
adequate pricing or exclusions
Return
71.3%
Lancashire Companies' combined ratio
Cathedral's combined ratio
73.6%
$299.5m
Kinesis limits deployed
www.lancashiregroup.com
15
OVERVIEW
CHIEF EXECUTIVE’S REVIEW
72.1%
Combined ratio
27.5%
Loss ratio
10.9%
Return on equity*
* RoE excluding the impact of
warrants in 2015 was 13.5%
INTERVIEW WITH
ALEX MALONEY
Good underwriting remains
paramount, as does our
ability to act quickly and
nimbly to changing conditions
and our preparedness to closely
match our capital to the
opportunities available.
16
Lancashire Holdings Limited | Annual Report & Accounts 2015
Q What have the challenges been in 2015?
Having worked in the insurance business for the last
25 years it is my view that 2015 has been the most
challenging calendar year for the whole insurance industry
that we have seen for at least a decade. The insurance
industry as a whole has seen a further accumulation of
capital; this stems from yet another benign year for
catastrophe losses, resulting in pressure on premium pricing
and the terms and conditions of coverage. Several insurers
have been involved in merger and acquisition activity, which
is in part a response to falling margins and the perceived
need amongst some of our competitors to rationalise their
larger and more complex operations and infrastructures.
The broking community has not been immune to these
pressures and has continued both to consolidate its
operations and to innovate with new products and methods
of distribution, which might be regarded as having been
designed to generate new income streams for the brokers
themselves, rather than serving the insurance needs of
the market. Into this mix must be added the continuing
commercial pressure on our clients, particularly in the oil
and gas industries, where the dramatic fall in the oil price
has resulted in less exploration and development activity,
as well as economic pressure on our clients’ existing
operations and asset prices and a corresponding drop-off
in the demand for insurance coverage. Whilst our return
on equity is 10.9 per cent, the warrant adjusted return on
equity of 13.5 per cent is a better reflection of our
underwriting results. This, together with our combined
ratio of 72.1 per cent for the year, demonstrates our ability
as a business to pick our team and adapt our game plan
to these harsh playing conditions. Against this backdrop
I am delighted with our financial performance.
Q How has the business responded to the
difficult market?
Our strategic priorities are engrained within our own
business and people and are also now well understood
by our investors and stakeholders. Good underwriting
(our basic skill set) remains paramount, as does our ability
to act quickly and nimbly to changing conditions and
our preparedness to closely match our capital to the
opportunities available. Our global headcount remains less
than 200, which means that as a business we remain able to
avoid the cost and complexity of our larger competitors and
to adapt our risk profile to market conditions. In a market
where the price for assuming risk has been falling, we have
reduced our risk levels. This takes discipline. We have had
to take hard decisions to turn down badly-priced business
and we have reduced our inwards exposures where required.
On the bright side, the reduction in the pricing of risk has
created excellent opportunities on the reinsurance
purchasing side. This combination of inwards underwriting
discipline and better priced and broader outwards
reinsurance coverage has enabled us to de-risk our overall
portfolio. Our Cathedral business, which we acquired during
2013, has helped give strength and breadth to the core
business of the Group. Its contribution to Group profits of
$46.0 million and its impressive combined ratio of 73.6 per
cent for the year illustrate the quality and discipline which
have always been characteristic of our Group. The year on
year decline in our net premium income is not an exciting
story to tell, but it is the mark of a business which adapts
its strategy so as to flex its capital and risk profile to deliver
a solid risk adjusted return to its shareholders. A more
detailed analysis of market conditions can be found in
the Underwriting Review on pages 28 to 29.
Q Does Lancashire have the size to remain relevant
to clients and brokers?
There has been a tendency amongst commentators and
analysts to equate the “relevance” of an insurance company
to the size of its capital base. That is a superficially attractive
argument, but it is flawed. Whilst the balance sheet size of an
insurer is important, it is not the only factor in the decision
of brokers and clients when placing insurance risks. Our
brokers come to us, whether that be through our London
or Bermuda Lancashire platforms, through Cathedral at
Lloyd’s, or through Kinesis, because we employ leading
specialty underwriters in the fields in which we underwrite.
Our underwriters understand the needs of the brokers and
our clients and have the standing and ability to act as leaders
in the negotiation of pricing and coverage terms and to
service with excellence the ongoing needs of our clients.
We may not always be the cheapest, or have the biggest
balance sheet, but you get what you pay for and we do pride
ourselves on being the leaders in those classes within which
we operate. As a Group we do not wish to create a worldwide
network. We have a strong presence in the London and
Bermuda markets and we are supportive of those markets
and the related broker distribution networks, which we
consider to be world-leading in their capabilities and
expertise. Our priority is to maintain a tightly focused
and relatively small business without the distractions
and overheads of multiple foreign offices and operations.
Lancashire is a business which prides itself on its
underwriting expertise, its excellence of service and its
ability to adapt its capital base to the opportunities in any
given market. I have recently met with all of our largest
shareholders and I am confident that they understand the
challenges of the current market and our strategic response,
which ensures our continuing relevance to our clients, our
brokers and all our stakeholders.
www.lancashiregroup.com
17
STRATEGY
CHIEF EXECUTIVE’S REVIEW CONTINUED
Q You have chosen a rugby theme for this Annual
Report – why is that?
Q Where do you see the business in the longer term?
Rugby has been a lifelong love for me. I have enjoyed the
game both as a player and as a supporter. It is the ultimate
team sport and a game in which success, whilst drawing on
individual talent, is ultimately built on teamwork. That is
how I see our Group. As a team we value the contribution
of all the members, and I hope that we encourage a culture
where we are not reliant on one or two star signings, but on
a bench strength of home grown talent. We also place value
on clear and rapid communication, a prime example of that
being Lancashire’s daily underwriting call where all our
Lancashire underwriters, however experienced, have the
opportunity to consider all the risks being evaluated by our
business – whether in London or Bermuda. Any team has to
adapt rapidly, to play the pitch, weather conditions and the
particular strengths and weaknesses of any opponent as they
are found. The challenges of the current insurance market
dictate to us as a business that we modify our game plan to
the conditions of play. As with any good team, we assess the
relative risks and rewards and we consider when to adopt a
defensive strategy and when to attack. From time to time we
may suffer setbacks, but our objective is to create a business
capable of succeeding year upon year, whatever challenges
we may face.
Q How do you think the market will change
during 2016?
The fundamentals of our business don’t change. The market
is driven by the forces of supply and demand and, absent
a major market moving catastrophe loss event, I anticipate
that there will continue to be an oversupply of underwriting
capacity across the industry in 2016. Generating returns
will remain difficult in this soft part of the cycle. As a Group
we will continue to adapt to these market conditions, but
I am suspicious of some of the recent innovations in the
market, including broker facilities, the rapid growth in
cyber coverage pursued by some of our competitors and
the use of disruptive technologies to create new platforms
for distribution. All of these have their associated risks and
my gut instinct is to proceed with extreme caution and to
focus on our traditional skills. So for 2016 we will work to
provide an acceptable return on our investors’ capital,
driven by our view of risk and capital requirements in
response to market conditions.
Our Group has the structure and expertise to implement
our current nimble strategy as a bespoke provider of
specialty insurance and reinsurance. We have carefully
and consistently developed this strategy since Lancashire’s
inception in 2005. My vision is to continue to build the
best bespoke specialty (re)insurance company in the world
by retaining and recruiting best in breed underwriters across
a number of specialty insurance and reinsurance classes.
Over the next few years we will look to consolidate our
existing core book of business and to grow organically
other specialty lines, but only where the right opportunities
present themselves. We will continue to optimise the use of
our different underwriting
platforms at Lloyd’s, in London
and Bermuda and through Kinesis,
our third-party capital facility. We
plan to keep the headcount small,
maintaining a tight control over
business costs. Perhaps most
importantly, I want to build and
consolidate a group of talented
people with individual expertise
and a strong sense of their place
in the overall Lancashire team and
a shared understanding of our
strategic goals.
Our underwriters
understand the needs
of the brokers and our
clients and have the
standing and ability
to act as leaders in the
negotiation of pricing
and coverage terms and
to service with excellence
the ongoing needs of
our clients.
In closing, I must mention Martin
Thomas, our Chairman, who is
stepping down at this year's AGM having served the Group
for over nine years. I have enjoyed working with Martin
and I have valued his support and insight – as well as
his constructive challenge. Martin has been an excellent
Chairman and member of the LHL Board and has helped
guide our Board and business through both challenging
and exciting times to establish Lancashire as one of the most
successful and respected specialty insurance and reinsurance
groups listed on the LSE. We will continue to work together
until the 2016 AGM, when I will look forward to working
with Peter Clarke, an existing member of our Board and
the designated new Chairman. But I would like to take this
opportunity to thank Martin for his exceptional contribution
to the success of Lancashire.
Alex Maloney
Group Chief Executive Officer
18
Lancashire Holdings Limited | Annual Report & Accounts 2015
STRATEGY
INTRODUCTION TO STRATEGY
Over our ten year history our strategic objectives have remained unchanged. How we implement that strategy
adapts as the market forces to which we find ourselves subject on the field of play ebb and flow. By adopting this
active fluidity of approach we demonstrate the importance of one of the three cornerstones of our strategy: to
operate nimbly through the cycle.
The market we find ourselves in today is a very different one from
when we started ten years ago. In all of our lines of business, rates
have declined and margins are under more pressure than at any
time in our history. In order to effectively balance risk and return
our approach is different over time. In very simple terms we get
paid less now than in prior years for assuming the same risk –
so we therefore adjust our risk levels down accordingly. We have
consolidated our core portfolio of business and defended this
book whilst at the same time protecting the balance sheet with
broader and deeper reinsurance coverage. This year we have
continued to manage down the volatility within the Group’s
underwriting portfolio as margins reduce. We still accept risk,
as this is what we do. But we carefully manage the risk levels
we accept, to reflect the market we see.
In soft markets premiums inevitably come under pressure. Even
maintaining constant risk levels will deliver lower premium
volumes as rates soften. In these markets there is a natural
tendency to lose sight of basic underwriting principles and focus
on premium income rather than underwriting profitability.
To maintain underwriting discipline you need to accept that
premiums will shrink. We believe that, ultimately, underwriting
profitability should remain the focus. Why write more risk when
the return for that risk is less? This can seem counterintuitive given
the obvious but superficial attraction of maintaining premium
levels. Our team of underwriters shares this view of the importance
of careful risk selection rather than top-line growth and our
LANCASHIRE FIRST LOSS XL LIMIT ILLUSTRATION
2012 VS 2015
principal focus is on generating underwriting profit. This
sharp strategic focus is demonstrated by a combined ratio
of 72.1 per cent. At Lancashire, underwriting always comes first.
Another temptation when premiums are reducing is to enter
markets or underwrite products that are new and fashionable.
Again, we tend not to be swayed by fashion. If we can understand
the risk, or bring in best in breed underwriting teams that
understand the risk, then we will expand the business. What
we will not do is enter new classes purely to replace lost revenue
across other areas of the portfolio.
It is fair to describe our underwriting strategy in this market as
defensive. We feel that a defensive strategy is the correct one, and
we are fortunate to have a portfolio of business with long-term blue
chip clients that allows us to take this stance. We are very grateful
for the support that both our clients and brokers have shown to
the Group over the past year and throughout our ten year history,
and we look forward to working with them for another ten
years and beyond.
We wait patiently for the time when the market is in a more
favourable position than it is today. In the meantime we will do
everything we can to capitalise on the expertise and relationships
we as a business have nurtured and to make sure the Group is best
positioned for when these better times return.
Outwards Reinsurance
1st loss limit 2015
Outwards Reinsurance
1st loss limit 2012
Energy
ex GOM
Energy
ex GOM
Energy
GOM
Energy
GOM
Marine
Hull
Marine
Hull
Marine
IGPIA
Marine
IGPIA
Terror
Metro
Terror
Metro
2012
2015
2012
2015
2012
2015
2012
2015
2012
2015
Terror
Non
metro
2012
Terror
Non
metro
2015
US ANP
ILWs
2012
Peak
Property
Cat
2015
Japan
ILWs
2012
Non-US
Property
Cat
2015
Political
Risk
Political
Risk
2012
2015
www.lancashiregroup.com
19
STRATEGY
STRATEGY CONTINUED
CONSISTENCY IN STRATEGIC
DIRECTION OVER TIME
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 that 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 Board through a simple and continuous reporting process.
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 treasury and risk to challenge the assumptions used
in all areas of our planning and measuring the business.
20
Lancashire Holdings Limited | Annual Report & Accounts 2015
Description
UNDERWRITING ALWAYS
COMES FIRST
We employ 34 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 profitable new opportunities
helping us to remain relevant to
our brokers and clients.
EFFECTIVELY BALANCE
RISK AND RETURN
By bringing together all our
disciplines – underwriting,
actuarial, modeling, finance,
treasury, risk and operations
– at our fortnightly RRC
meetings, we are able
to look at how different parts
of our operations are working
together. We stress test our
business plans and gauge
where we can be most effective
without undue volatility.
OPERATE NIMBLY THROUGH
THE CYCLE
As capital continues
to accumulate in the
(re)insurance market,
the need to be nimble is
more important than ever.
This means being ready to
deploy capital quickly when
it is needed, and having the
discipline to return it when
it is not.
Achievements in 2015
Performance
We have reduced our written
premium and PMLs by turning
down under-priced business,
whilst retaining our core book.
We have grown the number
of Kinesis investors to ten and
the number of cedants to ten,
whilst deploying $299.5 million
of limits.
Combined Ratio
72.1%
KPI
Gross premiums written
$641.1m
Still a leading combined
ratio, even in difficult markets,
evidencing the continued
focus on underwriting,
portfolio construction
and superior risk selection.
We saw a significant
contribution from Cathedral
in 2015 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.
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.
Lancashire renewed its
15 per cent disapplication of
pre-emption rights to smooth
potential future capital raises.
KPI
Return on Equity*
10.9%
A good result despite
a challenging market
and the incidence of risk
losses, helped by our
improved outwards
reinsurance programme.
Probable Maximum Loss
$198.7m*
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 for Lancashire is
to continue to serve our 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.
* RoE excluding the impact of warrants
in 2015 was 13.5%.
* 1 in 100 year Gulf of Mexico Hurricane
expected net loss at 1 January 2016.
Dividend Yield
17.3%
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
comprehensive income
returned to shareholders
KPI
187.0%
Lancashire continues to
exercise the discipline of
giving back capital it cannot
profitably deploy, but remains
open to new opportunities
such as those developed in
Syndicate 3010.
Page 26
KPIs
Lancashire has developed
an expectation among its
stakeholders that it will produce
a consistent return and pay
ordinary dividends and special
dividends when it makes sense
to do so. 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 39
Enterprise Risk Management
www.lancashiregroup.com
21
STRATEGY
PERFORMANCE
Disciplined
to achieve success
Being a disciplined and focused team,
with clear strategic goals, means we
deliver solid performance in all types
of conditions.
22
Lancashire Holdings Limited | Annual Report & Accounts 2015
P
E
R
F
O
R
M
A
N
C
E
PERFORMANCE
24 Financial review
26 Key performance indicators
28 Underwriting review
30 Business review
37 Cathedral
38 Kinesis and third-party capital
39 Enterprise risk management
42 Principal risks
44 Corporate responsibility
www.lancashiregroup.com
23
FINANCIAL REVIEW
Elaine Whelan
Group Chief Financial Officer
MAINTAINING STRONG
FINANCIALS
Q How would you sum up the 2015 Group financial performance?
While market conditions continued to deteriorate, we maintained our
disciplined approach to underwriting. A combination of our risk selection
and managing our exposure in a softening market meant we were still able
to produce a good result across all platforms. Our RoE for the year was
13.5 per cent, after adjusting for the impact of warrants, and our combined
ratio was 72.1 per cent. Lancashire contributed 9.3 per cent of that RoE,
with Cathedral and Kinesis contributing 3.4 per cent and 0.8 per cent
respectively. We produced a profit after tax of $181.1 million and
comprehensive income of $169.8 million. Our warrant adjusted
compound annual return since inception is now 18.8 per cent.
24
Lancashire Holdings Limited | Annual Report & Accounts 2015
Q Why have your premiums reduced by such a
significant amount?
Early on in 2014 we expected the market to
continue to soften. We therefore wrote some
multi-year deals as a hedge against that. Those
deals were predominantly in the property
catastrophe excess of loss, worldwide offshore
energy and Gulf of Mexico offshore energy lines
of business. The total multi-year premium in those
segments in 2014 was $175.3 million. Adjusting for
that, the reduction in premium was $91.2 million,
or 12.5 per cent, which is more indicative of the
pricing trend.
Q How else has the softening market impacted
performance?
Although pricing has reduced on the inwards
book, the same is true on the outwards book.
We have been able to increase our reinsurance
cover in 2015 without increasing the cost. That
has allowed us to protect our core book while
managing our exposures down, which we
believe is the right thing to do in this market.
As ever in a softening market, we see more losses
coming through. Thankfully, given our business
model, we have avoided most of these. There were
no major catastrophe losses this year, but we did
have a slightly higher level of mid-sized claims,
particularly in the energy and satellite lines of
business. However, reserve releases on prior years,
particularly for 2014, were substantial as there was
a general lack of reported claims coming through.
Our accident year loss ratio was 46.0 per cent and
our loss ratio was 27.5 per cent.
Q How did the investment market volatility
affect Lancashire?
There certainly was a lot of volatility throughout
most of the year. Speculation about the timing
of the Federal Reserve raising interest rates
and concerns around China and global growth
pervaded. But we have been hedging our portfolio
against rate hikes for some time now and also have
a small allocation to risk assets which helps to
hedge the portfolio. Our investment return of
0.7 per cent for the year reflects that, and is a
very respectable return in relative terms.
2015 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
Net change in unrealised gains/losses on investments
Comprehensive income
Dividends1
Diluted earnings per share
Diluted operating earnings per share
Fully converted book value per share
Return on equity
Return on equity excluding warrant adjustments
Net loss ratio
Net acquisition cost ratio
Expense ratio
Combined ratio
Accident year loss ratio
Net total return on investments2
(1) Dividends are included in the financial statement year in which they were recorded.
(2) Net return on investments includes internal foreign exchange hedges.
2011
$m
2012
$m
2013
$m
2014
$m
2015
$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%
13.4%
31.7%
19.6%
12.4%
63.7%
59.3%
1.8%
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%
17.1%
29.9%
20.5%
13.5%
63.9%
34.6%
3.1%
679.7
557.6
568.1
188.1
254.2
25.4
12.6
184.2
222.5
(32.5)
190.0
325.6
$1.17
$0.97
$7.50
18.9%
18.9%
33.1%
22.1%
15.0%
70.2%
36.1%
0.3%
907.6
742.8
715.6
226.5
335.7
28.6
(5.9)
231.9
229.3
(2.1)
227.2
321.0
$1.16
$1.17
$6.96
13.9%
14.7%
31.7%
21.4%
15.6%
68.7%
35.9%
1.0%
641.1
481.7
567.1
155.7
265.2
29.8
(2.8)
173.4
181.1
(11.3)
169.8
317.5
$0.91
$0.87
$6.07
10.9%
13.5%
27.5%
25.8%
18.8%
72.1%
46.0%
0.7%
Q What is the impact on RoE of warrants
exercised in 2015?
Q How has capital been
managed in 2015?
We had 18.7 million warrants outstanding at the beginning
of the year, all expiring on 16 December 2015. As expected,
these were all exercised during 2015, mostly on a cashless
basis. The impact of the cashless elections reduced our
headline RoE by 2.6 per cent. Going forward, our only
dilutive instruments will be our RSS awards and the impact
of exercises will be insignificant.
Much the same way as it always has been – we work out what
business we want to write, then we work out the capital we
need to support that. We add a buffer and any excess beyond
that buffer is returned to shareholders. We constantly
monitor our capital and exposures and adjust our position
as necessary. We still currently favour special dividends as a
means of return given our multiple. We returned a total of
$317.5 million this year, or 187.0 per cent of comprehensive
income. That's a dividend yield of 17.3 per cent. Including
dividends declared on 17 February 2016, our capital return
since inception stands at $2.5 billion.
Elaine Whelan
Group Chief Financial Officer
www.lancashiregroup.com
25
PERFORMANCE
KEY PERFORMANCE INDICATORS
RETURN ON EQUITY*
COMBINED RATIO
TOTAL INVESTMENT RETURN
10.9%
72.1%
DR
5 Year Average
.
4
3
1
.
9
8
1
.
7
6
1
.
9
3
1
.
9
0
1
.
7
3
6
.
9
3
6
.
2
0
7
.
7
8
6
.
1
2
7
0.7%
1
3
.
8
1
.
11
12
13
14
15
11
12
13
14
15
11
12
0
1
.
7
0
.
14
15
3
0
.
13
Aim
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.
The Group’s primary investment
objectives are to preserve capital and
provide adequate liquidity to support
the Group’s payment of claims and
other obligations. Within this framework
we aim for a degree of investment
portfolio growth.
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.
The combined ratio is the ratio of costs
to 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.
Total investment return measures
investment income and net realised
and unrealised gains and losses
produced by the Group’s managed
investment portfolio.
2015 Performance
Risk Management
Our market in 2015 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 2015 this led us to
buy more reinsurance and retrocession
protection to reduce our exposures.
Warrant exercises reduced our RoE by
2.6 per cent during 2015.
The stated aim is a long-term goal,
acknowledging that management expects
both higher and lower results in the
shorter term. The cyclicality and volatility
of the insurance market is expected to be
the largest driver of this pattern. We seek
to align our variable remuneration to
shareholders' interests by having an
RoE component in this.
* RoE excluding the impact of warrants in 2015
was 13.5% (2014: 14.7%)
26
Lancashire Holdings Limited | Annual Report & Accounts 2015
Whilst the combined ratio in 2015 was
above the five-year average, it was still
an excellent result. In the context of a
softening market and corresponding
downward pressure on premiums, we
would expect the loss ratio to increase
and have increased our attritional
loss ratio to take account of both
this and Cathedral’s more
frequency-oriented portfolio.
In 2015 Lancashire continued to monitor
risk-on/risk-off volatility and increased
the allocation to risk assets in the surplus
portfolio as a hedge against the interest
rate risk inherent in the significant
fixed-income portfolio. However, given
the liquidity and duration needs of the
business, 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.
TOTAL SHAREHOLDER RETURN
25.9%
.
6
1
4
DR
.
9
5
2
.
6
1
2
.
3
1
2
PERCENTAGE OF COMPREHENSIVE
INCOME RETURNED TO
SHAREHOLDERS
DONATIONS MADE TO THE
LANCASHIRE FOUNDATION
187.0%
$3.2m
.
0
7
8
1
.
4
1
7
1
.
3
2
5
1
2
3
.
0
3
.
5
2
.
5 Year Average
0
2
.
9
1
.
.
2
4
2
-
.
5
9
8
.
7
9
7
DR
KPI linked to Executive
Directors’ remuneration.
For more information
see pages 71 to 88.
11
12
13
14
15
11
12
13
14
15
11
12
13
14
15
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 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 percentage of comprehensive
income returned to shareholders equals
the total capital returned to shareholders
through dividends and share repurchases
paid in a given year, divided by the
Group’s comprehensive income.
Despite the challenging market in
2015 our share price performed
extremely well.
In view of the current market outlook
Lancashire took the decision to return
surplus capital to shareholders due to
the lack of opportunities meeting internal
hurdles. With significant and long-term
market capital to support our reinsurance
needs, we were able to improve the
Group's capital efficiency through
better pricing and terms on our
outwards reinsurance purchases.
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.
Money is donated by the Group to
the Lancashire Foundation ordinarily
through an annual cash donation and
by dividends on Lancashire warrants that
were donated to the Foundation on its
inception. During 2015 a third-party
donation of $2.5 million was also facilitated
(see page 91 for further details).
Charities supported in 2015 included
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 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.
Risk tolerances are set at a level that
aims to prevent the Group incurring
losses that would impair its ability to
operate. The Group’s key capital measure
is its A.M. Best rating, and a minimum
rating of A- is considered necessary to
attract business. In 2015, Lancashire
maintained its A rating.
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
27
PERFORMANCE
UNDERWRITING REVIEW
Paul Gregory
Group Chief Underwriting Officer
KNOWING OUR
MARKETS, DELIVERING
CONSISTENT RESULTS
2015 witnessed volatility across the globe with plunging
oil prices, uncertainty around China and further political
instability following a rise in war and terrorism related events.
(Re)insurance is a global industry and these shifts in economic
and political factors have ramifications in the classes of
business the Group underwrites, with some classes more
directly affected than others. This, combined with the
challenging and softening market conditions, creates
a landscape that requires careful navigation. The
Lancashire Group has the underwriting teams, with the
appropriate client and broker relationships, to do just this.
28
Lancashire Holdings Limited | Annual Report & Accounts 2015
PROPERTY REINSURANCE
Mother Nature was kind to the reinsurance industry
during 2015. There were a number of natural catastrophe
events including large earthquakes in Nepal, Pakistan,
India and Afghanistan, plus the most intense storm ever
recorded in the Western hemisphere, Hurricane Patricia,
in Mexico. Whilst all of these events sadly led to loss of
life, the economic impact to the industry was minimal.
Following this low level of natural catastrophe losses to
the industry the softening rating trend continued
through 2015. Loss levels were at historic lows, so the
rates in all global territories were under pressure, albeit
the pace of reductions slowed, most noticeably for US
catastrophe perils. The dynamic between traditional
markets and alternative ILS capacity providers remained,
but traditional paper still remains favoured by the
majority of clients with whom the Group enjoys
relationships. Across the Group we have strong client
and broker relationships that have been built up over
time, and with the benefit of both Lloyd’s and Bermudian
platforms we are able to offer different products to
satisfy the varying needs of both clients and brokers.
It is this that has allowed us to maintain our profitable
core portfolio.
PROPERTY DIRECT & FACULTATIVE
The property portfolio is less directly impacted by global
events than other classes, albeit economic factors
naturally have some impact on demand. It is the demand
and supply dynamics of the insurance industry that have
a more acute effect on this sector, although our portfolio
is structured in such a way as to help protect us. Our
portfolio of business underwritten in Syndicate 2010
is made up of two parts: binding authorities and open
market risks. Each part has experienced contrasting
fortunes. In a market where most lines of business are
under pressure, the binding authority portfolio has held
up extremely well. Loss activity has been low and rates
were relatively flat through the first half of the year with
small reductions during the latter half. The open market
risks have been under more pressure as a number of
aggressive competitors competed for market share and
premium income. In line with the Group’s underwriting
philosophy, risk selection is paramount and underwriting
with profitability in mind has been the focus in order to
navigate this competitive market landscape. An
abundance of facultative and treaty reinsurance capacity
allows the underwriting team to trade through this softer
part of the cycle and protect underwriting margins.
ENERGY
Without doubt 2015 was ‘the perfect storm’ for the upstream
energy market. The steep decline in the price of oil directly
impacted demand for insurance coverage at a time when
energy market insurance capacity had never been higher.
It was this supply-demand imbalance that drove a fiercely
competitive market, with market premiums reducing
significantly given lower rates and lower client demand.
Overlying these market conditions were a run of attritional
losses, which in quantum ultimately outstripped premium
in the market. Despite this, the Group portfolio held up well.
Premium income was undoubtedly impacted, but most
importantly we maintained our positions on our core
portfolio and the book remained profitable. Having
the discipline not to chase premium to protect top line
income was ultimately why our portfolio outperformed
the market. Under the circumstances this was a considerable
achievement and, whilst the challenges will continue
into 2016, the portfolio remains well placed to
outperform the market.
MARINE
The volatile commodity market, driven by uncertainty
around China, has had a direct impact on the marine cargo
portfolio underwritten in Syndicate 3010 as commodity
prices have a knock on effect on demand. Despite this, the
core portfolio has performed well, with the book performing
in line with expectations, albeit with premiums down given
it is a commodity based business. Much like the energy
book, the focus has been on underwriting for profit, not top
line premium growth, with underwriting discipline being
maintained. Outside of the cargo market, the other marine
classes we underwrite have been relatively stable throughout
2015. The hull, builders' risk and war accounts at Lancashire
have been remarkably stable from both a pricing and
demand point of view, with an absence of any significant
market losses. The Group’s marine portfolio is mature
and well established and will most likely remain that way
for the foreseeable future.
AVIATION
Following a turbulent 2014 loss year, the claims in the
aviation market continued in 2015. Political instability
continued to bring claims with the tragic loss of the Russian
Metrojet plane over Egypt, as well as the Germanwings crash
as a result of pilot suicide. The Group straddles many parts
of the aviation market with aviation reinsurance written in
Syndicate 2010, war and general aviation within Syndicate
3010 and the AV52 and satellite products within Lancashire
London. In the aviation reinsurance market the larger losses
in 2014 seem to be long forgotten and those in 2015 have
had little impact on the market as a whole. Market
conditions weakened as abundant capacity remained in
the sector, fuelling competition. In these environments
risk selection remains key and we have carefully navigated
the market with our core clients. We continue to build out
the war and general aviation offering from Syndicate 3010
carefully and selectively in a challenging marketplace.
The support from brokers and clients in the first full year
of underwriting has been appreciated as we build the
foundations of the portfolio for future years. The AV52
portfolio remains stable and once again performed
profitably, despite pressure on rating, given the extremely
low claims frequency for this class. The satellite market has
continued to experience a number of losses throughout the
year, however there has been limited reaction in risk rating.
As a result, we have shrunk our position in this sub-class as
the risk reward metrics no longer make larger positions on
satellite business viable. We remain willing and able to
increase risk levels in the future, should the risk reward
dynamic change.
TERRORISM, POLITICAL VIOLENCE AND POLITICAL RISKS
There has been a high frequency of political violence and
terrorism events throughout the course of 2015 across all
parts of the globe, from terrorist attacks in Nigeria, Tunisia,
Turkey and France to airstrikes in Libya, Syria and Yemen.
Despite the volatile world in which we live, and the
prevalence of tragic war and terrorism events, there remains
pricing pressure in all of these classes as, despite the terrible
loss of life these events bring, the financial cost borne by
insurers is thus far small. The escalation of incidents does
however raise awareness of the product, which stimulates
new demand, and given the pricing levels today the product
is more affordable and attractive to purchase. The Group
has been successful in building a core book of business and
defending that book during 2015 as well as slowly building
out the portfolio within Syndicate 3010 and at the same time
avoiding losses and maintaining profitability. The increase
in broker facilities has been a feature of 2015 which puts
further pressure on an already competitive market. To date
we have not entered any facility where we are not in control
of our underwriting, as we believe we must have complete
control of our risk selection and exposure management
which, in an ever more unstable world, is more important
than ever. Fortunately, given our history, line size, service
levels and leadership capabilities, we have been
able to maintain our market position despite the
increased competition.
www.lancashiregroup.com
29
PERFORMANCE
STRONG
PERFORMANCE
BUSINESS ENVIRONMENT AND OUTLOOK
2015 has been a difficult year for underwriting as we are now 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 specialty insurance and reinsurance lines, the silver lining of the
highly competitive market is the ability of the Group to maintain its
core inwards portfolio while managing net exposures through
greatly improved pricing, and terms and conditions on the
outward reinsurance placements.
The market is not without challenges, but the Lancashire business model
was designed with the knowledge that we have to cater for all phases of
the cycle. A 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, 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 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 the 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 the
RPI 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.
BUSINESS REVIEW
Hayley Johnston
Chief Underwriting Officer, LUK
Sylvain Perrier
Chief Underwriting Officer, LICL
In a difficult year for
underwriting, Lancashire
still achieved a combined
ratio of 72.1 per cent.
30
Lancashire Holdings Limited | Annual Report & Accounts 2015
The following table summarises the RPI figures for the main business classes, excluding the Lloyd’s segment, using 2006 as the base year:
RPI
Class
Aviation (AV52)
Gulf of Mexico offshore energy
Worldwide offshore energy
Marine
Property retrocession and reinsurance
Terrorism
Combined
UNDERWRITING RESULTS
2006
100
100
100
100
100
100
100
2007
2008
80
80
80
88
97
86
86
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
2015
41
118
81
82
117
43
68
Property
$m
Energy
$m
Marine
$m
Aviation
$m
Lloyd’s
$m
Total
$m
Property
$m
Energy
$m
Marine
$m
Aviation
$m
Lloyd’s
$m
Total
$m
2014
2015
Gross premiums written
Net premiums earned
Net loss ratio
Net acquisition cost ratio
Expense ratio
Combined ratio
67.7
57.7
53.2
52.6
239.4
169.7
641.1
263.0
567.1
221.5
9.8% 24.7% 47.8% 62.5% 47.9% 31.7% 10.6% 37.0% 13.8% 57.8% 33.4% 27.5%
11.8% 30.9% 30.7% 18.3% 22.2% 21.4% 18.4% 37.4% 34.2% 26.3% 23.0% 25.8%
18.8%
21.6% 55.6% 78.5% 80.8% 70.1% 68.7% 29.0% 74.4% 48.0% 84.1% 56.4% 72.1%
197.2
171.3
112.0
126.5
247.7
198.2
907.6
715.6
284.3
214.1
36.6
33.4
47.6
37.7
15.6%
–
–
–
–
–
–
–
–
–
–
PREMIUMS
Gross premiums written decreased by 29.4 per cent in 2015
compared to 2014. The decrease came primarily from the
property and energy segments where a number of multi-year
deals written in 2014 are not yet due to renew. Of the total
reduction of $266.5 million in gross premiums written for 2015,
non-annual deals in those segments accounted for $175.3 million.
Excluding the impact of these deals, the reduction for 2015 in
gross premiums written was $91.2 million or 12.5 per cent. Gross
premiums earned for the year decreased by 17.2 per cent. The
Group’s five principal segments, and the key market factors
impacting them, are discussed below.
PROPERTY
Property gross premiums written decreased by 25.0 per cent for
the year ended 31 December 2015 compared to the year ended
31 December 2014. The property retrocession and catastrophe
excess of loss, terrorism and political books, all saw reductions
due to the timing of multi-year contract renewals.
ENERGY
Energy gross premiums written decreased by 53.2 per cent for
the year ended 31 December 2015 compared to the year ended
31 December 2014. Multi-year contracts in the Gulf of Mexico
and worldwide offshore books drove the majority of the year
on year reduction with $65.0 million and $18.6 million
respectively of multi-year deals written in 2014 not yet due for
renewal. The remaining reduction was primarily due to pricing
pressure and exposure reductions given the drop in oil prices.
The reduction in gross premiums earned in 2015 in the energy
book of 26.0 per cent is significantly lower than the reduction
in gross premiums written, reflecting the impact of continued
earnings on the prior year multi-year deals. While 2015
gross premiums written have decreased by 53.2 per cent,
37.2 per cent is due to the impact of multi-year deals.
MARINE
Marine gross premiums written decreased by 29.7 per cent for
the year ended 31 December 2015 compared to the year ended
31 December 2014. The decrease is primarily driven by non-annual
contracts written in 2014 in the marine hull book which are not
due to renew until 2016. Overcapacity in the market continued
to put downward pressure on pricing, especially the hull book.
AVIATION
Aviation gross premiums written decreased by 31.2 per cent
for the year ended 31 December 2015 compared to the year
ended 31 December 2014 due to the timing of satellite launches
on contracts written in previous years.
www.lancashiregroup.com
31
PERFORMANCE
BUSINESS REVIEW CONTINUED
LLOYD’S
In the Lloyd’s segment gross premiums written decreased
by 12.9 per cent for the year ended 31 December 2015
compared to the year ended 31 December 2014. The
decrease for the year was mainly due to pricing pressure
across all historic lines of business, slightly offset by growth
in the terrorism and aviation classes that Cathedral began
writing in 2014.
CEDED
Ceded premiums decreased by $5.4 million, or 3.3 per cent,
for the year ended 31 December 2015 compared to the year
ended 31 December 2014. The overall decrease for the year
is predominantly due to the restructuring of the Lancashire
marine, energy and terrorism programmes during the first
quarter of 2015 at a reduced cost. The saving from the
restructuring was offset by new cover purchased on the
political risk book in the second quarter of 2015. Lancashire
and Cathedral both took advantage of favourable conditions
in the reinsurance market to buy more limit at a lower
attachment point for around the same outlay, with the
overall net decrease in outwards reinsurance spend in the
year being due to a multi-year programme placed in 2014
but not yet due for renewal.
EARNED
Net premiums earned as a proportion of net premiums
written were 117.7 per cent for the year ended
31 December 2015, compared to 96.3 per cent for the
year ended 31 December 2014. The increased percentage
in premiums earned for the year ended 31 December 2015
compared to the same period in 2014 was due to the impact
of multi-year deals written in 2014 where we saw the benefit
of earnings coming through on those deals in 2015.
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 2015.
32
Lancashire Holdings Limited | Annual Report & Accounts 2015
LOSSES
The Group’s net loss ratio was 27.5 per cent for the year
ended 31 December 2015 compared to 31.7 per cent
for the year ended 31 December 2014. The 2015 accident
year loss ratio, including the impact of foreign exchange
revaluations, was 46.0 per cent compared to 35.9 per cent
for the year ended 31 December 2014. For the year ended
31 December 2015, there were no significant losses, however,
we experienced a few mid-sized claims across a number
of our segments. Attritional losses have otherwise been
relatively low. In 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.
Prior year favourable development was $107.7 million
for the year ended 31 December 2015, which was primarily
driven by general IBNR releases across most lines of business
plus additional recoveries on our 2011 Thai flood losses.
This compared to favourable development of $34.4 million
for the year ended 31 December 2014 where favourable
development from IBNR releases was offset somewhat by
adverse development on prior year accident mid-sized
marine and energy claims.
The table below provides further detail of the prior years’
loss development by class, excluding the impact of foreign
exchange revaluations:
2011
$m
63.5
57.3
28.6
5.9
n/a
155.3
2011
%
56.7
59.3
2.6
2012
$m
(36.0)
37.4
25.9
0.1
n/a
27.4
2012
%
30.0
34.6
4.6
2013
$m
13.2
18.4
(23.4)
(1.4)
9.1
15.9
2013
%
27.5
36.1
8.6
2014
$m
19.8
5.4
(9.7)
0.9
18.0
34.4
2014
%
29.7
35.9
6.2
2015
$m
26.4
35.2
13.8
2.9
29.4
107.7
2015
%
46.0
n/a
n/a
Excluding the impact of foreign exchange revaluations,
previous accident years’ ultimate losses developed as follows
during 2015 and 2014:
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
2014 accident year
Total
2014
$m
1.8
(0.3)
3.6
4.3
5.7
(6.1)
11.1
14.3
n/a
34.4
2015
$m
1.6
1.1
(2.1)
4.1
(3.5)
17.1
10.8
35.4
43.2
107.7
Note: Positive numbers denote favourable development.
The ratio of IBNR to total net loss reserves was 35.2 per cent
as at 31 December 2015 compared to 31.6 per cent as at
31 December 2014.
ACQUISITION COSTS
The acquisition cost ratio was 25.8 per cent for the year
ended 31 December 2015 compared to 21.4 per cent for
the year ended 31 December 2014. The increase was largely
due to profit commission received in relation to Accordion
that lowered the ratio in 2014, combined with lower earned
premiums in 2015 and additional reinsurance cover
purchased during 2015 compared to 2014.
MANAGED INVESTMENT PORTFOLIO ALLOCATIONS
INVESTMENTS, LIQUIDITY AND CASH FLOW
Since inception, the primary objectives for our investment
portfolio have been capital preservation and liquidity.
Those objectives remain unchanged, and are more
important than ever in today’s volatile and reactive markets.
As market volatility continues, we position our portfolio
to limit downside risk in the event of market shocks. In 2015,
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 0.7 per cent
(2014 – 1.0 per cent) for the year. Our average annual total
investment return since inception is 3.0 per cent, and we
have made a positive investment return in every year since
inception, including 2008. Our portfolio mix illustrates our
conservative philosophy, as shown in the table on page 124.
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 123. As at 31 December 2015
and 2014 the managed portfolio was as follows:
Fixed income securities
Cash and cash equivalents
Hedge funds
Equity securities
Total
2014
%
81.9
10.6
6.8
0.7
100.0
2015
%
81.6
9.6
8.0
0.8
100.0
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
2011
%
2012
%
2013
%
2014
%
2015
%
13.2
4.0
–
27.2
4.2
13.2
5.8
2.5
29.9
–
–
–
–
–
100.0
11.1
5.4
–
18.8
6.2
19.2
5.3
–
32.2
1.8
–
–
–
–
100.0
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
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
9.6
1.1
0.6
23.6
0.2
7.3
8.4
–
33.2
5.9
1.3
0.8
8.0
–
100.0
www.lancashiregroup.com
33
PERFORMANCE
BUSINESS REVIEW CONTINUED
The composition, duration and asset allocation of the
investment portfolio are reviewed on a regular basis in order
to respond to changes in interest rates and other market
conditions. If certain asset classes are anticipated to produce
a higher return within management’s risk tolerance an
adjustment in asset allocation may be made. Conversely,
if the risk profile is expected to move outside of tolerance
levels, adjustments may be made to reduce the risk in the
portfolio. We try to be nimble in our investment strategy
while putting our objective of capital preservation first and
foremost. We believe in the application of common sense,
and do not place much reliance on ‘black box’ approaches
to investment selection.
Investments are, however, inherently unpredictable and
there are risks associated with any investment strategy
decisions. Recent market history has been tumultuous
and we remain ever watchful. We will continue to monitor
the economic environment closely.
INVESTMENT PERFORMANCE
Net investment income excluding realised and unrealised
gains and losses, was $29.8 million for the year ended
31 December 2015, an increase of 4.2 per cent compared
to 2014. Total investment return, including net investment
income, net realised gains and losses, impairments and
net change in unrealised gains and losses, was $14.4 million
for the year ended 31 December 2015 compared to
$22.0 million for 2014. The investment portfolio returned
0.7 per cent in 2015, a good result given the increase in
treasury yields and the widening of credit spreads during
the year. 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.
LIQUIDITY
The Group 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, the
Group’s investment strategy places an emphasis on the
preservation of invested assets and provision of sufficient
liquidity for the prompt payment of claims in conjunction
with providing a reasonably stable income stream.
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
The Group’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
primarily 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 premiums for 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 2015, whilst lower than the prior year, our operating
cash flow remained strong, driven by the Group’s robust
underwriting performance. A net positive cash inflow
arose from operations during the year of $98.1 million
(2014 – $212.5 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
2011
2012
2013
2014
2015
1.8 years
AA–
1.5%
1.9%
1.8 years
AA–
1.1%
1.8%
1.0 year
AA–
1.2%
1.4%
1.5 years
AA–
1.5%
1.5%
1.5 years
AA–
1.9%
1.6%
34
Lancashire Holdings Limited | Annual Report & Accounts 2015
ASSOCIATES
The $4.1 million share of profit of associate for the year
ended 31 December 2015, reflects Lancashire’s 10 per cent
interest in KHL. The share of profit of associates was
$5.9 million for the year ended 31 December 2014 and
related to the Kinesis vehicle and the remaining interest
in the Accordion and Saltire vehicles. Third-party capital
is discussed on page 38.
OTHER OPERATING EXPENSES
Employee salaries and benefits
Employment taxes
on equity compensation
Other operating expenses
Amortisation of intangible assets
Total
2014
$m
55.3
(1.2)
48.8
8.4
111.3
2015
$m
61.6
2.7
42.3
–
106.6
Employee remuneration costs for the year ended
31 December 2015 were $6.3 million higher than the same
period in 2014. With the recent announcement of the
incumbent CEO and CFO of Cathedral leaving the Group,
an additional compensation expense has been recorded.
A slight increase in headcount and an increase in year end
bonus and profit related pay provisions, due to underlying
performance, also led to increased salaries and benefits
for the year. The year ended 31 December 2014 included
a reversal of national insurance accruals in relation to
equity compensation exercises driven by both the timing
of exercises and fluctuations in the share price.
Other operating expenses were lower for the year ended
31 December 2015 compared to the same period in 2014
primarily due to reduced donations by the Group to the
Lancashire Foundation, as the Foundation had sufficient
funds to meet its goals in the current year. In addition, some
legal and consulting costs were incurred in 2014 in relation
to the retirement of the previous CEO. The amortisation of
intangible assets arising on the acquisition of Cathedral was
completed in the third quarter of 2014 and there was no
further amortisation in 2015.
Equity based compensation expenses were $15.8 million
for the year ended 31 December 2015 and $23.3 million
for the year ended 31 December 2014. The equity
based compensation charge is driven by the anticipated
vesting level of the active awards based on current
performance expectations.
CAPITAL MANAGEMENT
Lancashire has built a reputation for being one of the best
known and most active proponents of capital management
in the industry. Capital management is our most important
area of focus after underwriting and it is our firm belief that
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. We have returned 103.6 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 and Lloyd's requirements.
Capital raising can include debt or equity, and returns of
capital may be made through dividends, share repurchases,
a redemption of debt or any combination thereof. All capital
actions require approval by the Board of Directors. The
retention of earnings generated also leads to an increase
in capital.
The composition of capital is driven by management’s
appetite for leverage, amongst other factors, including
the cost and availability of different types of capital.
Maintaining a strong balance sheet will be the overriding
factor in all capital management decisions. Solvency II,
a new regulatory regime for (re)insurance in the European
Economic Area, introduced a new basis for assessing capital
which was effective from 1 January 2016. The Group
is confident that it is more than adequately capitalised
for supervisory and regulatory purposes under the
Solvency II regime.
www.lancashiregroup.com
35
PERFORMANCE
WARRANTS
All outstanding warrants to purchase the Company’s
common shares which were issued at inception were
exercised prior to their expiry on 16 December 2015.
Warrants exercised during the year are shown below.
LETTERS OF CREDIT
Lancashire has a standard syndicated LOC facility which
in total amounts to $350.0 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 $50.0 million available
by way of LOCs and $50.0 million by way of RCFs.
There was no outstanding debt under the above facilities
at any reporting date. There are no off-balance sheet forms
of capital.
BUSINESS REVIEW CONTINUED
CAPITAL
As at 31 December 2015, total capital available to the
Group was $1.542 billion, comprising shareholders’
equity of $1.220 billion and $322.3 million of long-term
debt. Tangible capital was $1.388 billion. Leverage was
20.9 per cent on total capital and 23.2 per cent on total
tangible capital. Total capital and total tangible capital
as at 31 December 2014 were $1.683 billion and
$1.530 billion respectively.
DIVIDENDS
During 2015, the Lancashire Board declared a final dividend
of $0.10 and a special dividend of $0.50 per common share
in respect of the 2014 financial year and an interim dividend
of $0.05 and special dividend of $0.95 per common share in
respect of 2015. With the final dividend in respect of 2015
of $0.10 per common share, total capital returns since
inception amount to $2.5 billion, or 210.9 per cent of initial
capital raised. The final dividend of $0.10 per common share
has been declared and will be paid on 23 March 2016 to
the shareholders of record on 26 February 2016.
NON PRE-EMPTIVE ISSUE OF SHARES
As part of the Group’s flexible approach to capital
management the Board has in recent years requested
and received from shareholders authority to issue up to
15 per cent of its shares on a non pre-emptive basis.
Lancashire believes that this ability to raise capital quickly
is important in securing first mover advantage in the
catastrophe insurance and reinsurance business which it
underwrites. The Board proposes to put a similar request for
authority to shareholders in a resolution at the 2016 AGM to
be held on 4 May 2016.
WARRANTS
Outstanding and exercisable
as at 31 December 2014
Exercised during the year
Outstanding and exercisable
as at 31 December 2015
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
117,480
(117,480)
559,182
(559,182)
15,032,679
(15,032,679)
648,143
(648,143)
2,350,000
(2,350,000)
18,707,484
(18,707,484)
–
–
–
–
–
–
36
Lancashire Holdings Limited | Annual Report & Accounts 2015
Lawrence Holder
Managing Director, CUL
Key financial information for Cathedral for
the year ended 31 December is as follows:
Gross premiums written
Net premiums written
Net premiums earned
Net insurance losses
Net underwriting income
Other income
Profit after tax
Comprehensive income
Net loss ratio
Net acquisition cost ratio
Expense ratio1
Combined ratio1
2014
$m
284.3
219.4
214.1
102.5
64.1
10.1
25.7
25.4
47.9%
22.2%
15.0%
85.1%
2015
$m
247.7
196.4
198.2
66.2
86.4
7.0
46.0
45.6
33.4%
23.0%
17.2%
73.6%
(1) The expense ratio in Cathedral’s financial statements is presented net
of fees, commissions and other non-investment income. On this basis
the combined ratio for 2015 is 71.0 per cent compared to 81.5 per cent
for 2014.
CATHEDRAL
2015 has seen a continuation of the deteriorating trading environment set against
a benign claims experience that has prevailed since the start of 2013. The main
distinction between this year and last has been a change in focal point in the
market, where both trading pressure and losses have fallen. Competitive emphasis
has moved from property reinsurance to the direct lines of business, as companies
look to supplement income lost across their reinsurance portfolios. Despite the
challenging market, during 2015 Cathedral has contributed to the Group's top and
bottom line, with strong premium retention and excellent underwriting profits.
We have been working hard to maintain our accounts in a shape where we believe
we have a reasonable chance of a profitable outcome, assuming that we return
to a more frequent and severe claims environment than we have had of late.
Syndicate 2010 has suffered a small loss of top line income but our net position
has been mitigated by our ability to purchase cost effective reinsurance that
has lowered our retentions while our overall exposures have remained stable.
The position of each of our underwriting teams within their markets has
enabled them to deliver a good quality book of business in a challenging year.
We continue to get presented with good business opportunities at the behest
of clients and brokers, but naturally we trade within oversubscribed market
places and have been forced to decline business, some of it very long standing
where we believe market pricing no longer holds out sufficient prospect of a
profit. Such disciplined underwriting involves hard choices, but is essential in
the current market.
Although 2014 was all about competition in the property reinsurance account,
in 2015 the biggest pressures have been in the open market direct insurance
book and the aviation reinsurance book. Both have seen additional players
shoehorning themselves into already oversubscribed markets, offering capacity
at prices our underwriters do not feel offers much prospect of profit, much of
the time within new rationalised coverage structures, where brokers and clients
are looking to maximise the value they can get.
Syndicate 3010’s core cargo account ebbs and flows with world trade and
commodity pricing but, outside that, the rest of our accounts are all operating
in very tough conditions. Both the direct aviation and aviation war markets are
heavily oversubscribed and blighted by the presence of broker lineslips corralling
significantly more capacity than is required. We have preferred to plough our
own furrow, offering open market leading expertise with the support of some
notable players in the Lloyd’s market on whose behalf we underwrite. We now
have an established presence and a good quality trading portfolio from which
to build in the future.
Our terror and energy accounts have also had to contend with challenging
market conditions created by over-capacity in general, and more specifically
broker facilities in the terrorism market and for energy a reduction in demand
from the industry on the back of falling oil prices. Despite these challenging
conditions, the foundations set when we established the accounts in 2014,
and the leverage the Group’s position in these markets provides, has allowed
these portfolios to develop in a measured way.
www.lancashiregroup.com
37
PERFORMANCE
BUSINESS REVIEW CONTINUED
Darren Redhead
Chief Executive Officer, Kinesis
The Kinesis
multi-class
approach continues
to find attractive
opportunities and
offers investors
superior returns.
38
Lancashire Holdings Limited | Annual Report & Accounts 2015
KINESIS AND
THIRD-PARTY CAPITAL
Kinesis was launched in 2013 and is the vehicle for the 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. During 2015, Kinesis deployed $299.5 million of limits of fully
collateralised reinsurance protection through its unique, multi-class
product offering for $62.9 million of net premiums written. Since
inception to the end of 2015 Kinesis has deployed combined aggregate
limits of $639.5 million for $140.7 million of net premiums written and
offers investors both superior returns and a high level of diversification.
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
10.0 per cent 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.
Financial information for the year ended 31 December is as follows:
Kinesis
Saltire
Accordion
Total
2015
$m
2014
$m
2015
$m
2014
$m
2015
$m
2014
$m
2015
$m
2014
$m
Profit commission
Underwriting fees
Equity pick up
7.3
5.6
4.1
–
6.2
4.7
–
–
–
3.0
–
0.1
–
–
–
6.7
–
1.1
7.3
5.6
4.1
9.7
6.2
5.9
Note: LHL owned 92.68 per cent of KCML at 31 December 2015.
ENTERPRISE RISK MANAGEMENT
Louise Wells
Chief Risk Officer
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. This has not
changed. However in 2015, we have had
a busy, yet successful year embedding
the Solvency II related processes and
procedures developed in 2014 into
our business as usual processes. We are
confident that we continue to have a clear
view of our risks, and their management,
right across the Group.
ERM DEVELOPMENTS
With the introduction of Solvency II on 1 January 2016 we worked
closely with the BMA (our former Group supervisor) to effect an orderly
transition to the PRA, who became our Group supervisor on that date.
During 2015, we successfully submitted our first supervisory reporting
to the PRA under the Solvency II preparatory phase guidelines.
At the Group level, the ORSA Working Group, created in 2014, has been
replaced by the RROC with the remit to “support the Board in reviewing
Solvency II and other regulatory and public reporting outputs on the
Board's behalf and, to the extent permitted by in force regulatory
requirements, approving these for release”. The RROC consists of at
least two Non-Executive Directors from the LHL Board who will rotate
every two years, the Group CEO, Group CFO and CRO. An equivalent
committee also operates at the LUK level as LUK is also PRA regulated.
The RROC allows the Non-Executive Directors to carry out a more
detailed review of the ORSA process and procedures and to contribute
directly to the point-in-time report given to our regulators outside of
the constraints of the Board’s calendar.
In 2015, the Group:
• Completed its scheduled RRC reviews of the underlying
ORSA framework elements and an internal audit of the capital
modeling process.
• Further developed the documentation and formalisation of policies
and procedures underpinning the broader system of governance in
accordance with the relevant Solvency II preparatory phase guidance.
• Provided further training and development to both relevant boards
and senior management in order to validate understanding and embed
engagement in the ORSA process.
• Further developed the stress, scenario and reverse stress testing processes
to include input from the Non-Executive Directors at the scenario
selection stage. The process also now includes stress testing the SCR.
• Commenced the implementation of a new governance and risk portal
to enhance the ERM process.
• Fully embedded our suite of capital and solvency measures, including
Solvency II metrics, into business as usual monitoring through RRC
review and quarterly CRO reporting.
• Submitted a Group ORSA point-in-time report to the PRA including
an assessment of the appropriateness of the standard formula for
Lancashire’s risk profile and a comparison to BLAST.
• Ensured Cathedral 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.
www.lancashiregroup.com
39
PERFORMANCE
ENTERPRISE RISK MANAGEMENT CONTINUED
ERM & ORSA
KEY ACTIVITIES
• Review of business strategy with challenge from Board
• Production of ORSA report
• CRO report to Board and
Executive Management
Committee
• Capital and liquidity
management frameworks
• Review of BLAST policies,
capital and solvency appetites
• Full/proxy capital assessments
• Rating agency capital
assessments
• Stress and scenario testing
STRATEGY REVIEW
& CHALLENGE
• Risk ID and assessment
• Quarterly risk and control
affirmations
RISK SOLVENCY &
ASSESSMENT
C U LTURE &
RISK ID &
ASSESSMENT
RRCRRC
RRC
OVERN A N C E
G
CAPITAL
MANAGEMENT
RISK & BUSINESS
MANAGEMENT
BUSINESS
PLANNING
RISK APPETITE &
TOLERANCES
• Review of risk strategy
and ‘attitude to risk’
• Review of risk appetite and limits
• Review of Group risk tolerances
• Review of risk management
• Review and approval
policies
of business plan
• Assessment of risk management
• Stress and scenario testing
framework maturity
(business plan)
• Integrated assurance assessment
• Assessment of management
• Emerging risk assessment
actions
Key Elements of ORSA
Board sign-off and embedding
Business Strategy
Risks
Capital and Solvency
Stress and Scenario Testing
RRC
The RRC, under the Chairmanship of the Group CEO,
is the key management tool for monitoring and challenging
the assessment of risk on a continual basis. The RRC
agenda is reviewed each year to ensure its activities
remain appropriate and aligned with the business cycle.
BLAST
We continue to challenge the assumptions used
in BLAST and make changes where appropriate.
EMERGING RISK
As ever in 2015, the Group strove to foresee potential areas
of new risk, or developments in existing risks that could
threaten the Group. We continue to 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
through our inwards insurance risk. Terrorism is an area of
core business focus for Lancashire, and is well understood,
but the continued increase in diversity of targets and modes
of attack from terrorist groups means we maintain a watch
on developing trends.
40
Lancashire Holdings Limited | Annual Report & Accounts 2015
RISK UNIVERSE
We continue to 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 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 the risk of earthquake we are exposed to the risk
that losses exceed our plan. We model our portfolio using
stochastic modeling to review actual and planned exposures
to ensure they remain within tolerances. The correlated
risks are that we might fail to design or maintain effective
tolerances and limits, and fail to maintain exposures within
such limits; or that we fail to keep accurate and timely
records of our exposures. We then devise systems and
processes to mitigate these risks, such as PML
reconciliations, and RDS sign-offs.
• 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 into
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 are assessed
and mitigated through scenario and stress testing.
RISK UNIVERSE
Type
Category
Description
e
r
o
C
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
Underwriting
Investment
Reserving
(Re)Insurance
counterparty
Liquidity
Operational
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.
Intrinsic risks to which we are inevitably exposed as a result of conducting
our day-to-day business operations yet offer no direct potential for return.
They are quantified insofar as practicable for the purposes of capital and risk
management and avoided or minimised insofar as is economically justifiable.
These are risks arising as a result of inadequate or failed internal processes,
personnel, systems or (non-insurance) external events.
They have the potential to either 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 insofar as is practicable.
www.lancashiregroup.com
41
PERFORMANCE
PRINCIPAL RISKS
PRINCIPAL RISKS
As described under our review of the Risk Universe, our
classification of risks as Intrinsic Core and Intrinsic Non-
Core, Operational and Other, helps us to focus on our
management and mitigation of those risks. 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
a large number of controls around monitoring risk levels
across the business. However, we understand that even risks
that do not generate a capital charge under an economic
capital model can pose serious threats to the execution of
the business plan and strategy, and therefore need to be
monitored and tested. For example, we spend a lot of time
looking at the implications of emerging capital and the
evolution of the market cycle.
INTRINSIC RISK: CORE
TYPE
Underwriting: Losses in our classes are hard to predict 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.
Investment: We need to hold sufficient assets in readiness to pay
claims, but the markets and products in which we invest can suffer
volatility and losses. As a short-tail insurer, we are able to hold the
majority of assets in low duration securities such as fixed 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 stress 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, this may have an
impact on earnings, or indeed capital. We use regular independent
external reviews of our reserves which look at the overall levels of
expected losses, as well as individual large events, including
benchmarking analyses.
MITIGATION
Modeling: We apply loads to, and stress test, stochastic models and
develop alternative views of losses using exposure damage ratios.
RRC: The RRC considers accumulations, clashes and
parameterisation of losses and models.
Capital: We set our internal capital requirements at a level
that allows for buffers above accumulations of extreme events.
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.
IRRC: The IRRC forms an integral part of our risk management
framework, meeting at least quarterly and reporting to the
RRC quarterly.
External advisers: Lancashire’s Board and management recognise
that the Group’s principal expertise lies in underwriting so we use
the services of internationally recognised investment managers
who are experts in their fields.
MITIGATION
Short-tail business: Lancashire’s focus is on short-tail lines of
business where losses are usually known within, or shortly after,
the policy period with a reasonable degree of certainty.
Experience data: We have access to a lot of data, both our own and
from the industry as a whole, about losses and loss trends. Actuarial
and statistical data 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 facilitate an independent,
external review of their loss reserves. Lancashire retains the
services of one of the leading industry experts, and our appetite
is defined so as to set reserves within a range of reasonable
estimates based on both internal and external review.
42
Lancashire Holdings Limited | Annual Report & Accounts 2015
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
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, 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. The RSC is
responsible for approving counterparties and monitoring
aggregate limits. We have terms of business agreements with
all our counterparties that seek to limit our exposure. All
reinsurers must conform to minimum rating standards or
collateral arrangements where appropriate.
Liquidity: In order to satisfy claims payments we need to ensure
that sufficient assets are held in a readily realisable form. This
includes holding cash accounts for the expected level of attritional
losses, as well as ensuring we can meet claims payment
requirements in extreme events.
Portfolio management: The Group maintains liquidity significantly
in excess of the Board agreed tolerances. This is achieved through
the maintenance of a highly liquid portfolio of short duration
and high creditworthiness. We monitor this through the use
of stress tests and mitigate risks 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 the failure of an IT system, such
as our underwriting system, could impact our ability to maintain
accurate and up-to-date records of our exposure. If correlated
with an insurance loss this could cause us to breach insurance
risk tolerances. It could also encompass IT integrity, where
an unauthorised intruder could alter data in our systems,
or introduce a bug that would corrupt the system.
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.
MITIGATION
Capacity: We mitigate IT availability risk by adding redundancy to
the capacity we need and using backups of data including off-site
storage that we test regularly.
Testing and access: We mitigate the integrity risk by using
independent external penetration tests, and by restricting access
to key systems to only those people who are qualified and need
to use them.
Personnel: We mitigate the risks associated with staff retention
and key-man risk through a combination of resource planning
processes and controls. Examples include targeted retention
packages, documented position descriptions and employment
contracts, resource monitoring and the provision of appropriate
compensation and training schemes.
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 reports
made by the CRO to the Board include standing items on
Emerging Risk.
Revision of Attritional Loss Ratio: Lancashire has responded to the
downturn in the market cycle by revising the expected attritional
loss ratios to account for the changes to pricing and coverage.
www.lancashiregroup.com
43
PERFORMANCE
CORPORATE RESPONSIBILITY
SUPPORTING COMMUNITIES –
OUR RESPONSIBILITY TO OTHERS
WHY CORPORATE RESPONSIBILITY IS IMPORTANT TO LANCASHIRE
Lancashire strives to be a responsible employer and a good corporate citizen supportive of the
communities in which we operate. We recognise the need to balance the responsibilities we owe
to our stakeholders such as shareholders, regulators, staff and clients with our responsibilities
to society as a whole. The insurance business by its nature seeks to provide support to those
afflicted by the unexpected, but we recognise that many communities 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 principally through our Foundation, which supports a number
of excellent charities, both through grant making and encouraging volunteering by our staff,
to whom we provide up to a week of annual charity leave after an initial period of employment.
OUR APPROACH
Corporate responsibility is an integral part of Lancashire’s
approach to its business. We limit the negative impact of our
carbon footprint through mitigation strategies and offsets,
and we try to improve the world around us in positive ways
such as the donations by the Foundation and the allocation
of 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. In terms of governance,
the LHL Board sets the policy for corporate donations to
the Foundation and reviews reports on its activities (and
is represented directly by a Non-Executive Director as one
of the Foundation’s Trustees). The LHL Board also sets
the policy for 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 from across
our operating platforms, which monitors and reports on the
activities of the charities to which donations are made.
During 2015, the UK government introduced legislation
requiring qualifying companies to publish details of how
they respond to the problem of modern slavery. Lancashire
has a relatively low headcount (less than 200 employees
globally), all of whom are remunerated on a basis which
comfortably exceeds UK minimum wage requirements.
In the ancillary services and limited supply chains used by
the Group, Lancashire seeks to receive assurance that its
service providers pay a living wage. Concerns over human
rights issues with insureds and potential clients are addressed
as part of the underwriting process. The Board has also
recently approved a statement addressing modern slavery
and human trafficking concerns, which can be found on
the Lancashire website.
We focus on the following four areas:
• Community (see page 45)
• Environment (see page 47)
• Marketplace (see page 48)
• Workplace (see page 48)
44
Lancashire Holdings Limited | Annual Report & Accounts 2015
COMMUNITY
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 by
making donations to locally based charities and through our
staff charity day release programmes and charity leave. In
2015, we donated funds to a number of charities providing
activities and care to disadvantaged children in London
during the summer holidays. In Bermuda we continue to
sponsor a morning fresh fruit programme for primary school
children, and have from time to time held staff raffles, bake
sales and other fundraising efforts.
OUR FOCUS AREAS
We focus on victims of disasters and those who are
disadvantaged and excluded whether through lack of
opportunity, lack of resources or just in need of a helping
$15.5m
donated by the Lancashire
Foundation since inception.
hand. As our business is in part based on
insuring against natural disasters we know
very well how disruptive they can be, so the
largest 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 2015, we supported RP
Fighting Blindness, Pancreatic Cancer UK, Back Up Trust,
Batten Disease Family Association, War Child, School of
Hard Knocks and The Brain Tumour Charity, all at the
suggestion of our business partners, helping to build the
sense of an insurance community in Bermuda and London.
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 up to a week’s annual 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.
The Lancashire Foundation also operates a charity
matching scheme to support individual staff members'
charitable initiatives. During 2015 such matched funds
from the Foundation amounted to $25,033 and supported
12 charities.
CORPORATE RESPONSIBILITY IN ACTION
The Family Centre
“Having just completed our 25th anniversary year, we look
back over the years and are overwhelmed with gratitude for all
of the supporters who have contributed to our many milestones.
The funding from Lancashire has been instrumental in
assisting us to provide consistent counselling support to the
highest risk families in Bermuda. This incredible, reliable
support led us to choose Lancashire as our Donor of the Year
for 2014. In 2015, in addition to their incredibly generous
donation, they also purchased a new van for our organisation!
Family Centre’s core mission and services are aimed at helping
families to get back on track to ensure a brighter future for their
children. We do this through our intensive counselling services,
training and community programmes.There is a powerful quote
that has always resonated with me: 'One hundred years from
now, it will not matter what kind of car I drove, what kind of
house I lived in, how much was in my bank account, nor what
my clothes looked like. But the world may be a little better because
I was important in the life of a child.' With Lancashire’s help,
I believe we are achieving this.
Thank you for your incredible commitment and meaningful
investment which is helping us to make a difference in the lives
of vulnerable children and their families all across Bermuda.”
Martha Dismont,
Executive Director, The Family Centre
From left to right: Elaine Whelan, Martha Dismont and Jennifer Wilson with the van
donated by the Lancashire Foundation in 2015.
www.lancashiregroup.com
45
PERFORMANCE
CORPORATE RESPONSIBILITY CONTINUED
CORPORATE RESPONSIBILITY IN ACTION
Project Transform
Every year, since 2010, six to eight employees from across
the Group volunteer to travel to the Philippines and work
alongside ICM for a week providing aid and support to
those living in ultra-poverty. The 2015 Project Transform
volunteers have reflected on their experience and
summarised their thoughts below:
“The general feeling amongst the team before we set off was that the
trip would provide a morale building and motivational opportunity
that would enrich and challenge our day-to-day lives. However, the
experiences that we had were much more profound; witnessing the
work of ICM in the communities that we encountered and who
briefly, and so kindly, let us into their lives, took us well outside
of our individual and collective comfort zones.
We worked with communities for whom the opportunities that we
take for granted – of education, shelter and aspirations – are not
readily available, but their dignity and determination to change
their lives for the better was truly humbling.
Overall, the experience of working together in both a physically
and emotionally tough environment is something that will always
bond us as a team. The ultimate reward, however, is the feeling of
accomplishment and utmost respect for the work ICM undertake
in those communities on a daily basis.
It was a privilege to demonstrate to those we met that we care
and that they are not forgotten.”
40
members of staff have volunteered to participate in
ICM’s Project Transform in the Philippines since 2010.
The 2015 Project Transform team pictured from left to right – Neeta Shah, Michael Bambury, Elaine Whelan, Aftab Akram, Rhys Dominique, Hayley Johnston, Michael Bush and
Kimberley Thompson.
46
Lancashire Holdings Limited | Annual Report & Accounts 2015
ENVIRONMENT
With operations in London and Bermuda, and with clients
and brokers around the globe, the Lancashire Group
generates the bulk of its carbon footprint as a result of
airline travel, which we offset through an organised
programme. In 2014, the Lancashire Group consolidated
its UK operations into 20 Fenchurch Street, which complies
with all the latest standards for energy use and recycling.
As a result, total emissions from electricity have decreased
by 21 per cent compared with 2014.
Types of Emissions
Activity
Direct (Scope 1) Gas (kWh)
Refrigerant
2015
tCO2e
60.4
0.0
2014
tCO2e
40.3
13.0
Indirect (Scope 2) Electricity (kWh)
590.2
751.6
Indirect (Scope 3) Business Travel (km) 1,754.4
1,270.9
346.6
63.7
2,815.3
334.3
67.4
2,477.5
14.7
12.9
Additional Upstream
Activities
Other
Total
Intensity metric:
Staff number – 192 FTE
Total Emissions (tCO2e)
Intensity ratio per FTE
100%
of our 2015 CO2 emissions offset.
OUR APPROACH
The figures in this report are calculated over a 12 month
period from 1 January 2015 to 31 December 2015.
Lancashire has elected to use the number of full-time
employees (FTE) as its intensity metric. Emissions per FTE
rose from 12.9 tCO2e per FTE in 2014 to 14.7 tCO2e per FTE
in 2015, an increase of 14.0 per cent, driven by the increase
in air travel. Where data was not available for 2015, values
were estimated using the corresponding months from the
previous year or by using industry benchmarks.
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
greenhouse gas (GHG) emissions including Scope 1, 2 and
3. Calculations performed follow the ISO-14064-1:2006
standard and give absolute and intensity factors for the
Group’s emissions.
Results show that GHG emissions in the year were 2,815.3
tonnes of CO2e, comprised of direct emissions (Scope 1)
amounting to 60.4 tonnes of CO2e, and indirect emissions
(Scope 2) amounting to 590.2 tonnes of CO2e. The source of
other indirect emissions (Scope 3) comprised 2,164.7 tonnes
of CO2e. Emissions from business travel have increased by
38.0 per cent compared to 2014, due to a 22.0 per cent
increase in total km travelled by air. Total emissions for
2015 increased by 13.6 per cent compared with 2014. In the
current challenging underwriting environment this increase
in travel emissions has been driven principally by an increase
in international client visits, particularly on long-haul flights
to Japan and the Far East.
Lancashire has purchased carbon credits to reduce its gross
GHG emissions by 2,815.3 tonnes, offsetting its total carbon
emissions and remaining carbon neutral.
The Group has chosen to offset its carbon emissions
with Carbon Clear by buying credits from the Mokla wind
power project in India. These offsetting proposals were
discussed and agreed with the Group’s CEO.
www.lancashiregroup.com
47
PERFORMANCE
CORPORATE RESPONSIBILITY CONTINUED
MARKETPLACE
We continue to help the development of our marketplace
by making employees available to sit on market committees,
boards and working groups. In 2015, our employees have
given talks at industry conferences, investor days and
symposia, and as part of market education programmes.
As noted on page 45, we also donate to many of the causes
supported by our industry partners 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. With our clients and their brokers we
are happy to welcome them to our offices, but we also travel
to see them and their businesses right around the world.
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 supporting a ‘broker
market’ and prize our broker relationships very highly
right across the Group.
• Investors: we continue to work hard at investor relations
and have an active programme of engagement with
investors around the globe.
100%
of our employees are eligible for RSS awards.
WORKPLACE
We strive to attract and retain 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.
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 Lancashire.
The Group promotes an inclusive environment that
recognises and values diversity as key to enhancing
individual development and maximising business
effectiveness. One way in which we seek to increase diversity,
and the values of the Group, is through our ‘Respect in the
Workplace’ training sessions which are given to all new
employees during their induction. The training sessions
aim to highlight their responsibilities in preventing
discrimination in the workplace.
Among the full-time staff, the turnover for the Group for
2015 was 8.9 per cent (down from 11.3 per cent in 2014),
and as at 31 December 2015, 3.5 per cent of the workforce
was composed of third party contractors, down from
6.6 per cent in 2014.
Lancashire complies with all relevant local UK and
Bermudian legal requirements, in particular with respect
to rights of freedom of association, collective bargaining
and working time regulations.
INTERNSHIP PROGRAMME
Since 2014, both the Group and the Foundation have jointly
sponsored two internship positions for Bermuda resident
college graduates. These graduates have been afforded the
opportunity to spend two years working and learning about
insurance in the Group’s London office and are due to
complete their placements during 2016. The two-year term
is a major commitment which demonstrates the Group’s
determination to give back to Bermuda and, given the
success of our first two interns, the Group is now in the
process of re-advertising the programme, with the hope
of welcoming two new graduates to the London office in
the summer of 2016.
48
Lancashire Holdings Limited | Annual Report & Accounts 2015
OUR FOCUS AREAS
Our focus in 2015 has been to maintain the success of
our employees through ongoing training and coaching
– provided both internally and externally. During 2015
almost 30 per cent of our employees undertook formal
training supported by the Group. We continue to measure
our employees’ success through attainment of personal
performance metrics as well as performance within the
Group’s values framework. We are delighted that during
2015 approximately 5 per cent of our employees were
promoted within the Group supported by the training
and development opportunities provided.
EMBRACING DIVERSITY
We are committed to being an equal opportunities employer.
The Lancashire Group is currently represented by employees
from 13 different nations. The gender split of males
to females (see page 68) within the Group is 62/38
per cent respectively.
We continue to promote the value of having a diverse
workforce by supporting 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. Recruiting the
right people for the Group is a high priority for the business
and we promote the value of having a diverse workforce.
We base all recruitment decisions on the ability of our
prospective employees to do the job, without consideration
to race, age, gender, sexual orientation, disability, beliefs,
or background. Ban the Box aligns with our commitment
to being an equal opportunities employer. The campaign
further aligns with our corporate social responsibility efforts,
in particular our partnership with St Giles Trust, a charity
which supports ex-offenders and prepares them for training
and employment opportunities.
CORPORATE RESPONSIBILITY IN ACTION
St Giles Trust (SGT)
“Some of our most important services have been able to flourish despite a
challenging funding landscape thanks to the wonderful support we get
from the Lancashire Foundation. These services fill the gaps which are
not met through statutory agencies and without our interventions many
of the clients we serve would be in freefall.
Our clients are some of the most vulnerable members of society. Many
have multiple issues around homelessness, mental health, substance
misuse and repeat offending histories. Their needs are complex and
for many St Giles Trust is one of the few places which is able to engage
with them effectively.
Throughout 2015, we developed our Peer Assist digital resettlement
platform, which uses the latest digital technology to offer easily
accessible, high quality online and over-the-phone resettlement
support to anyone who needs it. Since its launch in February 2015,
it is now receiving around 40-60 calls a day and has had 7,300 plus
visits to its website. Lancashire’s support has been vital in helping
us develop the platform through enabling us to adapt our telephony
and infrastructure.
But it’s not only the financial support that we feel so passionate and
thankful about. Lancashire staff visited our project in HMP Send
in July 2015 and met with some of the women working for us as Peer
Advisors in the prison. The visit made a real impression on the women
in the prison, who are always amazed that anyone is interested in them
and their futures. Former Peer Advisors make up around 40 per cent
of our paid staff and Lancashire staff are actively supporting this
by volunteering as mentors to some of our up and coming ex-offender
caseworker staff.
David Hart, Caseworker at SGT, commented on the mentoring support
received from Lancashire staff: “I feel like having someone so experienced
has given me great confidence when approaching certain issues, it’s
great to be able to speak with someone who can offer great advice, but
not only great advice but something sensible and relevant to what the
issue is”.
Voluntary funding is the lifeblood of St Giles Trust as it gives us the
ability to innovate and tackle difficult and complex issues. On behalf
of our staff and clients, we thank Lancashire for your kind support.”
Rob Owen OBE,
Chief Executive, St Giles Trust
www.lancashiregroup.com
49
PERFORMANCE
GOVERNANCE
Staying ahead
of the pack
Outperforming the competition comes
from more than just the players on the pitch,
and our management do more than just sit
in the stands. We achieve our goals through
strategic leadership and experienced direction.
GOVERNANCE
52 Chairman’s introduction
54 Board of Directors
59 Corporate governance report
62 Committee reports
71 Directors’ remuneration report
89 Directors’ report
93 Statement of Directors’ responsibilities
50
Lancashire Holdings Limited | Annual Report & Accounts 2015
G
O
V
E
R
N
A
N
C
E
www.lancashiregroup.com
51
CHAIRMAN’S INTRODUCTION
Martin Thomas
Non-Executive Chairman
STRATEGIC
CREATIVITY
Good governance is not about
slavishly following rules, but
creating a structure with the
flexibility to facilitate constructive
debate and creative strategic
decision making.
In my opening statement I gave a broad overview of
the challenges addressed by the Board during 2015
in ensuring that our business has the necessary
flexibility to identify and meet its strategic goals in
a challenging market. 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.
52
Lancashire Holdings Limited | Annual Report & Accounts 2015
Q How does the Board set and monitor the governance
objectives for the Group?
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 FRC. The FCA requires
each company with a premium listing to ‘comply or explain’ against the
Code (i.e. to disclose how it has complied with Code provisions or, if the
Code provisions have not been complied with, provide an explanation
for the non-compliance). The Group monitors its compliance with the
Code on at least a quarterly basis, and in this corporate governance section
and throughout this Annual Report for the 2015 financial year, areas
of corporate governance compliance are explained by reference to the
Code. The Company also monitors its compliance with applicable corporate
governance requirements under Bermuda law and regulations. I am pleased
to be able to report that there are no areas of material non-compliance with
the Code. This formal consideration of governance requirements is a useful
driver for the structuring of agendas and the consideration of matters which
are of real commercial and strategic benefit to the Group.
Q Is the Board effective?
In my opening remarks I noted that 2015 had been a year of continuity
and consolidation in the composition of our Board and management team.
I would like to thank all of our Directors for the diligence with which they
have discharged their duties during the year. During 2015 we took the
opportunity to use the services of Lintstock (a third-party provider of board
evaluation services) who worked with the Board and the business to review
the effectiveness of our Board, its Committees and our Directors. 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 Group effectively and to meet the
challenges of the business. As a Board we have also gained useful insights
and identified various areas for training and learning during the coming year.
The acid test for Board effectiveness is the quality of strategic debate and
decision making. I am confident that we have a Board which demonstrably
shows strategic leadership in its insightful and informed debate and
interaction with the management team and the business.
Q What changes have there been to the management teams during 2015?
As a Board we have welcomed Steve Hartley and Jas Bolla to the business as the
Head of Internal Audit and Head of Human Resources respectively. Louise
Wells, formerly Head of Internal Audit, has been appointed as Group Chief
Risk Officer and we have also welcomed Beverley Todd to our LICL subsidiary
Board (as a Non-Executive Director and Chairman). We have bid farewell to
Charles Mathias (our former Group Chief Risk Officer) and Dan Soares (the
former LICL Chairman) as well as Peter Scales and John Lynch (respectively
the CEO and CFO of the Cathedral Group and also Directors on the CUL
Board) and we thank them all for their contributions to the success of our
business over many years.
Q How does the Board shape and embed a healthy
corporate culture?
Whilst as a Board we have formally adopted a set of values
which we expect to inform and enhance the conduct
of our business, and against which we appraise the
performance of our employees, these are not a false
construct or an imposition from above, but real working
tools owned by everyone in our business. Good team work
is essential to all our operations, we look for passion and
a commitment to success in our people – for hard work,
loyalty and an understanding of, and commitment to,
our strategy and commercial objectives. Perhaps most
importantly we are committed to values of respect.
Amongst our workforce and on our Boards we value the
benefits of a broad diversity, and we strive for our dealings
with clients and counterparties to be honest, open and
characterised by a strong sense of both individual and
corporate integrity. We take particular pride in the facts
that with three women among our eight Directors
Lancashire is within the top ten FTSE 250 boards in terms
of its gender diversity; and that 38 per cent of the Group's
employees are women (see page 68 for further details).
Martin Thomas
Non-Executive Chairman
OUR GOVERNANCE STRUCTURE
Beverley Todd has extensive experience of international
insurance and reinsurance, specifically with JLT
Insurance Management where she has held senior
roles in Bermuda and Florida. In particular, she has
a detailed knowledge of Bermuda’s insurance regulatory
framework which will be invaluable in her role as
Chairman of the LICL Board of Directors.
INTRODUCING: BEVERLEY TODD
I am pleased to welcome Beverley Todd to the Lancashire Group
as the Chairman of the Board of LICL, our Bermuda operating
subsidiary. Beverley has extensive knowledge of the governance
and administration of Bermuda based insurance companies and her
wealth of insurance and operational experience will further enhance
the strong nexus of governance arrangements within the Group.
Group
Board
LANCASHIRE HOLDINGS LIMITED
BOARD OF DIRECTORS
Group
Committees
AUDIT
COMMITTEE
NOMINATION
& CORPORATE
GOVERNANCE COMMITTEE
INVESTMENT
COMMITTEE
UNDERWRITING
& UNDERWRITING
RISK COMMITTEE
REMUNERATION
COMMITTEE
Page 62
Page 67
Page 66
Page 69
Page 70
Operational
Boards
LUK
BOARD
LICL
BOARD
KCML
BOARD
CUL
BOARD
www.lancashiregroup.com
53
GOVERNANCE
BOARD OF DIRECTORS
From left to right:
Elaine Whelan, Christopher Head, Alex Maloney, Martin Thomas, Tom Milligan,
Samantha Hoe-Richardson, Peter Clarke, Simon Fraser, Emma Duncan
54
Lancashire Holdings Limited | Annual Report & Accounts 2015
www.lancashiregroup.com
55
GOVERNANCE
BOARD OF DIRECTORS’ BIOGRAPHIES
OUR TEAM
MARTIN THOMAS (AGE 52),
NON-EXECUTIVE CHAIRMAN
Martin Thomas is a partner and board member of Altima
Partners, LLP, the hedge fund manager, and a Director
of el Tejar 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 42),
CHIEF EXECUTIVE OFFICER
Alex Maloney joined Lancashire in December 2005 and
was appointed Group Chief Executive Officer in April 2014.
On joining, Mr Maloney was responsible for establishing and
building the energy underwriting team and account and, in
May 2009, was appointed Group Chief Underwriting Officer.
Since November 2010 Mr Maloney has served as a member
of the Board and was appointed Chief Executive Officer of
Lancashire Insurance Company (UK) Limited in 2012. Mr
Maloney also serves as a Director of Cathedral Underwriting
Limited and has been closely involved in the development
of the Group's Lloyd’s strategy. Mr Maloney has over
20 years' underwriting experience and has also worked
in the New York and Bermuda markets.
ELAINE WHELAN (AGE 41),
CHIEF FINANCIAL OFFICER
Elaine Whelan joined Lancashire in March 2006 and
leads both the Group finance function and the Bermuda
subsidiary, reporting to the Group Chief Executive Officer.
Ms Whelan was previously Chief Accounting Officer of
Zurich Insurance Company, Bermuda Branch. Prior to
joining Zurich, Ms Whelan was an Audit Manager at
PricewaterhouseCoopers, Bermuda, where she managed
a portfolio of predomintely (re)insurance and captive
insurance clients. Ms Whelan graduated from the University
of Strathclyde in 1994 with a BA in Accounting and
Economics and gained her Chartered Accountancy
qualification from the Institute of Chartered Accountants
of Scotland in 1997.
56
Lancashire Holdings Limited | Annual Report & Accounts 2015
PETER CLARKE (AGE 56),
NON-EXECUTIVE DIRECTOR
Peter Clarke was Group Chief Executive of Man Group plc
between April 2007 and February 2013. In 1993 Mr Clarke
joined Man Group plc, a leading global provider of
alternative investment products and solutions as well as
one of the world’s largest futures brokers. He was appointed
to the board in 1997 and served in a variety of roles,
including Head of Corporate Finance and Corporate
Affairs and Group Company Secretary before becoming
the Group Finance Director in 2000. During this period
he was responsible for investing in and developing one of
the leading providers of third-party capital insurance and
reinsurance products. In November 2005, he was given the
additional title of Group Deputy CEO. Mr Clarke is currently
the Chairman of the National Teaching Awards Trust and
a Non-Executive Director of both AXA Investment Managers
S.A. and Lombard Odier Asset Management. He is a
member of the Treasury Committee of King’s College
London. 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 56),
NON-EXECUTIVE DIRECTOR
Emma Duncan is the Editor of Intelligent Life, The
Economist’s sister magazine. She was Deputy Editor of
The Economist and has 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 Saudi 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.
GS Reinsurance Group into Global Atlantic Financial Group
(GAFG), before managing the sale of the Ariel businesses
from GAFG to BTG Pactual in 2014. He is also a Non-
Executive Director of Managing Agency Partners Limited.
Mr Milligan graduated from Durham University in 1991.
CHRISTOPHER HEAD (AGE 49),
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 (AGE 52),
SENIOR INDEPENDENT NON-EXECUTIVE DIRECTOR
Simon Fraser was Head of Corporate Broking at Merrill
Lynch and subsequently Bank of America Merrill Lynch
until his retirement in 2011. He began his career in the
City in 1986 with BZW and joined Merrill Lynch in 1997.
He led Initial Public Offerings, Rights Issues, Placings,
Demergers and Mergers and Acquisitions transactions
during his career and advised many UK companies on
stock market and LSE issues. Mr Fraser has an MA degree
in modern history from the University of St Andrews.
He is also a Non-Executive Director of Legal and General
Investment Management (Holdings) Limited and Derwent
London plc, where he chairs the Remuneration Committee
and sits on the Audit and Nominations Committees.
SAMANTHA HOE-RICHARDSON (AGE 45),
NON-EXECUTIVE DIRECTOR
Samantha Hoe-Richardson, who since 2014 has been
Chairman of the Audit Committee, is Head of Environment
and Sustainability for Network Rail. Prior to this, she was
Head of Environment for Anglo American plc, one of the
world’s leading mining and natural resources companies.
She was 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 46),
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 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
Goldman Sachs-owned Lloyd’s Syndicate 1910 in 2008
and serving as Active Underwriter until 2012. In 2012,
Mr Milligan led Goldman Sachs’ purchase of Ariel Re and
served as Co-CEO from April 2012 until July 2014. During
2013, Mr Milligan played a leading role in the spin-off of
www.lancashiregroup.com
57
GOVERNANCE
OUR BOARD’S YEAR
HIGHLIGHTS OF THE BOARD’S YEAR
FEBRUARY / Q1 MEETING
APRIL / Q2 MEETING
JULY / Q3 MEETING CONTINUED
• As part of its ongoing consideration of
talent management and succession
planning, the Board appointed Tom
Milligan as a Non-Executive Director
with effect from 3 February 2015 and as
a member of the Investment Committee
and the Underwriting and Underwriting
Risk Committee.
• Following its quarterly review of capital
management, the Board declared special
and final ordinary dividends of $0.50 per
common share and $0.10 per common
share, respectively, in respect of the year
ended 31 December 2014.
• The Board reviewed and approved the
Group’s 2015 business plan that had
been updated in light of the 1 January
renewals and current market conditions.
• The Board approved and adopted the
Group’s 2015 framework for executive
remuneration, including the three-year
policy for Executive Directors’
remuneration. The Group’s Annual Report
on Remuneration, as set out in the second
part of the Directors’ Remuneration Report
for the year ended 31 December 2014, was
approved for presentation to shareholders
at the 2015 AGM.
• The Board approved and adopted
the Group’s three-year strategic plan,
including the Group’s risk, and capital
and solvency appetites.
• The Board reviewed and adopted the
Group’s 2015 investment strategy.
• The Board received an annual investor
relations presentation from the Group’s
corporate brokers.
• The Company’s 2015 AGM was held at
its Head Office on 29 April 2015. All
resolutions were duly passed and approved
by shareholders casting their votes.
JUNE
• The Board approved the appointment
of Louise Wells to the role of Group
Chief Risk Officer with effect from
28 July 2015, subject to the relevant
regulatory approval.
JULY / Q3 MEETING
• The Board reviewed and approved the
Group’s 2015 reforecast business plan in
light of the 1 July renewals and actual
experience to 30 June.
• The Board declared an interim dividend
of $0.05 per common share.
• The Board approved amendments to the
Group’s investment portfolio guidelines
and to the terms of reference of the
Investment Committee.
• In light of industry M&A activity, the
Board approved changes to the companies
comprising the Group’s peer group for
comparator purposes.
• The Board approved an updated statement
on the representation of women on the
Board, on executive committees and in
senior management, which is published
on the Group’s website.
• The Board approved the constitution of
the RROC for the purpose of supporting
it in reviewing Solvency II and other
regulatory and public reporting outputs,
and approved and adopted the RROC’s
terms of reference.
NOVEMBER / Q4 MEETING
• The Board considered the Group’s
2016 business plan.
• The Board declared a special dividend
for 2015 of $0.95 per common share.
• The Board received a final Solvency
II project report following its transition
to ‘business as usual’.
• The Board approved and adopted
an updated division of responsibilities
between the Chairman and the CEO,
together with the Group’s updated
succession plan.
• The annual performance evaluation
of the Board and its Committees and
individual Directors was conducted,
facilitated by Lintstock Limited.
DECEMBER
• The warrants to purchase the Company’s
common shares that were issued on 16
December 2005 expired on 16 December
2015. All outstanding warrants were
exercised prior to the date of expiry.
58
Lancashire Holdings Limited | Annual Report & Accounts 2015
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, Simon Fraser, 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. Martin Thomas was independent upon his
appointment as Chairman on 1 May 2007. At the Board
meeting held on 17 February 2016, 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 the
Directors of the Company are submitting themselves for
re-election at the 2016 AGM with the exception of Martin
Thomas, who will retire from the Board at the conclusion
of the AGM.
CORPORATE GOVERNANCE REPORT
BOARD COMMITTEES
BOARD AND COMMITTEE ADMINISTRATION
The Board of Directors is responsible for the leadership and
control and the long-term success of Lancashire’s business.
The Board has reserved a number of matters for its decision,
including responsibility for setting the Group’s values and
standards, and approval of the Group’s strategic aims and
objectives. The Board has delegated certain matters to
Committees of the Board, as described below. Copies of the
Schedule of Board Reserved Matters and Terms of Reference
of the Board Committees are on the Company’s website at
www.lancashiregroup.com.
The Board has approved and adopted a formal division
of responsibilities between the Chairman and the CEO.
The Chairman is responsible for the leadership and
management of the Board and for providing appropriate
support and advice to the CEO. The CEO is responsible
for the management of the Group’s business and for the
development of the Group’s strategy and commercial
objectives. The CEO is responsible with the executive
team for implementing the Board’s decisions.
The Board and its Committees meet on at least a quarterly
basis. At the regular quarterly Board meetings, the Directors
review all areas of the Group’s business and receive reports
from management on underwriting, reserving, finance,
capital management, internal audit, risk, compliance and
other matters affecting the Group. Management provides
the Board with the information necessary for it to fulfil
its responsibilities. In addition, presentations are made
by external advisers such as the independent actuary,
the investment managers, the external auditors, the
remuneration consultants and the corporate brokers.
The Board Committees are authorised to seek independent
professional advice at the Company’s expense.
The Board also meets to discuss strategic planning
matters outside the formal meeting schedule.
The Chairman holds regular meetings with the
Non-Executive Directors without the Executive Directors
present, to discuss a broad range of matters affecting
the Group.
www.lancashiregroup.com
59
GOVERNANCE
CORPORATE GOVERNANCE REPORT CONTINUED
INFORMATION AND TRAINING
On appointment, the Directors receive written information
regarding their responsibilities as Directors and information
about the Group. An induction process is tailored for each
new Director in the light of his or her existing skill set and
knowledge of the Group, and includes meeting with senior
management and visiting the Group’s operations.
Information and advice regarding the Company’s official
list, legal and regulatory obligations and on the Group’s
compliance with the requirements of the Code, is also
provided on a regular basis. An analysis of the Group’s
compliance with the Code is collated and summarised in
quarterly reports together with a more general summary
of corporate governance developments, which are prepared
by the Group’s Legal and Compliance department for
consideration by the Nomination and Corporate Governance
Committee. The Directors have access to the Company
Secretary who is responsible for advising the Board on
all legal and governance matters. The Directors also have
access to the Group General Counsel and independent
professional advice as required. Regular sessions are
held between the Board and management as part of the
Company’s quarterly Board meetings, during which in-depth
presentations covering areas of the Group’s business are
made. During these presentations the Directors have the
opportunity to consider, challenge and help shape the
Group’s commercial strategy.
BOARD PERFORMANCE EVALUATION
A formal performance evaluation of the Board, its
Committees and individual Directors is undertaken on an
annual basis and the process is initiated by the Nomination
and Corporate Governance Committee. The aim of this work
is to assess the effectiveness of the Board and its Committees
in terms of performance, 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.
The 2015 performance evaluation of the Board was
facilitated by Lintstock Limited, a London-based corporate
advisory firm with no other connection to the Group. The
evaluation process involved each Director as well as the
Company Secretary, the Group Chief Risk Officer and the
Group General Counsel completing a confidential online
questionnaire designed by Lintstock and the Nomination
and Corporate Governance Committee. Responses to the
completed questionnaires were collated by Lintstock, who
then interviewed all of the respondents individually to
discuss the operation and performance of the Board,
each of the Committees, the Chairman and the Directors.
Lintstock prepared a suite of reports which were discussed
in draft with the Chairman before being distributed to
each of the Directors.
60
Lancashire Holdings Limited | Annual Report & Accounts 2015
In February 2016, the Lintstock performance evaluation
reports were discussed at meetings of the Nomination and
Corporate Governance Committee and the Board and each
of the other Committees discussed the report pertinent to
its own operation and performance. The Board discussions
were led by the Chairman and focused on such matters as
strategic oversight, succession planning, Board composition
and training.
In summary, in the Board’s consideration of the 2015
evaluation reports the Board concluded that it operates
effectively and has a good blend of insurance, financial
and regulatory expertise. All Non-Executive Directors are
committed to the continued success of the Group and
to making the Board and its Committees work effectively.
Attendance at Board meetings was found to be 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.
The process proved a useful learning exercise. The Board
identified a number of areas for training for the coming year
and also discussed options to optimise the focus of agendas,
Board and Committee materials and flows of management
information to the Board. The Board will also prioritise the
implementation of a more formal staff training and talent
management programme across the Group during 2016.
The Board will continue to review its procedures, training
requirements, effectiveness and development in 2016.
The Chairman’s performance appraisal was conducted by
the Senior Independent Director, who consulted with the
Non-Executive Directors with input from the Executive
Directors during July 2015. The Non-Executive Directors
also discussed the report prepared by Lintstock addressing
the Chairman’s performance at the Board meeting held in
February 2016. The Chairman’s performance was found to
be effective.
At the end of the year, the Chairman met with the CEO,
and the CEO met with the CFO, to conduct a performance
appraisal in respect of 2015 and to set targets for 2016. The
results of these performance evaluations were discussed by
the Chairman and the Non-Executive Directors and are
reported in the Directors' Remuneration Report
commencing on page 71.
Original date of
appointment to Board
Board
Audit
Committee
Investment
Committee
Nomination
and Corporate
Governance
Committee
Underwriting and
Underwriting Risk
Committee
Remuneration
Committee
Non-Executive Directors
Peter Clarke1
Emma Duncan
Simon Fraser
Samantha Hoe-Richardson
Tom Milligan2
Martin Thomas3
Executive Directors
Alex Maloney
Elaine Whelan
9 June 2014
4 August 2010
5 November 2013
20 February 2013
3 February 2015
15 September 2006
5 November 2010
1 January 2013
6/6
4/6
6/6
6/6
6/6
6/6
6/6
6/6
4/4
–
4/4
4/4
–
–
–
–
4/4
3/4
–
–
3/3
_
–
4/4
_
4/5
_
5/5
–
4/5
–
–
_
_
_
–
3/3
–
4/4
_
8/8
7/8
8/8
–
_
–
_
–
(1) Peter Clarke was appointed as Chairman of the Investment Committee with effect from 11 February 2015.
(2) Tom Milligan was appointed as a Non-Executive Director with effect from 3 February 2015. He was appointed as a member of the Investment Committee and of the Underwriting and Underwriting
Risk Committee with effect from 11 February 2015.
(3) Martin Thomas was conflicted from attending the meeting of the Nomination and Corporate Governance Committee held on 19 June 2015.
RELATIONS WITH SHAREHOLDERS
During 2015, the Group’s Head of Investor Relations, usually
accompanied by one or more of the CEO, the CUO, the
CFO, the Chairman or a senior member of the underwriting
team, made presentations to major shareholders, analysts
and the investor community. Formal reports of these meetings
were provided to the Board on at least a quarterly basis.
Conference calls with shareholders and analysts hosted by
senior management are held quarterly following the
announcement of the Group’s quarterly 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 2016 AGM.
The Company commissions regular independent shareholder
analysis reports together with independent research on
feedback from shareholders and analysts following the
Company’s results announcements. This research, together
with the analysts’ notes, is made available to all Directors.
ENTERPRISE RISK MANAGEMENT
The Board is responsible for setting the Group’s risk appetites
and preferences, defining its risk tolerances, and monitoring
and ensuring compliance with risk tolerances. During 2015,
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 the Group and
the policies in place to manage them can be found in
the risk disclosures section on pages 112 to 138.
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.
The facilitating and embedding of ERM and helping the
Group to improve its ERM practices is a major responsibility
assigned to the CRO. During 2015 the Board created the
RROC to assist in risk management and reporting (see page
39 for further details). The Group’s risk management is
informed by the FRC’s Guidance on Risk Management,
Internal Control and Related Financial and Business
Reporting. The CRO’s remuneration is subject to
annual review by the Remuneration Committee.
COMMITTEES
The Board has established Audit, Investment, Nomination
and Corporate Governance, Underwriting and Underwriting
Risk and Remuneration Committees. Each of the
Committees has written Terms of Reference, which are
reviewed regularly and are available on the Company’s
website (www.lancashiregroup.com). The Committees’
Terms of Reference were reviewed by the Board during 2015
and some amendments were made to the Terms of Reference
of the Investment Committee. The Committees are generally
scheduled to meet quarterly, although additional meetings are
arranged as business requirements dictate.The composition
of the Committees as at 31 December 2015 was as set out in the
table appearing above. A report from each of the Committees
is set out from page 62 to page 70.
www.lancashiregroup.com
61
GOVERNANCE
COMMITTEE REPORTS
Samantha Hoe-Richardson
Chairman of the Audit Committee
“The Audit Committee has a particular
role, acting independently from the
executive, to ensure that the interests
of shareholders are properly protected
in relation to financial reporting and
internal control.” (FRC – Guidance
on Audit Committees).
COMMITTEE MEMBERSHIP
The Audit Committee comprises three
independent Non-Executive Directors and is
chaired by Samantha Hoe-Richardson, a qualified
accountant. The Board considers that the three
independent Non-Executive Directors all have
recent and relevant financial experience. The
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)
Peter Clarke
Simon Fraser
Meetings
attended
4/4
4/4
4/4
62
Lancashire Holdings Limited | Annual Report & Accounts 2015
AUDIT COMMITTEE
This report sets out the detailed responsibilities of the Committee as
well as the significant areas of judgement or estimation focused on
during the year.
SIGNIFICANT AREAS OF JUDGEMENT OR ESTIMATION
LOSS RESERVES AND EXPENSES
As detailed on pages 155 to 157 of the consolidated financial statements,
the estimation of ultimate loss reserves is a complex actuarial process
that incorporates a significant amount of judgement. The Committee
considers the adequacy of the Group’s loss reserves at each Audit
Committee meeting, for which purpose it receives quarterly reports from
the Group’s Reserving Actuary. Ernst & Young LLP (EY) conduct a high
level review of the Group's loss reserves as part of their Q1 and Q3 review
procedures. Both the Reserving Actuary and EY present a comparison of
Lancashire’s reserves to their own best estimates at the Q2 and Q4 Audit
Committee meetings. During 2015, the Committee focused its discussions
around the Group’s loss reserves on: the range of reasonable actuarial
estimates and the divergence of the Group’s estimates to the external
actuarial estimates; current and prior year loss development including
‘back-testing’ of the Group’s prior year reserves; and reserving for each
insurance operating subsidiary. Having reviewed and challenged these
areas, the Committee concurred with management’s valuation of the
Group’s loss reserves and the relevant disclosures around loss reserving
in the Group’s consolidated financial statements.
INTANGIBLE ASSET VALUATION
The 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 108 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 carrying
value of these assets was reasonable.
PRIORITIES FOR 2016
The Committee’s priorities for 2016 are to ensure the continued
effectiveness of the Company’s control environment and the integrity
of external financial reporting. During the year the Chairman of the
Audit Committee will also lead a comprehensive and competitive
external audit tender process for the provision of external audit
services commencing in the 2017 financial year.
HOW THE COMMITTEE DISCHARGED ITS RESPONSIBILITIES DURING 2015
FINANCIAL REPORTING
COMMITTEE RESPONSIBILITY
Monitors the integrity of the Company’s
consolidated 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.
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.
SOLVENCY II
COMMITTEE RESPONSIBILITY
Monitors developments in the
Solvency II regime.
COMMITTEE ACTIVITIES
At each quarterly meeting the Committee reviews the Company’s quarterly 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 155 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 106 for the details of these areas).
Periodically the Audit Committee also undertakes a more detailed analysis of specific
topics, such as its review of the accounting and disclosure for the Group's equity
compensation plans undertaken in the third quarter of 2015. 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 2015, those
that were considered significant are loss reserving and the valuation of intangible assets.
These are explained in further detail on page 62. In accordance with auditing guidance,
the external auditors’ report includes revenue recognition through 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.
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 2015 Annual Report and Accounts at the
February 2016 Audit Committee meeting and advised the Board that the Annual
Report and Accounts, taken as a whole, is fair, balanced and understandable and
provides the information necessary for shareholders to assess the Company’s position
and performance, business model and strategy.
COMMITTEE ACTIVITIES
A quarterly report was provided during 2015 to the Audit Committee by the CRO detailing
the Company’s progress towards meeting its Solvency II requirements. During 2015,
the RROC was constituted by the Board to support it in reviewing Solvency II and other
regulatory and public reporting outputs following the implementation of the Solvency II
regime on 1 January 2016 when the PRA became the Group supervisor. The members
of the RROC are the CEO, the CFO, the CRO and at least two Non-Executive Directors
(currently Peter Clarke and Martin Thomas). The Group meets the requirements of the
new regime and a comprehensive training programme has been put in place to ensure
that all Board members are able to discharge their Solvency II responsibilities during 2016.
www.lancashiregroup.com
63
GOVERNANCE
COMMITTEE REPORTS CONTINUED
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.
• 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.
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 results. The Committee meets
in executive session with the external auditors and with management at least twice per annum.
During 2015, an assessment of the effectiveness of the external audit process was conducted by
the Company’s senior management with input from the Committee Chairman 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.
The Committee has approved and adopted a non-audit services policy that is reviewed on an annual
basis and was last updated in October 2015. The policy, which stipulates rules around approvals
required for various types of non-audit services, can be found on the Company’s website.
During 2015, EY provided non-audit services in relation to UK taxation. Fees for non-audit
services provided in 2015 totalled $0.1 million representing 7.4 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 2016
external audit. EY have 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 policy on audit partner rotation. During
2014, the Board approved a recommendation by the Committee that the external audit contract
for the provision of external audit services commencing in the financial year 2017 be put out to
tender during 2016. This is consistent with the mandatory rotation of the current EY lead audit
partner. A recommendation will then be made to shareholders at the 2017 AGM.
64
Lancashire Holdings Limited | Annual Report & Accounts 2015
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.
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 2015, the Committee reviewed and approved an updated Internal Audit Charter. This
can be viewed on the Company’s website. An assessment of the effectiveness of the Internal Audit
function was conducted by the executive, with a report issued to the Committee. The Committee
discussed the report and its findings with the executive 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. The Committee also appointed a new Head of Internal Audit.
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 2015, the Committee was satisfied that the Company’s internal control
framework was operating effectively.
During 2015, 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.
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65
GOVERNANCE
INVESTMENT COMMITTEE
PRINCIPAL RESPONSIBILITIES OF THE COMMITTEE
• Recommend investment strategies, guidelines and policies for the Board
of the Company and other members of the Group to approve annually.
• Recommend and set risk asset definitions and risk tolerance levels.
• Recommend to the relevant Boards the appointment of investment
managers to manage the Group’s investments.
• Monitor the performance of investment strategies within the risk framework.
• Establish and monitor compliance with investment operating guidelines
relating to custody of investments, internal controls and accounting.
HOW THE COMMITTEE DISCHARGED ITS RESPONSIBILITIES DURING 2015
During 2015, the Investment Committee undertook a strategic asset
allocation study that resulted in recommended changes to the Group
asset allocations. The Committee also recommended changes to the
Company’s investment guidelines.
The Committee considered regular reports on investment performance,
asset allocation and compliance with pre-defined guidelines and tolerances.
PRIORITIES FOR 2016
The Investment Committee will continue to focus on achieving the
appropriate balance of risk and return in the implementation of the Group’s
investment strategy, preserving capital and managing interest rate risk.
COMMITTEE REPORTS CONTINUED
Peter Clarke
Chairman of the Investment Committee
“The focus of the Committee continues to
be on capital preservation and liquidity
to support and complement the Group’s
underwriting operations. ”
COMMITTEE MEMBERSHIP
The Investment Committee comprises three
Non-Executive Directors and one Executive
Director (the CFO) together with the Head of
Investments and Treasury (who is not a Director).
Peter Clarke (Chairman)1
Emma Duncan
Tom Milligan2
Denise O’Donoghue
Elaine Whelan
Meetings
attended
4/4
3/4
3/3
4/4
4/4
(1) Peter Clarke was appointed as Chairman of the Investment Committee
with effect from 11 February 2015.
(2) Tom Milligan was appointed as a member of the Investment Committee
with effect from 11 February 2015.
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Lancashire Holdings Limited | Annual Report & Accounts 2015
Martin Thomas
Chairman of the Nomination and
Corporate Governance Committee
“A particular focus of the Committee
during 2015 has been succession
planning for the Board and
its Committees to ensure their
continued effective performance
through continuity of leadership.”
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 Thomas1 (Chairman)
Emma Duncan
Samantha Hoe-Richardson
Meetings
attended
4/5
4/5
5/5
(1) Martin Thomas was conflicted from attending the meeting of the
Nomination and Corporate Governance Committee held on 19 June 2015.
NOMINATION AND
CORPORATE GOVERNANCE
COMMITTEE
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.
• Oversee donations by the Group to the Lancashire Foundation and
to monitor the activities of the Foundation.
HOW THE COMMITTEE DISCHARGED ITS RESPONSIBILITIES DURING 2015
BOARD COMPOSITION
The Committee reviewed the composition of the Board 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. Following Martin Thomas’s
decision to retire from the Board at the 2016 AGM, the Committee
recommended the appointment of Peter Clarke as Chairman of the Board.
In its consideration of the appointment of a new Chairman, the Committee
noted that an independant external search consultancy had been used
in relation to the appointments of Peter Clarke and Tom Milligan as
Non-Executive Directors in 2014 and 2015, respectively. It was therefore
agreed that given this process, and the availability of Peter Clarke as a very
strong candidate, the utilisation of a further external search consultancy or
open advertising would be of little benefit to the Company at this time. The
Committee recommended changes to the composition of the Investment
Committee and the Underwriting and Underwriting Risk Committee
during the year.
SUCCESSION PLANNING
The Committee reviewed the Company’s succession plan for Executive
Directors and other senior executives, taking into account the Company’s
risk environment and strategic objectives, as well as the anticipated demands
of the business. A particular area of focus during 2015 has been that of talent
development and monitoring. Following the appointment of Jas Bolla as the
Group Head of HR effective talent mapping and management has been
identified as an area for further development and standardisation across
the Group in the coming year.
APPOINTMENT OF DIRECTORS TO SUBSIDIARY BOARDS
In early 2016 the Committee recommended to the Board the appointment
of Beverley Todd to the role of Chairman of the Board of LICL.
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67
GOVERNANCE
LHL BOARD MEMBERS
Men
Women
GROUP MANAGEMENT
EXCLUDING LHL
NON-EXECUTIVE DIRECTORS
Male: 80%
Female: 20%
OVERALL LANCASHIRE
GROUP EMPLOYEES
Men
Women
LHL BOARD MEMBERS
Male: 62%
Female: 38%
GROUP MANAGEMENT
EXCLUDING LHL NON-EXECUTIVE
BOARD DIRECTORS
Men
Women
OVERALL
GROUP EMPLOYEES
Male: 62%
Female: 38%
COMMITTEE REPORTS CONTINUED
CORPORATE GOVERNANCE
The Committee keeps under review the Company’s
corporate governance, particularly compliance with the
Code, and is responsible for making recommendations to
the Board concerning the process for conducting and
facilitating the annual performance evaluation of the Board,
its Committees and the individual Directors – see page 60.
During 2015, the Committee recommended the adoption by
the Board of revised Terms of Reference for the Investment
Committee. It also made recommendations to the Board
regarding the Terms of Reference and membership of a
new RROC that was established to support the Board in
reviewing Solvency II and other regulatory and public
reporting outputs.
The Nomination and Corporate Governance Committee
also recommended the approval by the Board of an updated
protocol for the division of responsibilities and roles of the
Chairman and Group CEO and the responsibilities and
reporting lines of the CEOs of Group subsidiaries.
The Committee 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 Lord Davies's reports, 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 Group employees.
These statistics are shown opposite.
The Committee recommended the approval and adoption
by the Board of a statement on slavery and human
trafficking, which is published on the Company’s website.
The Group is committed to social responsibility and has
zero tolerance for slavery and human trafficking.
THE LANCASHIRE FOUNDATION
The Committee is responsible for monitoring and making
recommendations to the Board in relation to the Company’s
charitable giving policy and the operation of, and reporting
requirements for, the Lancashire Foundation.
PRIORITIES FOR 2016
The Nomination and Corporate Governance Committee’s
priorities for 2016 will include a continued focus on
corporate governance matters, and on succession planning,
to support management in the development of talent
planning within the business.
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Lancashire Holdings Limited | Annual Report & Accounts 2015
Alex Maloney
Chairman of the 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.”
COMMITTEE MEMBERSHIP
The Underwriting and Underwriting Risk
Committee comprises one Executive Director
(the Group CEO) and one Non-Executive
Director 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).
Alex Maloney (Chairman)
Paul Gregory
Hayley Johnston
Tom Milligan1
Sylvain Perrier
Ben Readdy
Meetings
attended
4/4
3/4
3/4
3/3
4/4
4/4
(1) Tom Milligan was appointed as a member of the Underwriting and
Underwriting Risk Committee with effect from 11 February 2015.
UNDERWRITING AND
UNDERWRITING RISK
COMMITTEE
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 the Group's risk profile
and risk appetite.
HOW THE COMMITTEE DISCHARGED ITS RESPONSIBILITIES DURING 2015
Underwriting risk is one of the key risks faced by the Group, 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 2015, the Cathedral platform has afforded
opportunities for new lines of business within the Lloyd’s market through
the ongoing build out of Syndicate 3010. The Committee has also received
regular reports on the progress made in the development of the Kinesis
platform during 2015. The Committee receives quarterly reports of
significant claims to the business.
During 2015, 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 and Accounts
on pages 30 to 38.
PRIORITIES FOR 2016
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
69
GOVERNANCE
COMMITTEE REPORTS CONTINUED
Simon Fraser
Chairman of the 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 that
are closely linked to performance.”
COMMITTEE MEMBERSHIP
The Remuneration Committee comprises three
independent Non-Executive Directors.
Simon Fraser (Chairman)
Peter Clarke
Emma Duncan
Meetings
attended
8/8
8/8
7/8
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Lancashire Holdings Limited | Annual Report & Accounts 2015
REMUNERATION COMMITTEE
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 packages, including pension
arrangements, of the Company’s Chairman, the Executive Directors,
Company Secretary 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 or retirement, and any
payments made, are fair to the individual and the Company.
• Oversee any major changes in employee benefit structures throughout
the Group.
HOW THE COMMITTEE DISCHARGED ITS RESPONSIBILITIES DURING 2015
During 2015, the Committee reviewed the Group incentivisation packages
to ensure that remuneration is structured appropriately to promote the
long-term success of the Company. The Committee also reviewed the RSS
structure for Executive Directors to ensure that the performance metrics
continue to align the interests of the Company, its investors and management.
The Committee considered the salary and bonus awards for 2015 for
Executive Directors and other designated senior executives. The
Committee also approved the grant of awards under the Company’s RSS.
The Committee reviewed Executive Directors’ shareholdings in the context
of the Company’s share ownership guidelines for senior/key executives and
modified the guidelines to introduce for Executive Directors a post-vesting
two-year holding period for three-year performance-linked RSS awards,
thereby increasing the alignment with shareholders on such awards to a
period of at least five years.
The Committee also reviewed the policy for Executive Director remuneration
which has a three-year life after it was approved by shareholders at the 2014
AGM. The Committee considers the policy fit for purpose and does not
propose any amendments for the 2016 AGM.
The Directors’ Remuneration Policy and the Annual Report on Remuneration
for which the Committee is responsible can be found on pages 71 to 88.
During 2015, the Committee undertook a review of, and recommended
changes to, the companies comprising the Company’s peer group for
comparator purposes in light of recent M&A activity. (A list of peer
companies is on page 85.)
PRIORITIES FOR 2016
During the coming year, the Remuneration Committee will review the ongoing
appropriateness and relevance of the Group’s remuneration structures. The
Committee will also undertake a further review of the policy for Executive
Director remuneration, for presentation to shareholders for approval at the
2017 AGM.
DIRECTORS’ REMUNERATION REPORT
ANNUAL STATEMENT
Dear Shareholder,
I am pleased to present the 2015 Directors’ Remuneration Report
to shareholders.
As a company incorporated in Bermuda, LHL is not bound by
UK law or regulation in the area of Directors’ remuneration to
the same extent that it applies to UK incorporated companies.
However, by virtue of the Company’s premium listing on the LSE,
and reflecting the Committee’s approach to good governance,
shareholders were given the opportunity to approve our
remuneration policy at the 2014 AGM. We are not proposing any
changes to our remuneration policy this year and as the current
policy on pages 74 to 76 has a three-year life, a new policy will be
put forward for consideration at the 2017 AGM.
REMUNERATION AND STRATEGY
The Group’s goal continues to be to reward its employees fairly and
responsibly, by providing an appropriate balance between fixed
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
and Accounts, 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 on a risk-adjusted
basis over the course of the insurance cycle. Our remuneration
policy is closely aligned to this strategy.
PERFORMANCE OUTCOME FOR 2015
The Group has delivered solid results in a market which remained
challenging during 2015 (see the performance review of this report
on pages 81 to 84).
Against this background of challenging market conditions there
was an increase in total remuneration of 5.1 per cent for the CEO
between 2014 and 2015. For the CFO there was an increase of
28.9 per cent between 2014 and 2015 in total remuneration (see
the comparison table for single figure remuneration on page 80).
This movement is consistent with a warrant adjusted RoE of
13.5 per cent for 2015 compared to 14.7 per cent for 2014 and a
total shareholder return of 25.9 per cent for the year compared
to the disappointing -24.2 per cent for 2014 (see page 27 for
further details). In the case of the CFO, it should be noted that
the increase in total remuneration is principally the result of the
vesting of the 2013 Performance RSS awards which were awarded
following Elaine Whelan’s promotion.
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 2015 for financial
performance were stretching, and reflecting the Company's 2015
performance were achieved at slightly above target level (and at
63 per cent of maximum bonus for the CEO and at 63 per cent
of maximum bonus for the CFO), subject to confirmation of peer
group performance data. The potential percentage of maximum
bonus for both the CEO and CFO could rise to 78 per cent should
the Company performance be ranked at or above the upper
quartile against peers.
Consistent with the approach taken last year, due to the large
number of outstanding warrants which were due to be, and were
in fact, exercised prior to their expiry date in December 2015, and
the potentially volatile impact of exercises on the annual bonus
performance metrics, the Committee decided in respect of both
the 2014 and 2015 years 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 (including an
adjustment for dividend equivalent payments made on outstanding
warrants for the relative RoE calculation). Accordingly the warrant
adjusted RoE used for purposes of the absolute RoE metric is 13.5
per cent, which represents an uplift of 2.6 per cent on the 2015
actual RoE of 10.9 per cent. For full details of Executive Directors’
bonuses and the associated performance delivered see page 82.
In relation to long-term incentives, the 2013 Performance RSS
awards were 75 per cent based on absolute RoE targets and 25 per
cent on relative TSR against specified peer group companies over
the three-year period to 31 December 2015. Our TSR performance
(in USD) over this period ranked the Company below the median
of the designated peer group of 11 companies, resulting in 0 per
cent vesting for the TSR component. This, in part, was a reflection
of the out-performance of the Company’s share price relative to
its peer group comparator companies in 2012, 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, adjusted for warrants, over
this three-year performance period was 15.7 per cent against a
threshold target of the 13-week Treasury bill rate plus 6 per cent
and a maximum pay-out of the 13-week Treasury bill rate plus
15 per cent, resulting in 100 per cent of the RoE component
of the 2013 Performance RSS award vesting. Overall, the 2013
performance RSS awards vested at 75 per cent. This compared
to the overall 50 per cent vesting of the 2012 RSS Performance
awards due to 100 per cent vesting of the RoE portion of the
awards, which we reported last year.
The total remuneration received by our current Executive
Directors in 2015 was higher than that received in 2014 (see page
80 for the comparison data). It is to be noted that in the current
challenging underwriting environment total remuneration for
Executive Directors is lower than in many previous years, as
demonstrated by the chart of Total Remuneration History for the
CEO on page 87. The Committee believes in setting challenging
performance criteria and having a significant proportion of the
overall package linked to Company performance. However, the
Committee also recognises the need to ensure that Executive
Directors are appropriately remunerated and incentivised even in
the more challenging phases of the insurance cycle, as at present.
It is also important that the Committee and the Board ensure that
Executive Director compensation is structured in such a way so as
not to encourage excessive risk to the business. The like for like
employee costs for the Group were $80.1 million in 2015 compared
with $77.4 million in 2014 (see page 143 for further detail).
www.lancashiregroup.com
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GOVERNANCE
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.
Further to the Committee’s commitment in last year’s Annual
Report and Accounts, the Committee has concluded that
arrangements for our Executive Directors are appropriate and
achieve the desired alignment of remuneration with performance.
The Committee is committed to maintaining an open and
constructive dialogue with our shareholders on remuneration
matters and I welcome any feedback you may have.
Simon Fraser
Chairman of the Remuneration Committee
DIRECTORS’ REMUNERATION REPORT CONTINUED
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.
APPLICATION OF REMUNERATION POLICY FOR 2016
The Remuneration Committee has reviewed the policy approved by
shareholders and considers it to remain fit for purpose. That said,
we have made a number of changes in the way we will operate our
policy for 2016.
• The minimum and maximum absolute RoE targets attached to
our annual bonus plan have been modified to reflect the current
challenging market environment. The target and maximum
pay-out percentages have been maintained at 11 per cent and
19 per cent respectively. However, in order to reflect the market
outlook and budgeted returns, the threshold target payout
percentage has been reduced to 7 per cent. The Committee
and Board consider that, in light of the challenging business
environment and the need to moderate risk exposures in the
current market, these targets are appropriate for the 2016
financial year.
• The Committee and Board have agreed an amendment to the
management share ownership guidelines to stipulate that, in
respect of future grants of RSS awards having a performance
period of at least three years, Executive Directors are expected
to hold the resultant vested RSS awards (or the resultant net
of tax shares), for a further period of not less than two years
following vesting. The additional two-year holding period is in
line with recent institutional investor guidelines and, together
with our management share ownership guidelines, provides
further alignment between management and our shareholders.
The final section of this report is the Annual Report on
Remuneration which provides detailed disclosure on how
the policy will be implemented for 2016 and how Directors
have been paid in relation to 2015.
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Lancashire Holdings Limited | Annual Report & Accounts 2015
DIRECTORS’ REMUNERATION POLICY SECTION
This part of the Directors’ Remuneration Report sets out the
Remuneration Policy for the Company’s Directors. 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 are specific to 2015 or earlier
years (including, for example, the disclosure of the illustrative
remuneration scenarios) have been updated where applicable.
The full Policy Report approved by the Company's shareholders
at the 2014 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;
• 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 consolidated 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 any
of the Group’s employees may be offered similarly structured
packages, with participation in annual bonus and long-term
incentive plans, although award types (restricted cash or restricted
stock) and size may vary between different categories of staff. For
Executive Directors with higher remuneration levels, a higher
proportion of the compensation package is subject to performance
pay, share based remuneration and deferral. This ensures that
there is a strong link between remuneration, Company
performance and the interests of shareholders.
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.
www.lancashiregroup.com
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GOVERNANCE
DIRECTORS’ REMUNERATION REPORT CONTINUED
POLICY TABLE
Base Salary
Purpose and Link to Strategy Helps recruit, motivate and retain high-calibre Executive Directors by offering salaries at market
Operation
competitive levels.
Reflects individual experience and role.
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
Purpose and Link to Strategy Market competitive structure to support recruitment and retention.
Operation
Medical cover aims to ensure minimal business interruption as a result of illness.
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.
Opportunity
Company contribution is currently 10 per cent of base salary.
Annual Bonus1,2
Purpose and Link to Strategy Rewards the achievement of financial and personal targets.
Operation
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 78 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.
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Opportunity3
Performance Metrics
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: The Committee may set bonus opportunities less than the amounts set out above – see Implementation
of Policy section of the Annual Report on Remuneration.
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.
Long Term Incentives (LTI)
Purpose and Link
to Strategy
Operation2,4
Opportunity
Performance Metrics
Rewards Executive Directors for achieving superior returns for shareholders over a longer-term time frame.
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.
Award levels are determined primarily by seniority. A maximum individual grant limit of 350 per cent
of salary applies.
Awards vest at the end of a three-year performance period based on performance measures reflecting
the long-term strategy of the business at the time of grant.
These may include measures such as TSR, RoE/BVS, Company profitability or any other relevant
financial measures.
If more than one measure is used, the Committee will review the weightings between the measures
chosen and the target ranges prior to each LTI grant to ensure that the overall balance and level of
stretch remains appropriate.
A sliding scale of targets applies for financial metrics with no more than 25 per cent vesting 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.
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75
75
GOVERNANCE
DIRECTORS’ REMUNERATION REPORT CONTINUED
POLICY TABLE CONTINUED
Share Ownership Guidelines5
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
Operation
a market competitive fee level.
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
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 26 to 27 or others described within the Annual Report and Accounts Glossary commencing on page 172.
(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.
ILLUSTRATIONS OF ANNUAL APPLICATION OF REMUNERATION POLICY
The charts below show the potential total remuneration opportunities for the Executive Directors in 2016 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
5.32
38%
45%
17%
3.10
33%
38%
29%
0.89
100%
2.23
33%
37%
30%
0.68
100%
3.78
39%
43%
18%
Fixed pay
On-target
Maximum
Fixed pay
On-target
Maximum
CEO
CFO
Fixed pay
Annual bonus
LTI Awards (RSS)
Fixed pay = 2016 Salary + Actual Value of 2015 Benefits + 2016 Pension Contribution.
On-target = Fixed Pay + Target Bonus (being half the Maximum Bonus Opportunity) + Target Value of 2016 RSS grant
(assuming 50 per cent vesting with face values of grant).
Maximum = Fixed Pay + Maximum Bonus Opportunity + Maximum Value of 2016 RSS grant (assuming 100 per cent vesting
shown as the face values of grant).
No account has been taken of any share price growth or dividend equivalent accruals.
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Lancashire Holdings Limited | Annual Report & Accounts 2015
Lancashire Holdings Limited | Annual Report & Accounts 2015
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.
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.
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www.lancashiregroup.com
77
77
GOVERNANCE
DIRECTORS’ REMUNERATION REPORT CONTINUED
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 2016 AGM.
ANNUAL REPORT ON REMUNERATION
This Annual Report on Remuneration together with the Chairman’s Statement, as detailed on page 10, will be subject to an advisory vote
at the 2016 AGM. The information on page 80 with respect to Directors’ emoluments and onwards through page 88 has been audited.
IMPLEMENTATION OF REMUNERATION POLICY FOR 2016
In relation to the Policy described in the previous section, the following section sets out additional disclosure on the expected application
of the Policy for 2016.
BASE SALARY AND FEES
Executive Directors
Increases and resulting salaries effective from 1 January 2016 are set out below:
• CEO – salary increased by 3 per cent to $795,675.
• CFO – salary increased by 3 per cent to $546,364.
• For 2016, increases of 3 per cent are in line with the salary increases across the general workforce population.
Non-Executives
The Chairman's and Non-Executive Directors' fees are as follows for 2016:
• The fee for the outgoing Chairman is $325,000 per annum and the additional fee he receives for the role of Chairman of LUK is
$100,000. These will be pro-rated up to the date of the 2016 AGM, when Martin Thomas intends to step down from the Boards.
• The fee for the incoming Chairman (Peter Clarke) is to be $350,000 per annum. Mr Clarke will not hold the additional position of
Chairman of LUK. The Committee noted that the current LHL Chairman’s fee had not been amended since 2010. New Bridge Street
were commissioned to carry out a peer company benchmarking review. In light of that review, the Board decided to increase the fee
for the incoming Chairman to ensure appropriate alignment with peers.
• The Non-Executive Director fee will remain at $175,000 per annum.
ANNUAL BONUS
For 2016, 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 is in line with last year and represents a maximum bonus opportunity which
is 100 per cent of salary less than the set policy limit. The CFO's target bonus opportunity will be in line with the policy at
150 per cent of salary (maximum 300 per cent).
The financial and personal portions of the annual bonus will remain unchanged with 75 per cent on financial performance and
25 per cent on personal performance.
Financial Performance (75 per cent)
The Company's most important financial KPI is RoE, which is the core indicator of the delivery of our strategic priorities of ensuring
strong underwriting, effectively balancing risk and return and managing capital nimbly through the insurance cycle (see the strategic
overview on pages 20 and 21 of this report). Accordingly, for 2016, 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 (measured
by comparing the Group’s growth in basic book value per share or ‘BVS’) performance against appropriate peer companies (peer
companies can be located on page 85).
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Lancashire Holdings Limited | Annual Report & Accounts 2015
Lancashire Holdings Limited | Annual Report & Accounts 2015
• Absolute RoE:
Absolute financial performance is measured by growth in fully converted book value per share, plus dividends. A sliding scale range
of RoE targets is set with 25 per cent of bonus target payable if the threshold level of RoE is achieved (being 7 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. The Committee and Board
considers these targets to be appropriate to the present risk appetite given the current challenging insurance market conditions.
• Relative RoE:
Relative financial performance is measured by comparing the Group’s growth in basic book value per share, plus dividends, measured
against an identified comparator group of companies which can be seen on page 85. Payout will be based on performance against
a sliding scale with no payout (0 per cent) for below median performance, 50 per cent of target shall be payable for achieving a
median ranking, and up to 200 per cent of target shall be payable for upper quartile performance or better. Payout 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 the individual achievement of clearly articulated objectives created at the beginning of
each year. The table below sets out a broad summary of the 2016 personal objectives for each Executive Director.
Executive Director
Alex Maloney
Personal Performance
Effective leadership and management of the senior executive team and Group.
Development of the general business strategy.
Contribution aligned to the Lancashire Group Values.
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 Group Values.
The personal targets are broadly common among the Executive Directors, with variances being attributable to the specifics of their
respective roles. Specific granular areas for personal development within the set broad personal objectives are discussed between the
Chairman and the Executive Directors and agreed by the Committee. As part of the 2016 annual performance reviews each Executive
Director receives a performance rating which will determine the level of personal performance bonus pay-out for which each Executive
Director will be eligible.
RESTRICTED SHARE SCHEME
Performance Conditions
For Executive Directors, 2016 RSS awards are subject to RoE and relative TSR performance conditions measured by reference to a period
ending on 31 December 2018. 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 2016, the TSR/RoE weighting is 25 per cent on TSR and 75 per cent on RoE.
Target ranges
The RoE target range for 2016 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 rate 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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GOVERNANCE
DIRECTORS’ REMUNERATION REPORT CONTINUED
TSR target for 2016 awards:
The Group’s TSR is compared against a comparator group comprising 11 peer companies as disclosed on page 85.
• 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;
• 100 per cent will vest for upper quartile and above performance; and
• vesting will be on a proportionate basis for performance between median and upper quartile.
Award levels
2016 RSS award levels are as follows:
• CEO – 219,254 shares (257 per cent of salary);
• CFO – 157,104 shares (268 per cent of salary);
The number of shares awarded was determined based on the share price at 1 January 2016.
Post vesting holding period
Under the management share ownership guidelines, for RSS awards made in 2016 or subsequent years, Executive Directors are expected
to hold vested RSS awards (or the resultant net of tax shares) having a performance period of at least three years, for a further period of
not less than two years following vesting.
SINGLE FIGURE ON REMUNERATION
The following table presents the Executive Directors’ emoluments in U.S. Dollars in respect of the years ended 31 December 2015 and
31 December 2014.
Executive Directors
Alex Maloney4,5, CEO
Elaine Whelan4, CFO
Richard Brindle4,7, Former
CEO
2015
2014
2015
2014
2015
2014
Salary
$
770,955
675,181
530,224
518,117
–
Pension
$
77,096
78,573
55,880
51,500
–
Taxable
Benefits1
$
Annual Bonus6,9
$
Long-Term
Incentives
(RSS)2,3. 10
$
19,785
1,466,557
1,377,834
9,620
1,562,765
1,205,919
83,220
1,007,036
1,212,022
95,738
1,101,011
474,119
–
–
–
Other8
$
Total4
$
–
–
–
–
–
3,712,227
3,532,058
2,888,382
2,240,485
–
368,576
36,858
7,127
1,180,355
4,690,533
644,914
6,928,363
(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 2015, the long-term incentive values are based on the 2013 RSS awards which vest at 75 per cent on 18 February 2016 and are based on a three-year performance period that ended on 31 December
2015. The values are based on the share price at 31 December 2015 and include the value of dividends accrued on vested shares.
(3) For 2014, the long-term incentive values were based on the 2012 RSS awards which vested at 50 per cent on 12 February 2015 and were based on a three-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.
(4) Some amounts were paid in pounds sterling and converted at the average exchange rate of 1.5344 for the year as they are set in USD.
(5) For 2014, Alex Maloney's base salary and pension reflect his UK salary sacrifice pension contributions arrangement and are calculated at four months in his post as CUO (at an annual rate of $515,000)
and eight months as CEO (at an annual rate of $750,000).
(6) For 2015, the Lancashire Group delivered solid results in a challenging market. Bonus targets were set at the beginning of 2015 and based on a clear split between Company financial performance and
personal performance on a 75:25 basis. Company financial performance had two components, absolute financial performance and relative financial performance weighted 60:40 respectively. The absolute
component paid out at 131.25 per cent of target as the warrant adjusted RoE was 13.5 per cent against a warrant adjusted budget of 8.8 per cent and the relative component is provisionally cited at 58.3 per
cent (based on an estimated 50 per cent of maximum pay-out) 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 will be 75 per cent of the maximum for the CEO and 75 per cent of the maximum for the CFO. For full details of Executive Directors’ bonuses and the
associated performance delivered see pages 81 and 82. 25 per cent of Executive Director’s annual bonus is deferred into the long-term incentive scheme without performance conditions, vesting at 33.33
per cent over a three-year period.
(7) 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 of the 2014 Annual Report and
Accounts.
(8) 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 of the 2014 Annual Report.
(9) Annual bonus figures for Alex Maloney and Elaine Whelan for 2014 have been restated to reflect final relative performance data which was used to calculate the bonus figures and were finalised after all
peer data was released in 2015, after the 2014 Directors’ Remuneration Report was published for circulation. For 2014, the relative component had been provisionally stated to pay out at 0 per cent,
however after final results of all peers were released, this element paid out at 141.80 per cent of target (being 70.9 per cent of the maximum).
(10) For Elaine Whelan, the increased value of Performance RSS awards noted for 2015 compared to that of 2014 is a result of vesting of the 2013 Performance RSS awards which were awarded following Elaine
Whelan’s promotion.
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Lancashire Holdings Limited | Annual Report & Accounts 2015
Lancashire Holdings Limited | Annual Report & Accounts 2015
NON-EXECUTIVE DIRECTORS’ FEES
Current Non-Executive Directors
Peter Clarke1
Emma Duncan
Simon Fraser
Samantha Hoe-Richardson
Tom Milligan2
Martin Thomas
Former Non-Executive Directors
John Bishop3
Neil McConachie3
Ralf Oelssner3
Robert Spass4
William Spiegel4
Fee
$
Other
$
Total
$
175,000
98,077
175,000
175,000
175,000
175,000
175,000
175,000
158,958
–
325,000
325,000
Fee
$
–
58,333
–
58,333
–
–
–
–
–
–
–
–
–
–
–
100,000
100,000
Other
$
–
–
–
–
–
175,000
98,077
175,000
175,000
175,000
175,000
175,000
175,000
158,958
–
425,000
425,000
Total
$
–
58,333
–
58,333
–
58,333
10,000
68,333
–
175,000
–
175,000
–
–
–
–
–
175,000
–
175,000
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
(1) Peter Clarke was appointed as a Non-Executive Director with effect from 9 June 2014.
(2) Tom Milligan was appointed as Non-Executive Director with effect from 3 February 2015.
(3) John Bishop, Neil McConachie, and Ralf Oelssner retired from the Board on 30 April 2014.
(4) Robert Spass and William Spiegel retired from the Board on 31 December 2014.
2016 ANNUAL BONUS PAYMENTS IN RESPECT OF 2015 PERFORMANCE
As detailed in the Policy Report, each Executive Director participates in the annual bonus plan, under which performance is
measured over a single financial year.
The target value of bonus was 150 per cent of salary for the CEO and CFO respectively, and the maximum payable was two times the
target value. The warrant adjusted RoE is 13.5 per cent, which reflects the total impact of warrants of 2.6 per cent on the actual 2015
RoE of 10.9 per cent. In setting the annual bonus RoE targets for 2015 the Committee agreed that the effect of warrant exercises and
dividend equivalent payments should be excluded for annual bonus purposes due to the large number of warrants expiring in 2015
and potential volatile impact on the annual bonus performance metrics.
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GOVERNANCE
DIRECTORS’ REMUNERATION REPORT CONTINUED
FINANCIAL PERFORMANCE
75 per cent of the 2015 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
%
11
N/A
Max
%
19
75
Actual
performance
%
13.5
58.3
100
(75 per cent of Total Bonus)
% payout
131.3 of Target
100.0 of Target
118.8 of Target payable in
respect of Company performance
For 2015, the Lancashire Group delivered solid results in a challenging market. The absolute component paid out at 131.3 per cent
of target as the warrant adjusted RoE was 13.5 per cent against a warrant adjusted target of 8.8 per cent and the relative component
against the results of peer companies is provisionally stated at median performance (100 per cent pay-out of target, and 50 per cent
of the maximum) pending the final audited results of peer companies needed in order to calculate the final bonus payable. Any
changes to the bonus numbers reported will be restated in the 2016 Directors’ Remuneration Report as final numbers.
PERSONAL PERFORMANCE
25 per cent of the 2015 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 2015 personal objectives for each Executive Director.
Executive Director
Personal Performance
Alex Maloney
Elaine Whelan
Effective leadership and management of the senior executive team and Group.
Development of the general business strategy.
Contribution aligned to the Lancashire Values.
Effective leadership and management of the finance function and the Bermuda office.
Development of the general business strategy.
Contribution aligned to the Lancashire Values.
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 2015 annual performance reviews of each Executive Director, a performance rating was assigned to determine the level
of bonus pay-out for which each Executive Director was eligible.
As expected for a solid performance year in a challenging market, the Executive Directors each achieved a strong performance rating
against their objectives. For the 2015 performance against personal objectives the following ratings were determined, expressed as a
percentage of the maximum award for personal performance: CEO – 75 per cent, and CFO – 75 per cent.
A table of performance measures and total 2015 bonus achievement is set out below:
Executive Director
Alex Maloney
Elaine Whelan
Financial
performance
(max % of
total bonus)
%
Personal
performance
(max % of
total bonus)
%
Bonus
% of maximum
awarded
%
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
25
25
63
63
1,466,557
1,099,917
1,007,036
755,277
366,640
251,759
(1) For 2015 the Group delivered solid results in a challenging market. Bonus targets were set at the beginning of 2015 and based on a clear split between Company financial performance and personal
performance on a 75:25 basis. Company financial performance had two components, absolute financial performance and relative financial performance weighted 60:40 respectively. The absolute component
paid out at 131.25 per cent of target as the warrant adjusted RoE was 13.5 per cent against a warrant adjusted budget of 8.8 per cent and the relative component is provisionally cited at 58.3 per cent (based
on an estimated median payout calculation) 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 will be 75 per cent of the maximum for the CEO and 75 per cent of the maximum for the CFO. For full details of Executive Directors’ bonuses and the associated performance
delivered see pages 81 and 82.
(2) 25 per cent of total bonus award will be deferred into LHL shares with one third vesting annually, each year, over a three-year period with the first third becoming exercisable in February 2017, subject
to the Company being in an ‘open period’. These awards vest on the relevant dates subject to continued employment only.
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Lancashire Holdings Limited | Annual Report & Accounts 2015
Lancashire Holdings Limited | Annual Report & Accounts 2015
LONG-TERM SHARE AWARDS WITH PERFORMANCE PERIODS ENDING IN THE YEAR – 2013 RSS AWARD
The 2013 RSS awards are based on a three-year performance period ending on 31 December 2015 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 75 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 three years in excess of 13-week Treasury Bill Rate)
(relevant to 25% of the 2013 RSS awards)
(relevant to 75% of the 2013 RSS awards)
Performance required
% vesting
Performance required (%)
% vesting
Below median
Median
Upper quartile or above
Below median
0
25
100
0
Below 6
6
15 or above
15.7
0
25
100
100
Details of the performance RSS awards granted on 28 February 2013 with a performance period of 1 January 2013 – 31 December 2015
vesting for each Executive 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
$
131,969
116,087
32,993
29,022
98,976
87,065
456,302
1,377,834
401,389
1,212,022
(1) The value of the vested shares is based on the 2013 RSS awards which vest at 75 per cent on 18 February 2016 and are based on a three-year performance period that ended on 31 December 2015.
The values are based on the share price at 31 December 2015 (being $9.31 based on the exchange rate of 1.4826). The vested awards are subject to the claw back provision set out on page 75.
(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 the former CEO’s award can be found in the Loss of Office Payments section on page 72 of the 2014 Annual Report and Accounts.
SCHEME INTERESTS AWARDED DURING THE YEAR
The table below sets out the performance RSS share awards that were granted as nil-cost options on 12 February 2015.
Executive
Alex Maloney
Elaine Whelan
Number of
awards
granted during
the year
Face value
of awards
granted during
the year1,3
$
Grant date2
12-Feb-2015
244,208
2,388,354
12-Feb-2015
168,149
1,644,497
% vesting
at threshold
performance
25
25
(1) The share price on the date of performance awards grant was $9.78, when the RSS share awards were granted as nil-cost options. The awards were based on the share price as at 31 December 2014
(being $8.69, based on the exchange rate of 1.5534).
(2) These awards are due to vest subject to performance conditions being met at the end of the performance period ending 31 December 2017 and becoming exercisable after the meeting of the Board
in February 2018.
(3) The exercise share price is determined once an award has vested on the basis of the share price on the date an award is exercised.
LOSS OF OFFICE PAYMENTS
There were no loss of office payments during the 2015 year.
www.lancashiregroup.com
www.lancashiregroup.com
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GOVERNANCE
DIRECTORS’ REMUNERATION REPORT CONTINUED
DETAILS OF ALL OUTSTANDING SHARE AWARDS
In addition to awards made during the 2015 financial year, the table below sets out details of all outstanding RSS awards held by
Executive Directors.
PERFORMANCE AND DEFERRED BONUS AWARDS UNDER THE NIL-COST OPTION RESTRICTED SHARE SCHEME (RSS)
Grant date1
Exercise
price
Awards held
at 1-Jan-15
Awards
granted
during the
year
Awards vested
during the
year
Awards lapsed
during the
year
Awards
exercised
during the
year
Awards
held at
31-Dec-15
End of
performance
period
Alex Maloney,
Group CEO
Performance RSS2,3
28-Feb-12
Deferred Bonus RSS4
5-Mar-12
Total
Elaine Whelan,
Group CFO &
LICL CEO
Performance RSS2,3
28-Feb-13
Deferred Bonus RSS4
5-Mar-13
Performance RSS2,3
19-Feb-14
Deferred Bonus RSS4
5-Mar-14
Performance RSS2,3
12-Feb-15
Deferred Bonus RSS4
20-Mar-15
Performance RSS2,3
28-Feb-12
Deferred Bonus RSS4
5-Mar-12
Performance RSS –
Interim2,3
4-May-12
Performance RSS2,3
28-Feb-13
Deferred Bonus RSS4
5-Mar-13
Performance RSS2,3
19-Feb-14
Deferred Bonus RSS4
5-Mar-14
Performance RSS2,3
12-Feb-15
Deferred Bonus RSS4
20-Mar-15
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
187,165
4,485
131,969
11,695
124,333
29,430
–
–
–
–
–
–
–
–
244,208
41,929
93,583
93,582
93,583
– 31-Dec-14
4,485
–
5,847
–
9,810
–
–
–
–
–
–
–
–
–
4,485
–
–
131,969 31-Dec-15
5,847
5,848
– 124,333 31-Dec-16
9,810
19,620
–
–
244,208 31-Dec-17
41,929
489,077
286,137
113,725
93,582
113,725
567,907
48,586
5,159
25,000
116,087
10,080
102,989
23,956
–
–
–
–
–
–
–
–
–
168,149
29,540
24,293
24,293
24,293
– 31-Dec-14
5,159
–
5,159
–
12,500
12,500
12,500
– 31-Dec-14
–
5,040
–
7,985
–
–
–
–
–
–
–
–
–
116,087 31-Dec-15
5,040
5,040
–
102,989 31-Dec-16
7,985
15,971
–
–
168,149 31-Dec-17
29,540
Total
331,857
197,689
54,977
36,793
54,977
437,776
(1) The market values of the common shares on the dates of grant were:
• 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
• 12 February 2015 £6.36
• 20 March 2015 £6.30
(2) The vesting of the RSS performance awards prior to 2013 grants is subject to two performance
conditions as 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 85
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 85,
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 85. Between these two points vesting will take
place on a straight-line basis from 25 per cent to 100 per cent for RoE performance.
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 85 for a list of comparator companies for each grant year), over a three-year performance
period. 25 per cent of this part of the award vests for median performance by the Company,
rising to 100 per cent vesting of this part of the award for upper quartile performance by the
Company or better (with proportionate vesting between these two points).
• The other 75 per cent of each award is subject to a performance condition based on average
annual RoE over a three-year performance period. 25 per cent of this part of the award will vest
if average annual RoE over the performance period exceeds the criteria set out in the table on
page 85, 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 85. 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 dates of the RSS performance awards are subject to being out of a close period and are
as follows:
• 2012 – 12 February 2015;
• 2013 – 18 February 2016;
• 2014 – first open period following the release of the Company’s 2016 year-end results.
• 2015 – first open period following the release of the Company’s 2017 year-end results.
(4) The vesting dates of the RSS Deferred Bonus awards are subject to being out of a close period and,
for the 2012 to 2015 Deferred Bonus awards, are as follows:
• 2012 – vested 33.33 per cent over a three-year period at the first open period following the
release of the Company’s year-end results for 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 for 2013, 2014 and 2015;
• 2014 – vest 33.33 per cent over a three-year period at the first open period following the release
of the Company’s year-end results for 2014, 2015 and 2016; and
• 2015 – vest 33.33 per cent over a three-year period at the first open period following the release
of the Company’s year-end results for 2015, 2016 and 2017.
84
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Lancashire Holdings Limited | Annual Report & Accounts 2015
Lancashire Holdings Limited | Annual Report & Accounts 2015
TSR TARGETS FOR RSS
100%
25%
Nil
ROE TARGETS FOR RSS
100%
25%
Nil
2012
2013*
2014*
2015*
2016*
75th percentile
75th percentile
75th percentile
75th percentile
75th percentile
= median
< median
= median
< median
= median
< median
= median
< median
= median
< median
2012
2013*
2014*
2015*
2016*
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 plc1
Argo Group International Holdings, Ltd.
Aspen Insurance Holdings Limited
Axis Capital Holdings Limited
Beazley plc
Catlin Group Ltd.2
Endurance Specialty Holdings Ltd.3
Everest Re Group, Ltd.4
Flagstone Reinsurance Holdings Limited5
Hannover Re6
Hiscox Ltd.
Montpelier Re Holdings Ltd.3
Novae Group plc7
Renaissance Re Holdings Ltd.
Validus Holdings Ltd.
2012 awards
2013 awards
2014 awards
2015 awards
2016 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
X
(1) Mitsui Sumitomo Insurance Company announced on 8 September 2015 that it intended to acquire Amlin plc. The transaction completed on 1 February 2016. Accordingly, the Committee decided
to use Amlin plc as a comparator company up to 30 June 2015.
(2) Catlin Group Ltd. was acquired by the XL Group with effect from 1 May 2015 and so was used as a comparator company up to 31 December 2014.
(3) Montpelier Re Holdings Ltd. was acquired by Endurance with effect from 31 July 2015 and so was used as a comparator company up to 31 December 2014.
(4) Everest Re Group, Ltd. was added to the peer group of companies with effect from 1 July 2015 as a replacement for Amlin plc.
(5) Flagstone Reinsurance Holdings Limited 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.
(6) Hannover Re was added to the peer group of companies with effect from 1 January 2015 as a replacement for Montpelier Re Holdings Ltd.
(7) Novae Group plc was added to the peer group of companies with effect from 1 January 2015 as a replacement for Catlin Group Ltd.
www.lancashiregroup.com
www.lancashiregroup.com
85
85
GOVERNANCE
DIRECTORS’ REMUNERATION REPORT CONTINUED
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
Tom Milligan
Martin Thomas
At 1 January 2015
At 31 December 2015
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
321,841
233,820
382,008
287,169
67,397
50,551
500,510
387,225
–
–
–
3,947
N/A
6,950
–
–
1,000
3,947
1,000
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
Total
949,915
724,945
–
–
1,000
3,947
1,000
6,950
Shareholding
guideline
achieved?
Yes
Yes
N/A
N/A
N/A
N/A
N/A
N/A
Note: 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.
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
2015
LRE
FTSE 250 Index
Source: Thomson Reuters
This graph shows the value, by 31 December 2015, of £100 invested in LHL on 31 December 2008 compared with the value of
£100 invested in the FTSE 250 Index. The other points plotted are the values at intervening financial year-ends.
86
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Lancashire Holdings Limited | Annual Report & Accounts 2015
Lancashire Holdings Limited | Annual Report & Accounts 2015
TOTAL REMUNERATION HISTORY FOR CEO
The table below sets out the total single figure remuneration for the CEOs over the last seven years with the annual bonus paid as
a percentage of the maximum and the percentage of long-term share awards vesting in each year.
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
Richard Brindle
20141
Alex Maloney
20142
2013
10,460
10,175
10,0725
2,4054
73
99
80
100
80
613
734
50
2015
3,712
63
75
(1) Richard Brindle was the CEO from 2005 until he retired from the Group and as a Director on 30 April 2014.
(2) Alex Maloney was appointed CEO effective 1 May 2014, after the retirement of Mr Brindle. For the purposes of this table his numbers have been pro-rated to account for only his time in office as
CEO for 2014.
(3) Mr Brindle was afforded good leaver status and all RSS award interests were vested upon his departure, using estimated TSR and RoE values at the time of his retirement. The amounts in the table
above reflect all awards which vested in 2014. Further particulars of the vesting were reported in the Company’s 2014 Annual Report.
(4) Alex Maloney’s 2014 total remuneration and annual bonus have been restated in the above table to reflect changes made after the publication of the 2014 Annual Report. These changes are primarily
due to the disclosed relative RoE performance which impacted his annual bonus figure for 2014, as disclosed on page 80.
(5) Richard Brindle’s total remuneration figure has also been restated in the above table to reflect changes made after the publication of the 2014 Annual Report; this change is primarily due to including
Mr Brindle’s payment in lieu of six month’s notice which had not been included in 2014.
The table above shows the total remuneration figure for the former CEO during each of the relevant financial years; the current CEO is
reflected since his appointment to the position on 1 May 2014. The total remuneration figure includes the annual bonus and LTI awards
which vested based on performance in those years. The annual bonus and LTI percentages show the 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
Benefits
Bonus
Year on
year change
CEO2,3
%
Average year
on year change
employees1
%
-11
-6
-34
5
8
13
(1) Employee numbers were calculated on a per headcount basis as at 31 December 2015 and 31 December 2014, inclusive of the CEO.
(2) A blended CEO rate was used for 2014 to account for CEO changes through the year.
(3) Some amounts were paid in pounds sterling and converted at the average exchange rate of 1.5344 for the year.
RELATIVE IMPORTANCE OF THE SPEND ON PAY
The following table sets out the percentage change in dividends and overall spend on pay in the year ended 31 December 2015 compared to
the year ended 31 December 2014.
Employee remuneration costs
Dividends
2015
$m
80.1
317.5
2014
$m
77.4
321.0
Percentage
change
%
3
-1
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
LHL Remuneration Committee Chairman Independent; Attended 8 of a potential maximum meetings of 8 in 2015
Peter Clarke
Member from 4 November 2014
Independent; Attended 8 of a potential maximum meetings of 8 in 2015
Emma Duncan
Member from 5 November 2010
Independent; Attended 7 of a potential maximum meetings of 8 in 2015
www.lancashiregroup.com
www.lancashiregroup.com
87
87
GOVERNANCE
DIRECTORS’ REMUNERATION REPORT CONTINUED
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 the Group.
The primary role of NBS is to provide independent and objective advice and support to the Committee's Chairman and members.
In order to manage any possible conflict of interest, NBS operates as a distinct business within the Aon Group and there is a robust
separation between the business activities and management of NBS and all other parts of Aon Hewitt and the wider Aon Group.
The Committee is satisfied that the advice that it receives is objective and independent. NBS is also a signatory to the Remuneration
Consultants Group ('RCG') Code of Conduct which sets out guidelines for managing conflicts of interest, and has confirmed to the
Committee its compliance with the RCG Code.
The total fees paid to NBS in respect of its services to the Committee for the year ended 31 December 2015 were $132,330
(2014 – $160,691). Fees are predominantly charged on a 'time spent' basis.
ENGAGEMENT WITH SHAREHOLDERS
Details of votes cast for and against the resolution to approve last year’s Remuneration Report are shown below and any matters
discussed with shareholders during the year are provided in the Implementation of Remuneration Policy for 2016 section of the
report starting on page 78.
For
Against
Total
Abstentions
Vote to approve 2014 Annual Report on
Remuneration
Total number
of votes
% of
votes cast
92,692,097
39,185,080
131,877,177
8,472,313
70.3
29.7
100.0
The Board made a public announcement on 30 April 2015, which included the following statement:
“The Board has noted the level of abstentions and the significant number of votes against the remuneration report at the AGM.
Resolution 2 received 70.28 per cent of votes for and 29.71 per cent of votes against the resolution, with 8,472,313 of shares
abstaining. Lancashire consulted with its major shareholders particularly on the topic of its remuneration policy and practice
in advance of the 2015 AGM. The Board understands that the principal concern of shareholders was in relation to the exercise
by the Board of discretion when settling the retirement remuneration package for Richard Brindle. The Board considered that the
retirement arrangements for Richard Brindle were an appropriate reward for Mr Brindle’s unique contribution to Lancashire as a
founder and chief executive and were also appropriate to secure an orderly and successful transition. These were necessarily unique
circumstances and we will continue to engage with shareholders.”
Approved by the Board of Directors and signed on behalf of the Board
Simon Fraser
LHL Remuneration Committee Chairman
17 February 2016
88
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Lancashire Holdings Limited | Annual Report & Accounts 2015
Lancashire Holdings Limited | Annual Report & Accounts 2015
DIRECTORS’ REPORT
OVERVIEW OF THE GROUP
Lancashire Holdings Limited (the Company) is a Bermuda incorporated company (Registered Company No. 37415) with operating
subsidiaries in Bermuda and London, and two Syndicates at Lloyd’s.
The Company’s common shares were admitted to trading on AIM in December 2005 and were subsequently moved up to the
Official List and to trading on the main market of the LSE on 16 March 2009. The shares have been included in the FTSE 250
Index since 22 June 2009.
PRINCIPAL ACTIVITIES
The Company’s principal activity, through its wholly owned subsidiaries, is the provision of global specialty insurance and reinsurance
products. On 7 November 2013, the Company completed the acquisition of CCL, an established Lloyd’s insurer, and in July 2013
established Kinesis, a third-party capital and underwriting management facility, to complement the Group’s longstanding specialty
insurance activities. An analysis of the Group’s business performance can be found in the Business review on pages 30 to 38.
DIVIDENDS
For the year ended 31 December 2015, the following dividends were declared:
• an interim dividend of $0.05 per common share and warrant was declared on 28 July 2015 and paid on 25 September 2015 in
pounds sterling at the pound/U.S. dollar exchange rate of 1.5388 or £0.0325 per common share and warrant;
• a special dividend of $0.95 per common share and warrant was declared on 4 November 2015 and paid on 18 December 2015
in pounds sterling at the pound/U.S. dollar exchange rate of 1.5049 or £0.6313 per common share and warrant; and
• a final dividend of $0.10 per common share was declared on 17 February 2016 to be paid on 23 March 2016 in pounds sterling
at the pound/U.S. dollar exchange rate on the record date of 26 February 2016 or approximately £0.07 per common share.
DIVIDEND POLICY
The Group intends to maintain a strong balance sheet at all times, while generating an attractive risk-adjusted total return for
shareholders. We actively manage capital to achieve those aims. Capital management is expected to include the payment of a sustainable
annual (interim and final) dividend, supplemented by special dividends from time to time. Dividends will be linked to past performance
and future prospects.
Under most scenarios, the annual dividend is not expected to reduce from one year to the next. Special dividends are expected to vary
substantially in size and in timing. The Board may cancel the payment of any dividend between declaration and payment for purposes
of compliance with regulatory requirements or for exceptional business reasons.
DIRECTORS
• Peter Clarke (Non-Executive Director)
• Emma Duncan (Non-Executive Director)
• Simon Fraser (Senior Independent Non-Executive Director)
• Samantha Hoe-Richardson (Non-Executive Director)
• Alex Maloney (Chief Executive Officer)
• Tom Milligan (Non-Executive Director) (appointed effective 3 February 2015)
• Martin Thomas (Non-Executive Chairman)
• Elaine Whelan (Chief Financial Officer)
www.lancashiregroup.com
www.lancashiregroup.com
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GOVERNANCE
DIRECTORS’ REPORT CONTINUED
DIRECTORS’ INTERESTS
The Directors’ beneficial interests in the Company’s common shares as at 31 December 2015 and 2014 including interests held by
family members were as follows:
CORPORATE GOVERNANCE – COMPLIANCE STATEMENT
The Company’s compliance with the Code is summarised in the Corporate Governance section of this Report on pages 59 to 61.
The Company confirms, in accordance with the principle of ‘comply or explain’, that there are no areas of material non-compliance
Director
Peter Clarke
Emma Duncan
Simon Fraser1
Samantha Hoe-Richardson
Alex Maloney2
Tom Milligan3
Martin Thomas
Elaine Whelan4
Common shares
held as at
31 December 2015
Common shares
held as at
31 December 2014
–
–
1,000
3,947
382,008
1,000
6,950
287,169
–
–
–
3,947
321,841
–
6,950
233,820
There have been no changes in Directors’ shareholdings between the end of the financial year and the date of this Report.
(1) Simon Fraser conducted the following transactions in the Company’s shares during 2015:
• 5 May – purchase of 1,000 shares at a price of £6.25 costing £6,246.
(2) Includes 100,000 shares owned by his spouse, Amanda Maloney. Alex Maloney conducted the following transactions in the Company’s shares during 2015:
• 25 March – exercise of 93,583 RSS awards and 20,142 deferred bonus RSS awards and related sale of 53,558 shares to cover tax liabilities, at a price of £6.30 realising £337,205.
(3) Tom Milligan conducted the following transactions in the Company’s shares during 2015:
• 25 June – purchase of 1,000 shares at a price of £6.21 costing £6,205.
(4) Includes 2,600 shares owned by her spouse, Kilian Whelan. Elaine Whelan conducted the following transactions in the Company’s shares during 2015:
• 9 September – exercise of 36,793 RSS awards and 18,184 deferred bonus RSS awards and related sale of 1,628 shares to cover tax liabilities, at a price of £6.89 realising £11,217.
TRANSACTION IN OWN SHARES
The Company did not repurchase any of its own common shares during 2015.
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 20,034,191 common shares remaining to be purchased as at 31 December 2015
(approximately $186.5 million at the 31 December 2015 share price). The purpose of the Company’s repurchase programme is to
acquire shares to use in the future towards satisfying its obligations under its RSS awards. Further details of the share repurchase
authority and programme are set out in note 23 to the consolidated financial statements on page 164. The repurchase programme
is subject to renewal at the 2016 AGM in an amount of up to 10 per cent of the then issued common share capital.
DIRECTORS’ REMUNERATION
Details of the Directors’ remuneration are set out in the Directors’ Remuneration Report on pages 71 to 88.
CREDITOR PAYMENT POLICY
The Group aims to pay all creditors promptly and in accordance with contractual and legal obligations.
SUBSTANTIAL SHAREHOLDERS
As at 17 February 2016, the Company was aware of the following interests of 3 per cent or more in the Company’s issued share capital:
Name
Invesco Limited
Woodford Investment Management LLP
Setanta Asset Management Limited
Vidacos Nominees Ltd
Legal & General Group Plc
BlackRock, Inc.
Franklin Mutual Advisers, LLC
Number of
shares as at
17 February
2016
39,968,928
21,595,170
14,613,832
10,342,300
9,739,779
8,976,004
7,856,956
% of shares
in issue
20.0
10.8
7.3
5.2
4.9
4.5
3.9
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with the Code.
DONATIONS
of 2014.
During 2015 the Company facilitated a donation of $2.5 million to the Lancashire Foundation from a third party. In view of this
substantial donation, the Company decided not to make any further donation to the Foundation during 2015. The Foundation held
warrants in the Company, which were exercised in May 2015, and the dividend equivalent payments received on the warrants, which
had been an important income stream for the Foundation, will be taken into account when considering the appropriate level of
donations to be made by the Company in the future. The Foundation now owns 330,713 common shares in the Company and will
receive any dividends declared on those shares.
In November 2013, the Board of Directors approved a cash donation of $2.0 million to the Lancashire Foundation, payable in respect
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, 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 2015 can be found in the Corporate Responsibility section on
The Group did not make any political donations or expenditure during 2015 or 2014.
pages 44 to 49.
HEALTH AND SAFETY
The Group considers the health and safety of its employees to be a management responsibility equal to that of any other function.
The Group operates in compliance with health and safety legislative requirements in Bermuda and the UK.
GREENHOUSE GAS EMISSIONS
The Group’s greenhouse gas emissions are detailed in the Corporate Responsibility section on page 47.
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EMPLOYEES
The Group 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.
FINANCIAL INSTRUMENTS AND RISK EXPOSURES
Information regarding the Group’s risk exposures is included in the risk disclosures section on pages 112 to 138 of the consolidated
financial statements. The Group’s use of derivative financial instruments can be found on pages 127 to 130.
ACCOUNTING STANDARDS
The Group’s consolidated financial statements are prepared in accordance with accounting principles generally accepted under IFRS
as adopted by the European Union. Where IFRS is silent, as it is in respect of certain aspects relating to the measurement of insurance
products, the IFRS framework allows reference to another comprehensive body of accounting principles. In such instances, the 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.
DIRECTORS’ REPORT CONTINUED
DIRECTORS’ INTERESTS
family members were as follows:
Director
Peter Clarke
Emma Duncan
Simon Fraser1
Alex Maloney2
Tom Milligan3
Martin Thomas
Elaine Whelan4
Samantha Hoe-Richardson
The Directors’ beneficial interests in the Company’s common shares as at 31 December 2015 and 2014 including interests held by
Common shares
Common shares
held as at
held as at
31 December 2015
31 December 2014
–
–
1,000
3,947
382,008
1,000
6,950
287,169
–
–
–
–
3,947
321,841
6,950
233,820
Number of
shares as at
17 February
2016
39,968,928
21,595,170
14,613,832
10,342,300
9,739,779
8,976,004
7,856,956
% of shares
in issue
20.0
10.8
7.3
5.2
4.9
4.5
3.9
There have been no changes in Directors’ shareholdings between the end of the financial year and the date of this Report.
(1) Simon Fraser conducted the following transactions in the Company’s shares during 2015:
• 5 May – purchase of 1,000 shares at a price of £6.25 costing £6,246.
(2) Includes 100,000 shares owned by his spouse, Amanda Maloney. Alex Maloney conducted the following transactions in the Company’s shares during 2015:
• 25 March – exercise of 93,583 RSS awards and 20,142 deferred bonus RSS awards and related sale of 53,558 shares to cover tax liabilities, at a price of £6.30 realising £337,205.
(3) Tom Milligan conducted the following transactions in the Company’s shares during 2015:
• 25 June – purchase of 1,000 shares at a price of £6.21 costing £6,205.
(4) Includes 2,600 shares owned by her spouse, Kilian Whelan. Elaine Whelan conducted the following transactions in the Company’s shares during 2015:
• 9 September – exercise of 36,793 RSS awards and 18,184 deferred bonus RSS awards and related sale of 1,628 shares to cover tax liabilities, at a price of £6.89 realising £11,217.
TRANSACTION IN OWN SHARES
The Company did not repurchase any of its own common shares during 2015.
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 20,034,191 common shares remaining to be purchased as at 31 December 2015
(approximately $186.5 million at the 31 December 2015 share price). The purpose of the Company’s repurchase programme is to
acquire shares to use in the future towards satisfying its obligations under its RSS awards. Further details of the share repurchase
authority and programme are set out in note 23 to the consolidated financial statements on page 164. The repurchase programme
is subject to renewal at the 2016 AGM in an amount of up to 10 per cent of the then issued common share capital.
Details of the Directors’ remuneration are set out in the Directors’ Remuneration Report on pages 71 to 88.
As at 17 February 2016, the Company was aware of the following interests of 3 per cent or more in the Company’s issued share capital:
DIRECTORS’ REMUNERATION
SUBSTANTIAL SHAREHOLDERS
Name
Invesco Limited
Woodford Investment Management LLP
Setanta Asset Management Limited
Vidacos Nominees Ltd
Legal & General Group Plc
BlackRock, Inc.
Franklin Mutual Advisers, LLC
CORPORATE GOVERNANCE – COMPLIANCE STATEMENT
The Company’s compliance with the Code is summarised in the Corporate Governance section of this Report on pages 59 to 61.
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
During 2015 the Company facilitated a donation of $2.5 million to the Lancashire Foundation from a third party. In view of this
substantial donation, the Company decided not to make any further donation to the Foundation during 2015. The Foundation held
warrants in the Company, which were exercised in May 2015, and the dividend equivalent payments received on the warrants, which
had been an important income stream for the Foundation, will be taken into account when considering the appropriate level of
donations to be made by the Company in the future. The Foundation now owns 330,713 common shares in the Company and will
receive any dividends declared on those shares.
In November 2013, the Board of Directors approved a cash donation of $2.0 million 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, 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 2015 can be found in the Corporate Responsibility section on
pages 44 to 49.
The Group did not make any political donations or expenditure during 2015 or 2014.
HEALTH AND SAFETY
The Group considers the health and safety of its employees to be a management responsibility equal to that of any other function.
The Group operates in compliance with health and safety legislative requirements in Bermuda and the UK.
GREENHOUSE GAS EMISSIONS
The Group’s greenhouse gas emissions are detailed in the Corporate Responsibility section on page 47.
EMPLOYEES
The Group 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.
FINANCIAL INSTRUMENTS AND RISK EXPOSURES
Information regarding the Group’s risk exposures is included in the risk disclosures section on pages 112 to 138 of the consolidated
financial statements. The Group’s use of derivative financial instruments can be found on pages 127 to 130.
ACCOUNTING STANDARDS
The Group’s consolidated financial statements are prepared in accordance with accounting principles generally accepted under IFRS
as adopted by the European Union. Where IFRS is silent, as it is in respect of certain aspects relating to the measurement of insurance
products, the IFRS framework allows reference to another comprehensive body of accounting principles. In such instances, the 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.
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DIRECTORS’ REPORT CONTINUED
ANNUAL GENERAL MEETING
The notice of the 2016 AGM, to be held on 4 May 2016 at the Company’s head office, 29th Floor, 20 Fenchurch Street, London
EC3M 3BY, UK, is contained in a separate circular to shareholders which is made available to shareholders at the same time as
this Annual Report and Accounts. The notice of the AGM is also available on the Company’s website.
ELECTRONIC AND WEB COMMUNICATIONS
Provisions of the Bermuda Companies Act 1981 enable companies to communicate with shareholders by electronic and/or website
communications. The Company will notify shareholders (either in writing or by other permitted means) when a relevant document
or other information is placed on the website and a shareholder may request a hard copy version of the document or information.
GOING CONCERN AND VIABILITY STATEMENT
The Business Review section on pages 30 to 38 sets out details of the Group’s financial performance, capital management, business
environment and outlook. In addition, further discussion of the principal risks and material uncertainties affecting the Group can be
found on pages 42 to 43. Starting on page 112, the risk disclosures section of the consolidated financial statements sets out the principal
risks to which the Group is exposed, including insurance, market, liquidity, credit, operational and strategic, together with the Group’s
policies for monitoring, managing and mitigating its exposures to these risks. The Board considers annually and on a rolling basis a three-
year strategic plan for the business which the Company progressively implements. A three-year plan period aligns to the short-tail nature
of the Group’s liabilities and the agility in the business model, allowing the Group to adapt capital and solvency quickly in response to
market cycles, events and opportunities. This is consistent with the outlook period in the Group’s ORSA. The three-year strategic plan
was last approved by the Board on 29 April 2015. The Board receives quarterly reports from the CRO and sets and approves risk
tolerances for the business.
During 2015, the Board carried out a robust assessment of the principal risks facing the Group, including those that would threaten
its business model, future performance, solvency or liquidity. As part of this assessment the business plan was stressed for a number of
scenarios and the impact on capital (on both an IFRS and Solvency II basis) evaluated. The Directors believe that the Group is well
placed to manage its business risks successfully, having taken into account the current economic outlook. Accordingly, the Board
believes that, taking into account the Group’s current position, and subject to the principal risks faced by the business, the Group
will be able to continue in operation and to meet its liabilities as they fall due for the period up to 31 December 2017, being the
period considered under the Group’s current three-year strategic plan.
The Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they
fall due over the period to 31 December 2017. Accordingly, the Board has adopted and continues to consider appropriate the going
concern basis in preparing the Annual Report and Accounts.
AUDITORS
Resolutions will be proposed at the Company’s 2016 AGM to re-appoint EY 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 carry out 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 and Accounts confirms that:
• so far as the Director is aware, there is no relevant audit information of which the Company’s auditors are unaware; and
• the Director has taken all the steps that he or she ought to have taken as a Director in order to make himself or herself aware
of any relevant audit information and to establish that the Company’s auditors are aware of that information.
Approved by the Board of Directors and signed on behalf of the Board.
Christopher Head
Company Secretary
17 February 2016
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STATEMENT OF DIRECTORS’ RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and Accounts and the Group’s consolidated financial statements
in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year that give a true and fair view of the state
of affairs of the 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 certain aspects relating to the measurement
of insurance products, U.S. GAAP is considered. Further detail on the basis of preparation is described in the consolidated financial
statements. In preparing the consolidated financial statements, the Directors are required to:
• select suitable accounting policies and apply them consistently;
• make judgements and accounting estimates that are reasonable and prudent;
• state whether they have been prepared in accordance with IFRS;
• state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the
Group’s consolidated financial statements;
• provide additional disclosures where compliance with the specific requirements of IFRS are considered to be insufficient to enable
users to understand the impact of particular transactions, events and conditions on the financial position and performance; and
• prepare the consolidated financial statements on the going concern basis unless it is inappropriate to presume that the 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 position and 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
17 February 2016
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FINANCIAL STATEMENTS
Traction
in the marketplace
We know how difficult it is to gain a
foothold in the marketplace and we
know the importance of getting stuck
in and digging deep to ensure our
performance doesn’t slip.
FINANCIAL STATEMENTS
96 Independent auditors’ report
102 Consolidated primary statements
106 Accounting policies
112 Risk disclosures
139 Notes to the accounts
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INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF LANCASHIRE HOLDINGS LIMITED
OUR OPINION ON THE CONSOLIDATED 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 2015 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
LHL’s financial statements comprise:
• the consolidated balance sheet as at 31 December 2015;
• the consolidated statement of comprehensive income for the year then ended;
• the consolidated statement of changes in shareholders' equity for the year then ended;
• the statement of consolidated cash flows for the year then ended; 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 7 August 2015. 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.
OVERVIEW OF OUR AUDIT APPROACH
Risks of material misstatement
• Valuation of loss reserves
• Goodwill and intangible assets
• Revenue recognition – premium estimates
Audit scope
• We performed an audit of the complete financial information of 4 components
• The components where we performed full or specific audit procedures accounted for 100 per cent
of profit before tax, 100 per cent of gross premiums written and 100 per cent of insurance
contract liabilities
Materiality
Overall Group materiality of $8.6 million, which represents 5 per cent of profit before tax
OUR ASSESSMENT OF RISKS OF MATERIAL MISSTATEMENT AND RESPONSE TO THOSE RISKS
We identified the risks of material misstatement described below as those that had the greatest effect on our overall audit strategy, the
allocation of resources in the audit and the direction of the efforts of the audit team. These risks are consistent with those identified
during the 2014 audit. In addressing these risks, we have performed the procedures below which were designed in the context of the
consolidated financial statements as a whole and, consequently, we do not express any opinion on these individual areas.
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VALUATION OF LOSS RESERVES
Refer to page 62 (Audit Committee report), page 109 (accounting policies), page 120 (risk disclosures), and page 155 (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 the Group’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. The main areas of judgement
include the level of reserves held for specific losses, the loss development
patterns selected and the initial expected loss ratios.
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 re-projection 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 114 and note 13 related
to losses and loss adjustment expenses.
What we concluded to the Audit
Committee
Taken as a whole, we
consider that management’s
judgement in the areas
highlighted is reasonable
based on the information
available at the date of this
report. Consistent with
the prior period, the
Group’s booked reserves
lie within what we consider
to be a reasonable range
of estimates.
In addition we consider
that the disclosures made
are satisfactory, and they
provide information that
assists in understanding the
uncertainty inherent in the
valuation of loss reserves.
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INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF LANCASHIRE HOLDINGS LIMITED CONTINUED
What we concluded to the Audit
Committee
We agreed with
management’s assessment
at 30 September 2015, that
the recoverable amounts
exceeded the recorded
values with headroom
remaining when key
assumptions were stressed
for what we consider to
be cautious assumptions,
and that as a result,
no impairment of the
goodwill and indefinite
lived intangible assets
was required.
We also agreed with
management’s assessment
that no impairment triggers
occurred in the final quarter
of the year.
What we concluded to the Audit
Committee
Based on the results of the
procedures performed we
have concluded that the
premium estimates are
recorded in line with the
Group’s accounting policy.
GOODWILL AND INTANGIBLE ASSETS
Refer to page 62 (Audit Committee report), page 108 (accounting policy) and page 159 (disclosures)
Risk
Response
During 2015 we considered
the risk that the goodwill
and intangible assets arising
from the Cathedral
acquisition may be impaired.
In testing for impairment,
judgement is applied by
management in deriving:
• the forecast cash flows;
and
• the pre-tax discount
rate applied to those
cash flows.
Management's impairment assessment of the recorded value of goodwill and
the syndicate participation rights was performed as at 30 September 2015.
We evaluated and challenged this assessment, including:
• validating that the base 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;
and
• assessing whether long term growth assumptions are consistent with
economic and industry forecasts; and challenging the adequacy of
sensitivity analysis performed by management, by re-performing our
own stress tests of the pre-tax discount rate, forecast cash flows, and
long term growth rate assumptions in isolation and in combination
to consider reasonably possible alternative scenarios.
REVENUE RECOGNITION – PREMIUM ESTIMATES
Refer to page 63 (Audit Committee report) and page 108 (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
intermediaries 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 2014 to identify if there is any indication
of management bias.
For certain contracts written,
premium revenues are
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 consolidated
financial statements.
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THE SCOPE OF OUR AUDIT
TAILORING THE SCOPE
Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope
for each component within the Group. Taken together, this enables us to form an opinion on the consolidated financial statements.
We take into account size, risk profile, the organisation of the Group and effectiveness of group-wide controls, changes in the business
environment and other factors such as recent Internal Audit results when assessing the level of work to be performed at each component.
In assessing the risk of material misstatement to the consolidated financial statements, and to ensure we had adequate quantitative
coverage of significant accounts in the consolidated financial statements, we selected all of the reporting components of the Group,
covering the insurance entities within UK and Bermuda, namely LUK, LICL, and Cathedral, the Group Companies, which include the
third-party capital management business, Kinesis, and the Group’s investment in associate.
We performed an audit of the complete financial information of the four components (“full scope components”) which were selected
based on their size or risk characteristics. We carried out specific audit procedures on the balances arising from the Group’s investment
in associate.
The reporting components where we performed audit procedures accounted for 100 per cent (2014: 97 per cent) of the Group’s profit
before tax, 100 per cent (2014: 100 per cent) of the Group’s gross premiums written and 100 per cent (2014: 100 per cent) of the Group’s
insurance contract liabilities.
The charts below illustrate the coverage obtained from the work performed by our audit teams.
PROFIT BEFORE TAX
GROSS PREMIUMS WRITTEN
INSURANCE CONTRACT LIABILITIES
98% Full scope audit procedures
2% Specific scope audit procedures
100% Full scope audit procedures
100% Full scope audit procedures
CHANGES FROM THE PRIOR YEAR
There have been no material scoping changes from the prior year.
INVOLVEMENT WITH COMPONENT TEAMS
In establishing our overall approach to the Group audit, we determined the type of work that needed to be undertaken at each of the
components by us, as the primary audit engagement team, or by component auditors from other EY global network firms operating
under our instruction.
The Group audit team visited all of the full scope components. These visits involved discussing the audit approach with the component
team and any issues arising from their work, meeting with local management, and reviewing key audit working papers on the Group risk
areas. The primary team interacted regularly with the component teams where appropriate during various stages of the audit, reviewed
key working papers and were responsible for the scope and direction of the audit process. This, together with the additional procedures
performed at Group level, gave us appropriate evidence for our opinion on the consolidated financial statements.
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INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF LANCASHIRE HOLDINGS LIMITED CONTINUED
OUR APPLICATION OF MATERIALITY
We apply the concept of materiality in planning and performing our audit, in evaluating the effect of identified misstatements on
our audit and in forming our audit opinion.
MATERIALITY
The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic decisions
of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our audit procedures.
We determined materiality for the Group to be $8.6 million (2014: $10.0 million), which is approximately 5 per cent (2014:
approximately 5 per cent) of profit before tax. 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. The decrease in materiality from the prior period is due to the reduced profit before tax during the current period.
PERFORMANCE MATERIALITY
The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the probability
that the aggregate of uncorrected and undetected misstatements exceeds materiality.
On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, our judgement was
that performance materiality was 50 per cent (2014: 50 per cent) of our planning materiality, namely $4.3 million (2014: $5.0 million).
Audit work at component locations for the purpose of obtaining audit coverage over significant financial statement accounts is
undertaken based on a percentage of total performance materiality. The performance materiality set for each component is based on
the relative scale and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that component.
In the current year, the range of performance materiality allocated to components was $4.3 million to $2.4 million (2014: $4.0 million
to $1.2 million).
REPORTING THRESHOLD
An amount below which identified misstatements are considered as being clearly trivial.
We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of $0.5 million
(2014: $0.5 million), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.
In forming our opinion, we evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed
above and in the light of other relevant qualitative considerations.
SCOPE OF THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS
An audit involves obtaining evidence about the amounts and disclosures in the consolidated financial statements sufficient to give
reasonable assurance that the consolidated 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 consolidated 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 consolidated 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.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
As explained more fully in the Statement of Directors’ Responsibilities set out on page 93, 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 the 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.
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.
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Lancashire Holdings Limited | Annual Report & Accounts 2015
OPINION ON OTHER MATTER
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
ISAs (UK and Ireland)
reporting
We are required to report to you if, in our opinion, financial and non-financial
information in the Annual Report and Accounts is:
• materially inconsistent with the information in the audited consolidated 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
• otherwise misleading.
In particular, we are required to report whether we have identified any inconsistencies
between our knowledge acquired in the course of performing the audit and the Directors'
statement that they consider that the Annual Report and Accounts taken as a whole is fair,
balanced and understandable and provides the information necessary for shareholders to
assess the entity's performance, business model and strategy; and whether the Annual
Report and Accounts appropriately addresses those matters that we communicated to the
Audit Committee that we consider should have been disclosed.
We have no
exceptions
to report.
Listing Rules review
requirements
We are required to review the part of the Corporate Governance Statement relating
to the Company’s compliance with the provisions of the UK Corporate Governance
Code specified for our review.
We have no
exceptions
to report
STATEMENT ON THE DIRECTORS’ ASSESSMENT OF THE PRINCIPAL RISKS THAT WOULD THREATEN THE SOLVENCY OR LIQUIDITY
OF THE ENTITY
ISAs (UK and Ireland)
reporting
We are required to give a statement as to whether we have anything material to add or
to draw attention to in relation to:
• the Directors' confirmation in the Annual Report and Accounts that they have carried
out a robust assessment of the principal risks facing the entity, including those that
would threaten its business model, future performance, solvency or liquidity;
• the disclosures in the Annual Report and Accounts that describe those risks and
explain how they are being managed or mitigated;
• the Directors' statement in the Annual Report and Accounts about whether they
considered it appropriate to adopt the going concern basis of accounting in preparing
them, and their identification of any material uncertainties to the entity's ability to
continue to do so over a period of at least twelve months from the date of approval
of the consolidated financial statements; and
• the Directors' explanation in the Annual Report and Accounts as to how they have
assessed the prospects of the entity, over what period they have done so and why they
consider that period to be appropriate, and their statement as to whether they have a
reasonable expectation that the entity will be able to continue in operation and meet
its liabilities as they fall due over the period of their assessment, including any related
disclosures drawing attention to any necessary qualifications or assumptions.
We have no
exceptions
to report.
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Ernst & Young LLP
London
17 February 2016
(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 consolidated 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
101
101
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2015
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 (losses) income
Net realised (losses) gains and impairments
Share of profit of associates
Other income
Net foreign exchange losses
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 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 attributable to:
Equity shareholders of LHL
Non-controlling interests
Total comprehensive income for the year
Earnings per share
Basic
Diluted
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Lancashire Holdings Limited | Annual Report & Accounts 2015
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
2015
$m
641.1
(159.4)
481.7
79.9
5.5
567.1
29.8
(1.3)
(2.8)
4.1
19.9
(2.4)
614.4
177.5
(21.8)
155.7
148.2
(2.0)
106.6
15.8
424.3
190.1
18.4
171.7
10.0
181.7
181.1
0.6
181.7
(11.6)
0.3
(11.3)
170.4
169.8
0.6
170.4
26
26
$0.93
$0.91
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
$1.24
$1.16
CONSOLIDATED BALANCE SHEET
As at 31 December 2015
Assets
Cash and cash equivalents
Accrued interest receivable
Investments
Inwards premiums receivable from insureds and cedants
Reinsurance assets
– Unearned premiums on premiums ceded
– Reinsurance recoveries
– Other receivables
Other receivables
Corporation tax receivable
Investment in associate
Property, plant and equipment
Deferred acquisition costs
Intangible assets
Total assets
Liabilities
Insurance contracts
– Losses and loss adjustment expenses
– Unearned premiums
– Other payables
Amounts payable to reinsurers
Deferred acquisition costs ceded
Other payables
Corporation tax payable
Deferred tax liability
Interest rate swap
Long-term debt
Total liabilities
Shareholders’ equity
Share capital
Own shares
Other reserves
Accumulated other comprehensive (loss) income
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
14
12
13
12, 14
11, 17
18
15
19
13
20
20, 21
12, 21
15
21
16
22
22
23
23
24
10
27
2015
$m
2014
$m
291.8
6.5
1,773.3
253.7
30.2
83.9
2.7
37.8
–
47.5
7.2
87.2
153.8
2,775.6
671.0
399.2
36.2
26.6
0.3
67.0
1.8
25.6
4.8
303.5
7.7
1,986.9
316.2
24.7
112.4
5.3
36.6
4.3
52.7
9.1
104.6
153.8
3,117.8
752.6
479.1
40.8
34.2
0.1
83.5
–
38.7
4.9
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322.3
1,554.8
326.6
1,760.5
100.7
(30.4)
880.8
(10.5)
279.7
96.1
(43.3)
887.1
0.8
416.1
1,220.3
1,356.8
0.5
1,220.8
2,775.6
0.5
1,357.3
3,117.8
The consolidated financial statements were approved by the Board of Directors on 17 February 2016 and signed on its behalf by:
Martin Thomas
Director/Chairman
Elaine Whelan
Director/CFO
www.lancashiregroup.com
www.lancashiregroup.com
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FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
For the year ended 31 December 2015
Share
capital
$m
Own
shares
$m
Share
premium
$m
Other
reserves
$m
Notes
Accumulated
other
comprehensive
income (loss)
$m
Retained
earnings
$m
Shareholders’
equity
attributable
to equity
shareholders
of LHL
$m
Non-
controlling
interests
$m
Total
shareholders’
equity
$m
Balance as at 31 December 2013
92.7
(36.8)
192.2
700.9
2.9
507.8
1,459.7
0.7
1,460.4
Total comprehensive income for
the year
10
Share premium reclassification
24, 28, 29
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
Equity based compensation –
expense
23
24, 27
23, 24
23, 24, 27
23
23
23, 24
24
8, 24
6, 24
–
–
–
–
–
–
–
–
–
–
(25.0)
–
21.6
(8.1)
–
–
3.4
5.0
–
–
–
–
–
–
Balance as at 31 December 2014
96.1
(43.3)
Total comprehensive income for
the year
10
Shares purchased by trust
23, 24, 27, 28
Distributed by trust
Dividends on common shares
Dividend equivalents on warrants
Dividends paid to minority interest
holders
23, 24
23
23
–
0.5
–
–
–
–
–
(9.3)
12.5
–
–
–
Warrant exercises
23, 24, 28
4.1
9.7
Equity based compensation – tax
Equity based compensation –
expense
8, 24
6, 24
–
–
–
–
Balance as at 31 December 2015
100.7
(30.4)
–
–
(2.1)
229.3
227.2
0.3
227.5
(192.2)
192.2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(0.6)
(28.3)
8.1
–
–
5.7
(9.8)
(4.4)
23.3
887.1
–
8.8
(17.2)
–
–
–
(13.8)
0.1
15.8
880.8
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(25.0)
(0.6)
(6.7)
–
(288.9)
(288.9)
(32.1)
(32.1)
–
–
–
–
14.1
(9.8)
(4.4)
23.3
–
–
–
(25.0)
(0.5)
–
–
–
–
–
–
–
–
(1.1)
(6.7)
–
(288.9)
(32.1)
14.1
(9.8)
(4.4)
23.3
0.8
416.1
1,356.8
0.5
1,357.3
(11.3)
181.1
169.8
0.6
170.4
–
–
–
–
–
–
–
–
–
–
–
(4.7)
(316.0)
(316.0)
(1.5)
(1.5)
–
–
–
–
–
(4.7)
(316.0)
(1.5)
–
–
–
–
–
–
0.1
15.8
(0.6)
(0.6)
–
–
–
–
0.1
15.8
(10.5)
279.7
1,220.3
0.5
1,220.8
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Lancashire Holdings Limited | Annual Report & Accounts 2015
STATEMENT OF CONSOLIDATED CASH FLOWS
For the year ended 31 December 2015
Cash flows from operating activities
Profit before tax
Tax refunded
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
Share of profit of associates
Net other investment losses (income)
Net realised losses (gains) and impairments
Net unrealised (gains) losses 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
Purchase of investments
Proceeds on sale of investments
Net cash flows from investing activities
Cash flows used in financing activities
Interest paid
Dividends paid
Dividend paid to minority interest holders
Share repurchases
Warrant exercises
RSS compensation
Distributions by trust
Purchase of shares from non-controlling interests
Net cash flows used in financing activities
Net decrease 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
2015
$m
2014
$m
171.7
4.4
1.9
–
15.1
(40.9)
8.1
15.8
10.8
(4.1)
1.3
2.8
(0.1)
(71.0)
(17.7)
98.1
42.1
–
9.3
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
(990.8)
(2,153.7)
1,173.5
234.1
2,159.0
66.5
(15.2)
(317.5)
(0.6)
–
–
–
(4.7)
–
(15.5)
(321.0)
–
(25.0)
14.1
(9.8)
(6.7)
(1.1)
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(338.0)
(365.0)
(5.8)
303.5
(5.9)
291.8
(86.0)
403.0
(13.5)
303.5
5
19
7
6
17
3
3
27
23
27
9
www.lancashiregroup.com
www.lancashiregroup.com
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FINANCIAL STATEMENTS
ACCOUNTING POLICIES
For the year ended 31 December 2015
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The basis of preparation, consolidation principles and significant accounting policies adopted in the preparation of these consolidated
financial statements are set out below.
BASIS OF PREPARATION
The Group’s consolidated financial statements are prepared in accordance with accounting principles generally accepted under IFRS
as adopted by the European Union.
Where IFRS is silent, as it is in respect of certain aspects relating to the measurement of insurance products, the IFRS framework allows
reference to another comprehensive body of accounting principles. In such instances, the Group 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, equity securities and hedge funds as AFS or FVTPL. The new standard is effective for annual periods beginning on or
after 1 January 2018, although it is likely to be deferred to insurers to better align with the implementation date of IFRS 4 Phase II.
IFRS 9 is not expected to have a material impact on the results and disclosures reported in the consolidated financial statements.
The consolidated balance sheet of the Group is presented in order of decreasing liquidity.
USE OF ESTIMATES
The preparation of financial statements in conformity with IFRS requires the Group to make estimates and assumptions that affect
the reported and disclosed amounts at the balance sheet date and the reported and disclosed amounts of revenues and expenses
during the reporting period. Actual results may differ materially from the estimates made.
The most significant estimate made by management is in relation to losses and loss adjustment expenses. This is discussed on page 109
and also in the risk disclosures section from page 120. Estimates in relation to losses and loss adjustment expenses recoverable are
discussed on page 109.
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 109 and 110 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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BASIS OF CONSOLIDATION
The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as at and for the year ended
31 December 2015. 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 two Syndicates at Lloyd’s, which are
managed by the Group’s managing agent subsidiary. In view of the several liability of underwriting members at Lloyd’s, the Group
recognises its proportion of all the transactions undertaken by the Syndicates in which it participates within its consolidated statement
of comprehensive income. Similarly, the Group’s proportion of the Syndicates’ assets and liabilities has been reflected in its consolidated
balance sheet. This proportion is calculated by reference to the Group’s participation as a percentage of each Syndicate’s total capacity
for each year of account.
Subsidiaries’ accounting policies are generally consistent with the Group’s accounting policies. Where they differ, adjustments are made
on consolidation to bring accounting policies in line.
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 consolidated 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 and
denominated in a foreign currency are translated at historic rates. Non-monetary assets and liabilities carried at estimated fair value and
denominated in a foreign currency are translated at the exchange rate at the date the estimated fair value was determined, with resulting
exchange differences recorded in accumulated other comprehensive income in shareholders’ equity.
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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 their useful economic life and assessed for impairment whenever there is an indication that the intangible asset
may be impaired. Intangible assets with indefinite useful lives are tested for impairment at least annually at the CGU level by comparing
the net present value of the future earnings stream of the CGU to the carrying value of the intangible asset. Such intangible assets are
not amortised. The useful life of an intangible asset with an indefinite life is reviewed annually to determine whether the indefinite life
assessment continues to be supportable.
GOODWILL
Goodwill is deemed to have an indefinite life and, after initial recognition, is measured at cost less any accumulated impairment
losses. Goodwill is tested for impairment annually, or when events or changes in circumstances indicate that it might be impaired.
SYNDICATE PARTICIPATION RIGHTS
Syndicate participation rights purchased in a business combination are initially measured at fair value and are subsequently measured
at cost less any accumulated impairment losses. Syndicate participation rights are considered to have an indefinite life as they will
provide benefits over an indefinite future period and are therefore not subject to an annual amortisation charge. The value of the
syndicate participation rights is reviewed for impairment at least annually, or when events or changes in circumstances indicate that
it might be impaired.
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 consolidated 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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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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FINANCIAL STATEMENTS
ACCOUNTING POLICIES CONTINUED
INVESTMENTS
The Group’s fixed income and equity securities are quoted or unquoted investments that are classified as AFS or at FVTPL and are
carried at estimated fair value. The classification of the Group’s financial assets is determined at the time of initial purchase and depends
on the nature of the investment. A financial asset is classified at FVTPL if it is managed and evaluated on a fair value basis and if acquired
principally for the purpose of selling in the short term, or if it forms part of a portfolio of financial assets in which there is evidence of
short-term profit taking. AFS financial assets are non-derivatives that are not classified as FVTPL or in any of the other categories.
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. Unrealised gains and losses from changes in estimated
fair value of AFS investments are included in accumulated other comprehensive income in shareholders’ equity. Changes in estimated
fair value of investments classified at FVTPL are recognised in current period net other investment income.
Investments are derecognised when the Group has transferred substantially all of the risks and rewards of ownership. On derecognition
of an AFS investment, previously recorded unrealised gains and losses are removed from accumulated other comprehensive income in
shareholders’ equity and included in current period income. Realised gains and losses are included in income in the period in which
they arise.
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 income on the date the dividends become payable to the holders of record.
The Group regularly reviews the carrying value of its AFS investments for evidence of impairment. An investment is impaired if its
carrying value exceeds the estimated fair value and there is objective evidence of impairment to the asset. Such evidence would include
a prolonged decline in estimated fair value below cost or amortised cost, where other factors, such as expected cash flows, do not support
a recovery in value. If an impairment is deemed appropriate, the difference between cost or amortised cost and estimated fair value is
removed from accumulated other comprehensive 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 not currently hold any derivatives classified as hedging instruments. For discounted cash
flow techniques, estimated future cash flows are based on management’s best estimates and the discount rate used is an appropriate
market rate.
Derivative financial assets and liabilities are offset and the net amount is reported in the consolidated balance sheet only to the
extent there is a legally enforceable right of offset and there is an intention to settle on a net basis, or to realise the assets and liabilities
simultaneously. Derivative financial assets and liabilities are derecognised when the Group has transferred substantially all of the risks
and rewards of ownership or the liability is discharged, cancelled or expired.
OTHER INCOME
Managing agents 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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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 other reserves.
PENSIONS
The Group operates a defined contribution plan. On payment of contributions to the plan there is no further obligation for the
Group. Contributions are recognised as employee benefits in the consolidated statement of comprehensive 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 non-taxable income and certain items which are not tax deductible or which are deferred to subsequent periods.
Deferred tax is recognised on all temporary differences between the assets and liabilities in the consolidated balance sheet and their tax
base, except when the deferred tax liability arises from the initial recognition of goodwill. Deferred tax assets or liabilities are accounted
for using the balance sheet liability method. Deferred tax assets are recognised to the extent that realising the related tax benefit through
future taxable profits is likely.
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Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current
tax liabilities and when the deferred income taxes relate to the same fiscal authority.
Where the current estimated fair value of equity based compensation awards differs from the estimated fair value at the time of
grant, adjusted where applicable for dividends, the related corporation tax and deferred tax charge or credit is recognised directly
in other reserves.
OWN SHARES
Own shares include shares repurchased under share repurchase authorisations and held in treasury, plus shares repurchased and held in
trust, for the purposes of employee equity based compensation schemes. Own shares are deducted from shareholders' equity. No gain or
loss is recognised on the purchase, sale, cancellation or issue of own shares and any consideration paid or received is recognised directly
in equity.
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FINANCIAL STATEMENTS
RISK DISCLOSURES
For the year ended 31 December 2015
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 Board and individual entity boards of directors review
actual risk levels versus tolerances, emerging risks and any risk learning events at least quarterly. In addition, on at least a monthly basis,
management reviews the output from 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:
• overall management of the risk management system;
• drive ERM culture, ownership and execution on three levels: Board, executive management, and operationally within the business;
• facilitate the identification, assessment, evaluation and management 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 they feel that management is not appropriately addressing areas of concern.
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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 has input to the scope of each audit and receives a copy of each internal audit report. The CRO 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. Due to the particular requirements of Lloyd’s
regulations, Cathedral has its own Internal Model which is vetted by Lloyd’s as part of its own capital and solvency regulations. To
formulate an overall Group view of risk, exposures from Cathedral are combined with LICL, LUK and Kinesis 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 114 to 138.
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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 principal
classes of business for the Group, excluding the Lloyd’s segment, are Property, Energy, Marine and Aviation. These classes, plus the
Group’s Lloyd’s segment, are deemed to be the Group’s five operating segments. The level of insurance risk tolerance per peril is set
by the respective Boards of Directors at both the LHL and entity level.
A number of controls are deployed to manage the amount of insurance exposure assumed:
• the Group has a rolling three-year strategic plan that helps establish the over-riding business goals that the Board of Directors aims
to achieve;
• a detailed business plan is produced annually which includes expected premiums and combined ratios by class and considers risk-
adjusted profitability, capital usage and requirements. The plan is approved by the Board of Directors and is monitored, reviewed
and updated on an ongoing basis;
• for Cathedral, the Syndicate business forecast and business plan are subject to review and approval by Lloyd’s;
• BLAST, SHARP and Cathedral’s internal models are used to measure occurrence risks, aggregate risks and correlations between classes
and other non-insurance risks, and the outputs and assumptions from BLAST and SHARP are reviewed periodically by the RRC;
• each authorised class has a predetermined normal maximum line structure;
• each underwriter has a clearly defined limit of underwriting authority;
• the Group and individual operating entities have predetermined tolerances on probabilistic and deterministic losses of capital
for certain single events;
• risk levels versus tolerances are monitored on a regular basis;
• a daily underwriting call is held for LICL and LUK to peer review insurance proposals, opportunities and emerging risks;
• a daily post-binding review process with exception reporting to management based on underwriting authority operates at Cathedral;
• sophisticated pricing and aggregation models are utilised in certain areas of the underwriting process, and are updated frequently;
• BLAST and other modeling tools are deployed to model catastrophes and resultant losses to the portfolio and the Group; and
• reinsurance may be purchased to mitigate both frequency and severity of losses on a treaty or facultative basis and to improve
risk-adjusted RoE as modeled in BLAST.
Some of the Group’s business provides coverage for natural catastrophes (e.g. hurricanes, earthquakes and floods) and is subject
to potential seasonal variation. A proportion of the Group's business is exposed to large catastrophe losses in North America, Europe
and Japan as a result of windstorms. The level of windstorm activity, and landfall thereof, during the North American, European and
Japanese wind seasons may materially impact the Group's loss experience. The North American and Japanese wind seasons are typically
June to November and the European wind season November to March. The Group also bears exposure to large losses arising from other
non-seasonal natural catastrophes, such as earthquakes, tsunamis, droughts, floods and tornadoes, from risk losses throughout the year
and from war, terrorism and political risk and other events. The Group’s associate bears exposure to catastrophe losses and any significant
loss event could potentially result in impairment in the value of the Group’s investment in associate.
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The Group’s exposures to certain peak zone elemental losses, as a percentage of tangible capital, including long-term debt, are
shown below. Net loss estimates are before income tax and net of reinstatement premiums and outwards reinsurance. The exposure
to catastrophe losses that would result in an impairment to the investment in associate is included in the figures below.
As at 31 December 2015
Zones
Non-Gulf of Mexico – U.S.
Gulf of Mexico1
California
Pan-European
Japan
Japan
Pacific North West
(1) Landing hurricane from Florida to Texas.
As at 31 December 2014
Zones
Non-Gulf of Mexico – U.S.
Gulf of Mexico1
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
236.2
231.6
157.7
92.2
72.1
47.7
37.1
17.0
16.7
11.4
6.6
5.2
3.4
2.7
457.4
347.2
250.8
145.6
121.2
69.3
98.5
32.9
25.0
18.1
10.5
8.7
5.0
7.1
100 year return period
estimated net loss
250 year return period
estimated net loss
$m
% of
tangible capital
$m
% of
tangible capital
254.0
254.2
154.8
133.2
116.0
61.2
39.5
16.6
16.6
10.1
8.7
7.6
4.0
2.6
455.8
377.2
247.5
205.0
184.8
94.6
123.3
29.8
24.7
16.2
13.4
12.1
6.2
8.1
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:
U.S. and Canada
Worldwide offshore
Worldwide, including the U.S. and Canada1
Europe
Far East
Worldwide, excluding the U.S. and Canada2
Middle East
Rest of world
Total
2015
$m
176.1
153.2
135.6
48.9
31.2
18.2
8.0
69.9
641.1
%
27.5
23.9
21.2
7.6
4.9
2.8
1.2
10.9
100.0
2014
$m
221.7
287.4
172.5
59.6
42.7
23.2
9.5
91.0
907.6
%
24.4
31.7
19.0
6.6
4.7
2.6
1.0
10.0
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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RISK DISCLOSURES CONTINUED
Details of annual gross premiums written by business segment are provided below:
Lloyd’s
Property
Energy
Marine
Aviation
Total
2015
$m
247.7
197.2
112.0
47.6
36.6
641.1
%
38.6
30.8
17.5
7.4
5.7
100.0
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
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
Terrorism
Contingency
Total
2015
$m
92.9
66.2
29.6
28.5
20.1
6.0
4.4
2014
$m
104.3
80.7
37.5
27.6
25.9
3.5
4.8
247.7
284.3
Property reinsurance predominantly includes property catastrophe excess of loss, property per risk excess of loss and property
retrocession lines of business. Property catastrophe excess of loss and property per risk excess of loss provide protection for elemental
and non-elemental risks and are written on an excess of loss treaty basis within the U.S. and internationally. The U.S. property catastrophe
excess of loss book is particularly focused on regional clients. Property retrocession is written on an excess of loss basis through treaty
arrangements. It provides coverage for elemental risks when sold on a catastrophe basis and both elemental and non-elemental risks
when sold on a per risk retrocession basis. Protection is generally given on a regional basis and may cover specific property risks or all
catastrophe perils. It is also generally written on an UNL basis, meaning loss payments are linked to the ceding company’s own loss.
Property direct and facultative is a worldwide book of largely commercial property business, written both in the open market and under
delegated authorities. The account spans small individual locations to Fortune 500 accounts but with a bias towards small to medium
sized risks. Policies are generally provided both for non-elemental and elemental perils, although not all risks include both elemental
and non-elemental coverage. Coverage is generally written on a full value, primary or excess of loss basis, although the very largest
accounts are currently seldom written at the primary level.
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 risk carriers.
Construction energy contracts generally cover all risks of platforms, FPSO and drilling units under construction at yard and offshore,
during towing and installation. Onshore construction contracts are generally not written.
Terrorism business can be written either ground-up or for primary or excess layers, with cover provided for U.S. and worldwide property
risks, but typically excluding nuclear, chemical 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.
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.
II. PROPERTY
Gross premiums written, for the year:
Property catastrophe excess of loss
Terrorism
Property political risk
Property retrocession
Other property
Total
2015
$m
90.6
43.8
33.3
13.6
15.9
2014
$m
124.2
55.2
44.4
18.1
21.1
197.2
263.0
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 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.
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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 114 and 115.
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
2015
$m
92.8
6.1
3.3
2.8
7.0
2014
$m
149.9
69.9
8.5
6.5
4.6
112.0
239.4
Energy risks are written mostly on a direct basis and may be ground-up or for primary or excess layers on either a first loss or full value
basis. Worldwide offshore energy policies are typically package policies which may include physical damage, business interruption and
third-party liability sections. Coverage can include fire and explosion and elemental risks. Individual assets covered can be high-value
and are therefore mostly written on a subscription basis, meaning that coverage is placed with multiple risk carriers.
Gulf of Mexico offshore energy programmes cover elemental and non-elemental risks. Most policies have sub-limits on coverage for
elemental losses. These programmes are exposed to Gulf of Mexico windstorms. Exposure to such events is controlled and measured
through loss modeling. The accuracy of this exposure analysis is limited by the quality of data and the effectiveness of the modeling.
It is possible that a catastrophic event significantly exceeds the expected modeled event loss. The Group’s appetite and exposure
guidelines to large losses are set out on pages 114 and 115.
The Group writes energy liability business on a stand-alone basis. Unlike the liability contained within the energy packages that
Lancashire writes, stand-alone energy liability is written on an excess of loss basis only. Coverage is worldwide and provides coverage
for all kinds of damages and loss to third parties. Coverage is generally restricted to offshore assets.
Construction energy contracts generally cover all risks of platform and drilling units under construction at yards and offshore,
during towing and installation. Onshore construction contracts are generally not written.
Reinsurance protection may be purchased to protect a portion of loss from elemental and non-elemental energy claims, and from
the accumulation of smaller, attritional losses. Reinsurance is typically purchased on an excess of loss basis but, from time to time,
quota share arrangements may be entered into. Reinsurance may be purchased on a facultative or treaty basis.
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Lancashire Holdings Limited | Annual Report & Accounts 2015
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
2015
$m
19.9
13.0
6.5
6.0
2.2
47.6
2014
$m
29.6
12.8
12.2
10.3
2.8
67.7
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
2015
$m
23.5
12.2
0.9
36.6
2014
$m
25.9
24.8
2.5
53.2
AV52 is written on a risk attaching excess of loss basis and provides coverage for third-party liability, excluding own passenger liability,
resulting from acts of war or hijack of aircraft. Cover excludes countries whose governments provide a backstop coverage, but does,
since 2014, include some U.S. commercial airlines.
Aviation satellite cover is written on a full value, primary or excess of loss basis and can provide cover for satellite launch, satellite in-orbit
or both satellite launch and in-orbit. 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.
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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 RSC considers reinsurers that are not rated or do not fall within the predefined rating categories on a
case-by-case basis, and would usually require collateral to be posted to support such obligations. There are specific guidelines for
these collateralised contracts. The RSC monitors its reinsurers on an ongoing basis and will formally review 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 losses and
loss adjustment expenses. The estimation of the ultimate liability arising from claims made under insurance and reinsurance contracts
is a critical estimate for the Group, particularly given the nature of the business written.
Under U.S. GAAP, loss reserves are not permitted until the occurrence of an event which may give rise to a claim. As a result, only loss
reserves applicable to losses incurred up to the reporting date are established, with no allowance for the provision of a contingency
reserve to account for expected future losses or for the emergence of new types of latent claims. Claims arising from future events can
be expected to require the establishment of substantial reserves from time to time. All reserves are reported on an undiscounted basis.
Losses and loss adjustment expenses are maintained to cover the Group’s estimated liability for both reported and unreported claims.
Reserving methodologies that calculate a point estimate for the ultimate losses are utilised, and then a range is developed around these
point estimates. The point estimate represents management’s best estimate of ultimate loss and loss adjustment expenses. The Group’s
internal actuaries review the reserving assumptions and methodologies on a quarterly basis with loss estimates being subject to a semi-
annual 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 2015
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 2015, management’s estimates for IBNR represented 35.2 per cent of total net loss reserves (31 December
2014 – 31.6 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 of which the Group was not made aware by the balance sheet date.
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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:
i.
Insurance risk;
ii. Investment risk;
iii. Debt risk; and
iv. Currency risk.
These risks, and the management thereof, are described below.
I. INSURANCE RISK
The Group is exposed to insurance market risk from several sources, including the following:
• the advent or continuation of a soft market, which may result in a stabilisation or decline in premium rates and/or terms
and conditions for certain lines, or across all lines;
• the actions and reactions of key competitors, which may directly result in volatility in premium volumes and rates, fee levels and
other input costs;
• market events 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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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 Investment Committee 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 quarterly to ensure that the Group’s strategic and tactical investment actions are consistent with investment
risk preferences, appetite, risk and return objectives and tolerances. The IRRC also helps further develop the risk tolerances to
be incorporated into the ERM framework.
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RISK DISCLOSURES CONTINUED
The investment mix of the fixed income portfolios is as follows:
As at 31 December 2015
– 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
– 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 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
Core
$m
7.5
11.4
178.4
24.4
0.6
2.9
16.1
20.2
5.5
4.1
–
182.4
453.5
–
453.5
%
0.5
0.7
11.1
1.5
–
0.2
1.0
1.3
0.3
0.3
–
11.4
28.3
–
28.3
Core plus
Surplus
Total
$m
13.1
–
157.5
22.6
–
1.0
66.3
39.0
12.1
11.5
–
278.9
602.0
–
602.0
%
0.8
–
9.8
1.4
–
–
4.1
2.4
0.8
0.7
–
17.4
37.4
–
37.4
$m
–
–
57.4
18.4
4.6
–
31.5
84.6
%
–
–
3.6
1.2
0.3
–
2.0
$m
20.6
11.4
393.3
65.4
5.2
3.9
113.9
5.3
143.8
4.2
0.3
21.8
13.2
115.0
192.5
521.4
24.8
546.2
0.8
7.2
12.0
32.7
1.6
34.3
28.8
115.0
653.8
1,576.9
24.8
Core
Core plus
Surplus
Total
$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
%
–
0.8
8.0
2.7
–
0.1
4.9
2.2
0.5
–
0.3
–
17.0
36.5
–
36.5
$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
%
–
–
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
20.8
2.4
39.6
127.9
705.1
1,787.1
31.2
0.4
0.1
1.1
7.0
13.5
39.5
1.7
41.2
%
1.3
0.7
24.5
4.1
0.3
0.2
7.1
9.0
1.4
1.8
7.2
40.8
98.4
1.6
%
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
1,601.7
100.0
1,818.3
100.0
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Lancashire Holdings Limited | Annual Report & Accounts 2015
Bank loans, corporate bonds, fixed income securities at FVTPL and other government bonds by country are as follows:
As at 31 December 2015
United States
United Kingdom
Canada
Netherlands
Australia
France
Germany
Japan
Norway
Switzerland
Sweden
Luxembourg
Hong Kong
Mexico
Russian Federation
Other
Total
Financials
$m
126.6
Other
industries
$m
372.9
48.8
19.4
19.2
26.8
14.2
5.2
15.4
8.0
11.2
12.2
–
–
–
–
2.0
309.0
27.7
15.3
10.5
5.7
8.4
13.2
5.1
0.7
2.1
0.1
11.8
4.8
1.0
–
5.3
Total1
$m
499.5
76.5
34.7
29.7
32.5
22.6
18.4
20.5
8.7
13.3
12.3
11.8
4.8
1.0
–
7.3
Other
government
bonds
$m
–
1.0
13.8
7.5
4.2
7.8
10.8
–
5.3
–
0.2
–
–
3.5
3.4
7.9
484.6
793.6
65.4
(1) Includes bank loans, corporate bonds and fixed income securities at FVTPL.
(2) Includes bank loans, corporate bonds, fixed income securities at FVTPL and other government bonds.
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
(1) Includes bank loans, corporate bonds and fixed income securities at FVTPL.
(2) Includes bank loans, corporate bonds, fixed income securities at FVTPL and other government bonds.
Financials
$m
141.5
Other
industries
$m
382.5
49.8
29.7
34.1
10.3
13.2
2.8
15.5
10.2
15.6
13.9
–
–
–
–
4.6
341.2
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
Total1
$m
524.0
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
14.2
864.2
Other
government
bonds
$m
–
0.4
24.6
9.8
8.4
6.4
9.8
5.0
–
–
0.2
–
3.6
–
3.5
12.3
84.0
Total2
$m
499.5
77.5
48.5
37.2
36.7
30.4
29.2
20.5
14.0
13.3
12.5
11.8
4.8
4.5
3.4
15.2
859.0
Total2
$m
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
26.5
948.2
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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
2015
$m
457.9
308.5
26.7
0.5
793.6
%
57.7
38.9
3.4
–
100.0
2014
$m
487.3
338.3
35.7
2.9
864.2
%
56.5
39.1
4.1
0.3
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 small equity and hedge fund
portfolios. 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)
2015
$m
(25.5)
(19.1)
(12.7)
(6.4)
6.8
13.5
20.3
27.1
%
(1.6)
(1.2)
(0.8)
(0.4)
0.4
0.8
1.3
1.7
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
The Group mitigates interest rate risk on the investment portfolio by establishing and monitoring duration ranges in its investment
guidelines. The Group may manage duration through the use of interest rate futures and swaptions from time to time. The duration
of the core portfolio is matched to the modeled duration of the insurance reserves, within a permitted range. The permitted duration
range for the core plus portfolio is between zero and four years and the surplus portfolio is between one and five years.
The total durations of the externally managed portfolios which are comprised of fixed income, cash and cash equivalents and certain
derivatives, are as follows:
As at 31 December
Core portfolio
Core plus portfolio
Surplus portfolio1
Overall external portfolio1
(1) Including duration overlay.
2015
years
1.7
1.7
1.3
1.6
2014
years
1.7
1.9
1.4
1.6
The overall duration for fixed income, managed cash and cash equivalents and certain derivatives is 1.5 years (2014 – 1.5 years).
In addition to duration management, the Group uses VaR on a monthly basis to measure potential losses in the estimated fair values of
its cash and invested assets and to understand and monitor risk. The VaR calculation is performed using variance/covariance risk
modeling to capture the cash flows and embedded optionality of the portfolio. Securities are valued individually using standard
market pricing models. These security valuations serve as the input to many risk analytics, including full valuation risk analyses,
as well as parametric methods that rely on option adjusted risk sensitivities to approximate the risk and return profiles of the portfolio.
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Lancashire Holdings Limited | Annual Report & Accounts 2015
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 level1
(1) Including the impact of internal foreign exchange hedges.
2015
2014
% of shareholders’
equity
$m
% of shareholders’
equity
$m
28.9
2.4
34.0
2.5
DERIVATIVE FINANCIAL INSTRUMENTS
The Group’s investment guidelines permit the investment managers to utilise exchange-traded futures and options contracts, and
OTC instruments including interest rate swaps, credit default swaps, interest rate swaptions and forward foreign currency contracts.
Derivatives are used for yield enhancement, duration management, interest rate and foreign currency exposure management or to
obtain an exposure to a particular financial market. These positions are monitored regularly. The Group may also use OTC or exchange
traded managed derivatives to mitigate interest rate risk and foreign currency exposures. The Group principally has exposure to
derivatives related to the following types of risks: foreign currency risk, interest rate risk and credit risk.
The Group currently invests in the following derivative financial instruments:
a. Futures;
b. Options;
c. Forward foreign currency contracts;
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 2015
Treasury futures
Forward foreign currency contracts
Interest rate swaps – held internally
Total
As at 31 December 2014
Treasury futures
Forward foreign currency contracts
Interest rate swaps – investments portfolio
Interest rate swaps – held internally
Swaptions
Total
Net other
investment
income
$m
Net realised
(losses)
$m
Net foreign
exchange
gains
$m
–
–
–
–
(1.4)
–
–
(1.4)
–
3.6
–
3.6
Net other
investment
(losses)
$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)
Financing
(losses)
$m
–
–
(2.5)
(2.5)
Financing
(losses)
$m
–
–
–
(7.4)
–
(7.4)
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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 – held
internally
Total
2015
2014
Other
investments
$m
Other
receivables
$m
Other
payables
$m
Interest
rate swaps
$m
Other
investments
$m
Other
receivables
$m
Other
payables
$m
Interest
rate swaps
$m
–
–
–
1.6
–
1.6
(0.7)
–
(0.7)
–
(4.8)
(4.8)
0.7
–
0.7
3.8
–
3.8
(1.8)
–
(1.8)
–
(4.9)
(4.9)
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
56.1
56.1
2015
Notional
short
$m
152.5
152.5
Net notional
long (short)
$m
(96.4)
(96.4)
Notional
long
$m
89.1
89.1
2014
Notional
short
$m
169.9
169.9
Net notional
long (short)
$m
(80.8)
(80.8)
B. OPTIONS
The Group’s investment guidelines permit the use of exchange-traded options on U.S. treasury futures and Eurodollar futures, which
are used to manage exposure to interest rate risk and also to hedge duration. Exchange-traded options are held on a similar basis
to futures and are subject to similar safeguards. Options are contractual arrangements that give the purchaser the right, but not the
obligation, to either buy or sell an instrument at a specific set price at a predetermined future date. The Group may enter into option
contracts that are secured by holdings in the underlying securities or by other means which permit immediate satisfaction of the Group’s
obligations. The notional amount of options is $nil as at 31 December 2015 and 2014.
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 2015
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
Japanese Yen
British Pound
Malaysian Ringgit
Euro
Total
2015
Notional
long
$m
Notional
short
$m
Net notional
long (short)
$m
Notional
long
$m
2014
Notional
short
$m
Net notional
long (short)
$m
–
7.1
5.9
10.4
3.0
28.9
55.3
21.4
17.8
7.4
8.6
–
15.9
71.1
(21.4)
(10.7)
(1.5)
1.8
3.0
13.0
(15.8)
0.4
10.0
5.1
–
3.7
43.2
62.4
20.7
26.3
5.1
8.1
–
26.4
86.6
(20.3)
(16.3)
–
(8.1)
3.7
16.8
(24.2)
D. SWAPS
The Group’s investment guidelines permit the use of interest rate swaps and credit default swaps which are traded primarily 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 2015 and 2014. 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 2015
is $246.4 million (31 December 2014 – $252.3 million).
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FINANCIAL STATEMENTS
RISK DISCLOSURES CONTINUED
E. SWAPTIONS
The Group has the ability to use 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
2015 and 2014.
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 on the LHL debt 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 until 2020 the Group has no cash flow 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 $0.7 million
on an annual basis.
IV. CURRENCY RISK
The Group underwrites from two locations, Bermuda and London, although risks are assumed on a worldwide basis. Risks assumed
are predominantly denominated in U.S. dollars.
The Group is exposed to currency risk to the extent its assets are denominated in different currencies to its liabilities. The Group is also
exposed to non-retranslation risk on non-monetary assets such as unearned premiums and deferred acquisition costs. Exchange gains
and losses can impact income.
The Group hedges monetary non-U.S. dollar liabilities primarily with non-U.S. dollar assets, but may also use derivatives to mitigate
foreign currency exposures. The Group’s main foreign currency exposure relates to its insurance obligations, cash holdings, investments,
premiums receivable, dividends payable and the euro denominated subordinated loan notes long-term debt liabilities discussed in
note 22. See page 129 for a listing of the Group’s open forward foreign currency contracts.
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Lancashire Holdings Limited | Annual Report & Accounts 2015
The Group’s assets and liabilities, categorised by currency at their translated carrying amount, are as follows:
Assets
Cash and cash equivalents
Accrued interest receivable
Investments
Inwards premiums receivable from insureds
and cedants
Reinsurance assets
Other receivables
Investment in associate
Property, plant and equipment
Deferred acquisition costs
Intangible assets
Total assets as at 31 December 2015
Liabilities
Losses and loss adjustment expenses
Unearned premiums
Insurance contracts – other payables
Amounts payable to reinsurers
Deferred acquisition costs ceded
Other payables
Corporation tax payable
Deferred tax liability
Interest rate swap
Long-term debt
Total liabilities as at 31 December 2015
U.S. $
$m
190.8
6.5
1,706.3
204.4
106.1
35.5
47.5
0.5
68.4
153.8
2,519.8
U.S. $
$m
529.3
318.5
27.0
24.0
0.3
31.7
0.8
16.7
2.3
284.4
1,235.0
Sterling
$m
40.3
–
17.0
15.4
7.2
1.8
–
6.7
5.6
–
94.0
Sterling
$m
43.5
19.2
3.8
1.8
–
35.2
1.0
8.9
–
–
113.4
Euro
$m
17.8
–
32.0
23.5
2.7
–
–
–
7.1
–
83.1
Euro
$m
47.4
34.6
3.0
0.6
–
0.1
–
–
2.5
37.9
126.1
Japanese Yen
$m
18.5
–
–
–
–
–
–
–
0.4
–
18.9
Japanese Yen
$m
20.9
3.7
0.3
–
–
–
–
–
–
–
Other
$m
24.4
–
18.0
10.4
0.8
0.5
–
–
5.7
–
59.8
Other
$m
29.9
23.2
2.1
0.2
–
–
–
–
–
–
24.9
55.4
Total
$m
291.8
6.5
1,773.3
253.7
116.8
37.8
47.5
7.2
87.2
153.8
2,775.6
Total
$m
671.0
399.2
36.2
26.6
0.3
67.0
1.8
25.6
4.8
322.3
1,554.8
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131
131
FINANCIAL STATEMENTS
RISK DISCLOSURES CONTINUED
Assets
Cash and cash equivalents
Accrued interest receivable
Investments
Inwards premiums receivable from insureds
and cedants
Reinsurance assets
Other receivables
Corporation tax receivable
Investment in associate
Property, plant and equipment
Deferred acquisition costs
Intangible assets
Total assets as at 31 December 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
263.5
119.8
10.8
–
52.7
0.3
81.8
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
15.9
15.3
25.1
4.3
–
8.8
4.8
–
135.8
Sterling
$m
51.9
20.2
1.4
2.4
–
36.8
21.3
–
–
134.0
Euro
$m
27.2
–
41.2
27.6
3.9
–
–
–
–
10.9
–
110.8
Euro
$m
65.6
48.4
2.2
1.0
–
0.1
–
3.3
42.2
162.8
Japanese Yen
$m
28.6
–
–
0.2
–
–
–
–
–
0.6
–
29.4
Japanese Yen
$m
43.3
4.8
0.3
–
–
–
–
–
–
Other
$m
31.5
–
41.2
9.0
3.4
0.7
–
–
–
6.5
–
92.3
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
316.2
142.4
36.6
4.3
52.7
9.1
104.6
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
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 $2.6 million (2014 – $3.8 million).
The 31 December 2014 losses and loss adjustment expenses included the equivalent of $21.0 million of Japanese Yen denominated
insurance liabilities that were contained within the Group’s outwards reinsurance programme which limited the Group’s net liability
to $30.0 million. The Group did not therefore hedge 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 129 for details
of the Group’s open forward foreign currency contracts.
132
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Lancashire Holdings Limited | Annual Report & Accounts 2015
Lancashire Holdings Limited | Annual Report & Accounts 2015
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 2015
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 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
Core
$m
58.0
185.3
96.6
25.1
21.3
21.3
45.9
453.5
Core
$m
103.7
168.1
200.0
20.9
21.9
5.9
143.8
664.3
Core plus
$m
93.0
190.7
102.8
28.3
46.5
11.8
128.9
602.0
Core plus
$m
58.9
117.1
80.6
19.6
29.1
9.5
89.3
404.1
Surplus
$m
24.5
70.3
35.9
53.3
96.2
132.5
133.5
546.2
Surplus
$m
43.6
42.4
75.5
65.3
97.5
243.8
181.8
749.9
Total
$m
175.5
446.3
235.3
106.7
164.0
165.6
308.3
1,601.7
Total
$m
206.2
327.6
356.1
105.8
148.5
259.2
414.9
1,818.3
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www.lancashiregroup.com
www.lancashiregroup.com
133
133
FINANCIAL STATEMENTS
RISK DISCLOSURES CONTINUED
The maturity profile of the financial liabilities of the Group is as follows:
As at 31 December 2015
Years until liability becomes due – undiscounted values
Balance sheet
$m
Less than one
$m
One to three
$m
Three to five
$m
Losses and loss adjustment expenses
671.0
269.5
Insurance contracts – other payables
Amounts payable to reinsurers
Other payables
Interest rate swap
Long-term debt
Total
36.2
26.6
67.0
4.8
322.3
1,127.9
33.1
26.6
67.0
2.0
14.0
412.2
246.4
3.1
–
–
2.3
33.8
285.6
88.6
–
–
–
0.5
36.5
125.6
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
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
Over five
$m
66.5
–
–
–
–
Total
$m
671.0
36.2
26.6
67.0
4.8
521.3
587.8
605.6
1,411.2
Over five
$m
81.4
–
–
–
(0.2)
546.6
627.8
Total
$m
752.6
40.8
34.2
83.5
4.9
633.1
1,549.1
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.
134
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Lancashire Holdings Limited | Annual Report & Accounts 2015
Lancashire Holdings Limited | Annual Report & Accounts 2015
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,
requiring the posting of margins and settling of unrealised gains and losses daily. Credit risk on OTC derivatives is mitigated by
monitoring the creditworthiness of the counterparties and by requiring collateral 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, as discussed on page 120.
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 2015
AAA
AA+, AA, AA-
A+, A, A-
BBB+, BBB, BBB-
Other1
Total
(1) Reinsurance recoveries classified as “other” include $1.5 million of reserves that are fully collateralised.
As at 31 December 2014
AAA
AA+, AA, AA-
A+, A, A-
BBB+, BBB, BBB-
Other1
Total
Cash and fixed
income securities
$m
Other
investments
$m
Inwards
premiums
receivable and
other receivables
$m
Reinsurance
recoveries
$m
302.8
744.0
502.2
232.0
112.5
1,893.5
–
–
–
–
–
–
–
–
81.3
–
212.9
294.2
–
–
77.5
–
6.4
83.9
Cash and fixed
income securities
$m
Other
investments
$m
Inwards
premiums
receivable and
other receivables
$m
Reinsurance
recoveries
$m
385.9
765.8
642.4
193.1
134.6
2,121.8
–
–
0.7
–
–
0.7
–
–
85.0
–
273.1
358.1
–
–
103.0
0.1
9.3
112.4
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(1) Reinsurance recoveries classified as “other” include $4.2 million of reserves that are fully collateralised.
The two counterparties to the Group’s long-term debt interest rate swaps are currently rated A and BBB+ by S&P.
www.lancashiregroup.com
www.lancashiregroup.com
135
135
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
2015
$m
16.1
5.6
6.4
28.1
2014
$m
23.6
6.7
3.2
33.5
Provisions of $2.2 million (2014 – $1.2 million) have been made for impaired or irrecoverable balances and $1.0 million
(2014 – $1.0 million) was charged to 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 Board 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.
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 2016.
I. BUSINESS PLAN RISK
The Group addresses the risks associated with the planning and execution of the business plan through a combination of the following:
• an iterative annual forward-looking business planning process with cross departmental involvement;
• evaluation 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.
136
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Lancashire Holdings Limited | Annual Report & Accounts 2015
Lancashire Holdings Limited | Annual Report & Accounts 2015
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
2015
$m
1,220.3
322.3
1,542.6
(153.8)
1,388.8
2014
$m
1,356.8
326.6
1,683.4
(153.8)
1,529.6
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 29 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.
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137
137
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 20142
31 December 20152
(1) The returns shown are for the period from date of incorporation, 12 October 2005 to 31 December 2005.
(2) The annual return was 13.5 per cent (2014 – 14.7 per cent), after adjusting for the impacts of warrants.
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 20142
31 December 20152
Annual
return
%
Compound
annual return
%
Inception to
date return
%
(3.2)
17.8
31.4
7.8
26.5
23.3
13.4
16.7
18.9
13.9
10.9
n/a
14.0
22.4
17.9
19.8
20.3
19.5
19.2
19.2
18.9
18.6
(3.2)
14.0
50.3
63.7
105.8
152.4
191.2
242.7
308.0
375.3
449.1
Annual
return
%
Compound
annual return
%
Inception to
date return
%
(3.4)
13.0
26.9
6.4
26.4
23.2
13.3
16.6
18.9
13.9
10.9
n/a
9.2
17.8
14.3
17.1
18.2
17.7
17.7
17.9
17.7
17.5
(3.4)
9.2
40.8
52.7
94.6
141.1
179.9
231.3
296.6
363.8
437.5
(1) The returns shown are for the period from date of incorporation, 12 October 2005 to 31 December 2005.
(2) The annual return was 13.5 per cent (2014 – 14.7 per cent), after adjusting for the impacts of warrants.
III. RETENTION RISK
Risks associated with succession planning, staff retention and key man risks are mitigated through a combination of resource
planning processes and controls, including:
• the identification of key personnel with appropriate succession plans;
• the identification of key team profit generators and function holders with targeted retention packages;
• documented recruitment procedures, position descriptions and employment contracts; and
• resource monitoring and the provision of appropriate compensation, including equity based compensation which vests over
a defined time horizon, and training schemes.
138
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Lancashire Holdings Limited | Annual Report & Accounts 2015
Lancashire Holdings Limited | Annual Report & Accounts 2015
NOTES TO THE ACCOUNTS
1. GENERAL INFORMATION
The Group is a provider of global specialty insurance and reinsurance products with operations in London and Bermuda. LHL was
incorporated under the laws of Bermuda on 12 October 2005. On 16 March 2009, LHL was added to the official list and its common
shares were admitted to trading on the main market of the LSE; previously LHL’s shares were listed on AIM, a subsidiary market of the
LSE. Since 21 May 2007, LHL’s shares have had a secondary listing on the BSX. LHL’s registered office is Power House, 7 Par-la-Ville
Road, Hamilton HM 11, Bermuda. LHL’s head office is at Level 29, 20 Fenchurch Street, London, EC3M 3BY, United Kingdom.
The consolidated financial statements for the year ended 31 December 2015 include the Company’s subsidiary companies, the Company’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 116 to 119. 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.
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www.lancashiregroup.com
www.lancashiregroup.com
139
139
FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
2. SEGMENTAL REPORTING CONTINUED
REVENUE AND EXPENSE BY OPERATING SEGMENT
For the year ended 31 December 2015
Gross premiums written by geographical region
U.S. and Canada
Worldwide offshore
Worldwide, including the U.S. and Canada1
Europe
Far East
Worldwide, excluding the U.S. and Canada2
Middle East
Rest of world
Total
Outwards reinsurance premiums
Change in unearned premiums
Change in unearned premiums 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
74.3
0.2
23.0
24.2
23.2
10.4
7.3
34.6
197.2
(51.4)
19.6
5.9
171.3
(33.0)
14.8
(32.4)
0.8
121.5
1.2
106.2
3.9
(0.1)
(0.1)
–
–
0.9
112.0
(30.6)
48.6
(3.5)
126.5
(47.5)
0.7
(48.0)
0.7
32.4
–
46.8
–
–
–
–
–
0.8
47.6
(11.9)
1.9
0.1
37.7
(5.2)
–
(13.2)
0.3
19.6
–
–
36.6
–
–
–
–
–
36.6
(14.2)
6.4
4.6
33.4
(26.8)
7.5
(8.9)
0.1
5.3
100.6
–
72.1
24.8
8.1
7.8
0.7
33.6
247.7
(51.3)
3.4
(1.6)
198.2
(65.0)
(1.2)
(45.7)
0.1
86.4
10.6%
18.4%
–
37.0%
37.4%
–
13.8%
34.2%
–
57.8%
26.3%
–
33.4%
23.0%
–
29.0%
74.4%
48.0%
84.1%
56.4%
176.1
153.2
135.6
48.9
31.2
18.2
8.0
69.9
641.1
(159.4)
79.9
5.5
567.1
(177.5)
21.8
(148.2)
2.0
265.2
(93.5)
171.7
27.5%
25.8%
18.8%
72.1%
(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.
140
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Lancashire Holdings Limited | Annual Report & Accounts 2015
Lancashire Holdings Limited | Annual Report & Accounts 2015
REVENUE AND EXPENSE BY OPERATING SEGMENT
For the year ended 31 December 2014
Gross premiums written by geographical region
U.S. and Canada
Worldwide offshore
Worldwide, including the U.S. and Canada1
Europe
Far East
Worldwide, excluding the U.S. and Canada2
Middle East
Rest of world
Total
Outwards reinsurance premiums
Change in unearned premiums
Change in unearned premiums 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
92.3
0.1
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)
(33.4)
7.2
173.7
12.5
220.2
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
–
67.0
–
–
–
–
–
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
221.7
287.4
172.5
59.6
42.7
23.2
9.5
91.0
907.6
(164.8)
(37.0)
9.8
715.6
(110.2)
(237.9)
7.7
11.4
(47.7)
(161.8)
0.2
64.1
8.4
335.7
(109.2)
226.5
31.7%
21.4%
15.6%
68.7%
9.8%
11.8%
–
24.7%
30.9%
–
47.8%
30.7%
–
62.5%
18.3%
–
47.9%
22.2%
–
21.6%
55.6%
78.5%
80.8%
70.1%
(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
NOTES TO THE ACCOUNTS CONTINUED
3. INVESTMENT RETURN
The total investment return for the Group is as follows:
For the year ended 31 December 2015
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
Net investment
income
and net other
investment (losses)
income1
$m
Net realised
(losses) gains
and impairments
$m
Net change
in unrealised
gains/losses on AFS
$m
Total investment
return excluding
foreign exchange
$m
Net foreign
exchange
(losses) gains
$m
Total investment
return including
foreign exchange
$m
28.8
(1.3)
0.4
–
–
0.6
28.5
(1.8)
2.7
(0.7)
(1.6)
(1.4)
–
(2.8)
(11.4)
–
(0.2)
–
–
–
(11.6)
15.6
1.4
(0.5)
(1.6)
(1.4)
0.6
14.1
(9.2)
–
–
–
2.1
(0.3)
(7.4)
6.4
1.4
(0.5)
(1.6)
0.7
0.3
6.7
(1) Net unrealised gains/losses on our FVTPL investments are included within net investment income and net other investment income.
For the year ended 31 December 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
Net investment
income
and net other
investment (losses)
income1
$m
Net realised
(losses) gains
and impairments
$m
Net change
in unrealised
gains/losses on AFS
$m
Total investment
return excluding
foreign exchange
$m
Net foreign
exchange
(losses) gains
$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)
(1) Net unrealised gains/losses on our FVTPL investments are included within net investment income and net other investment income.
Net realised (losses) gains and impairments includes impairment losses of $2.4 million (2014 – $0.1 million) recognised on fixed
income securities and $0.5 million (2014 – $0.2 million) recognised on equity securities held by the Group.
Refer to page 128 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 (losses) gains and impairments.
Included in investment income is $3.2 million (2014 – $5.7 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
2015
$m
130.8
–
17.4
(2.2)
0.2
146.2
2014 included a portion of the amortisation expense relating to the value of in-force business acquired that was allocated to insurance
acquisition expenses, in line with the run-off profile of that business.
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19.1
1.6
(0.3)
2.1
(8.6)
(0.2)
13.7
2014
$m
177.6
15.0
(30.8)
(8.3)
(0.1)
153.4
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
2015
$m
1.9
3.4
–
1.8
0.1
7.2
2014
$m
2.1
3.8
8.4
1.7
0.3
16.3
During 2015, EY provided non-audit services in relation to taxation services. 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.
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
2015
$m
30.4
3.1
30.8
64.3
7.3
2.1
6.4
15.8
80.1
2014
$m
27.4
3.0
23.7
54.1
12.6
3.2
7.5
23.3
77.4
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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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 2015 and 2014:
Assumptions
Dividend yield
Expected volatility1
Risk-free interest rate2
Expected average life of options
Share price
2015
2014
0.0%
19.5%
0.7%
3 years
$9.87
0.0%
22.0%
1.0%
3 years
$12.16
(1) The expected volatility of LHL and comparator companies’ share prices are calculated based on the movement in the share prices over a period prior to the grant date, equal in length to the expected life
of the award.
(2) The risk-free interest rate is consistent with three- year UK government bond yields on the date of grant.
The calculation of the equity based compensation expense assumes forfeitures due to employee turnover of 10.0 per cent per annum
prior to vesting, with subsequent adjustments to reflect actual experience.
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.
Number of
employee
restricted stock
Number of
non-employee
restricted stock
Total number of
restricted stock
4,320,761
1,157,761
408,827
4,729,588
–
1,157,761
(1,894,668)
(186,994)
(2,081,662)
(166,857)
(262,781)
3,154,216
1,529,507
(662,345)
(223,893)
(525,348)
3,272,137
956,911
–
–
(166,857)
(262,781)
221,833
3,376,049
–
1,529,507
(128,839)
–
(92,994)
–
–
(791,184)
(223,893)
(618,342)
3,272,137
956,911
Outstanding as at 31 December 2013
Granted
Exercised
Forfeited
Lapsed
Outstanding as at 31 December 2014
Granted
Exercised
Forfeited
Lapsed
Outstanding as at 31 December 2015
Exercisable as at 31 December 2015
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2015
2014
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
Weighted average fair value at date of grant
during the year
$9.78
–
–
7.9 years
7.9 years
6.8 years
7.9 years
$9.78
$12.25
–
$12.25
Weighted average share price at date of
exercise during the year
$9.98
$9.86
$9.97
$11.35
$10.66
$11.29
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 2013
Granted
Exercised
Forfeited
Outstanding as at 31 December 2014
Granted
Exercised
Forfeited
Outstanding as at 31 December 2015
Exercisable as at 31 December 2015
Number of
employee
restricted stock
Number of
non-employee
restricted stock
Total number of
restricted stock
355,221
278,608
24,921
–
380,142
278,608
(266,228)
(11,183)
(277,411)
(3,991)
363,610
268,738
–
13,738
–
(3,991)
377,348
268,738
(170,844)
(11,183)
(182,027)
(26,229)
435,275
60,882
–
2,555
–
(26,229)
437,830
60,882
2015
2014
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
8.0 years
7.2 years
8.0 years
8.4 years
7.6 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
$9.69
–
$9.69
$12.14
–
$12.14
$10.08
$9.96
$10.08
$11.40
$11.08
$11.39
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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 2015.
Outstanding as at 31 December 2015 and 2014
Weighted average remaining contractual life
Weighted average fair value at date of grant
Total number of
restricted stock
2,307,157
Total restricted
stock
7.9 years
$13.01
MANAGEMENT TEAM ORDINARY WARRANTS
Ordinary warrants were all fully vested by 31 December 2008 and expired ten years from the date of issue on 16 December 2015. The fair
value of all ordinary warrants granted was $2.62 per warrant. Ordinary warrants granted and exercised were:
Outstanding as at 31 December 2013
Exercised
Outstanding as at 31 December 2014
Exercised
Outstanding and exercisable as at 31 December 2015
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
(559,182)
–
$4.64
$4.63
$4.72
$4.72
–
2015
–
$9.96
2014
1.0 year
$10.55
MANAGEMENT TEAM PERFORMANCE WARRANTS
Performance warrants were all fully vested by 31 December 2009 and expired ten years from the date of issue on 16 December 2015.
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
Exercised
Outstanding as at 31 December 2014
Exercised
Outstanding and exercisable as at 31 December 2015
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.
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Number
Weighted average
exercise price
859,445
(741,965)
117,480
(117,480)
–
$3.62
$3.62
$3.62
$3.62
–
2015
–
$9.96
2014
1.0 year
$11.07
7. FINANCING COSTS
Interest expense on long-term debt
Net losses on interest rate swaps
Other financing costs
Total
2015
$m
15.1
2.5
0.8
18.4
2014
$m
15.5
7.4
0.9
23.8
Refer to note 22 for details of long-term debt and financing arrangements.
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 31 March 2035. At the present time no such taxes are levied in Bermuda.
UNITED KINGDOM
LHL and its UK subsidiaries are subject to normal UK corporation tax on all their taxable profits.
Tax credit
Corporation tax charge for the period
Adjustments in respect of prior period corporation tax
Deferred tax credit for the period
Tax rate change adjustment
Adjustments in respect of prior period deferred tax
Total tax credit
Tax reconciliation
Profit before tax
UK corporation tax at 20.3% (2014 – 21.5%)
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
Utilisation of tax losses previously unrecognised for deferred tax
Total tax credit
2015
$m
2.3
(0.4)
(7.9)
(0.8)
(3.2)
(10.0)
2015
$m
171.7
34.8
(41.1)
(3.6)
0.4
1.7
(0.8)
–
(1.4)
(10.0)
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)
Due to the different taxpaying jurisdictions throughout the Group, the current tax credit as a percentage of the Group’s profit before
tax is 5.8 per cent (2014 – 1.4 per cent).
For the years ended 31 December, the following tax movements were recognised in other reserves relating to tax deductions for equity
based compensation award exercises and temporary differences in respect of unexercised awards where the estimated market value varies
from the cumulative expense at the reporting date.
Tax (credit) charge in other reserves
Deferred tax (credit) charge
Total tax (credit) charge in other reserves
2015
$m
(0.1)
(0.1)
2014
$m
4.4
4.4
Refer to note 10 for details of the tax expense related to the net change in unrealised gains/losses on investments that is included
in accumulated other comprehensive (loss) income within shareholders’ equity.
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FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
9. CASH AND CASH EQUIVALENTS
Cash at bank and in hand
Cash equivalents
Total cash and cash equivalents
2015
$m
131.7
160.1
291.8
2014
$m
210.6
92.9
303.5
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 2015
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
– 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
Total investments
Cost or
amortised cost
$m
Unrealised
gains
$m
Unrealised
losses
$m
Estimated
fair value
$m
20.6
13.9
394.9
70.0
5.0
3.9
115.2
144.0
22.1
28.8
119.9
659.4
1,597.7
24.9
15.8
153.6
–
–
0.2
0.3
0.2
–
0.1
1.7
0.3
0.1
0.2
1.4
4.5
–
1.6
5.3
–
(2.5)
(1.8)
(4.9)
–
–
(1.4)
(1.9)
(0.6)
(0.1)
(5.1)
(7.0)
20.6
11.4
393.3
65.4
5.2
3.9
113.9
143.8
21.8
28.8
115.0
653.8
(25.3)
1,576.9
(0.1)
(1.8)
(2.9)
24.8
15.6
156.0
1,792.0
11.4
(30.1)
1,773.3
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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
Unrealised
gains
$m
Unrealised
losses
$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
–
–
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
–
(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
1,992.2
18.7
(24.0)
1,986.9
Accumulated other comprehensive (loss) income is in relation to the Group’s AFS fixed income and equity securities and is as follows:
Unrealised gains
Unrealised losses
Net foreign exchange losses on fixed income – AFS
Tax provision
Accumulated other comprehensive (loss) income
2015
$m
6.1
(27.1)
10.4
0.1
(10.5)
2014
$m
12.5
(21.8)
10.3
(0.2)
0.8
Fixed income maturities are presented in the risk disclosures section on page 133. Refer to note 22 for the investment balances in trusts
in favour of ceding companies and on deposit as collateral.
The Group determines the estimated fair value of each individual security utilising the highest level inputs available. Prices for the Group’s
investment portfolio are provided by a third-party investment accounting firm whose pricing processes and the controls thereon are
subject to an annual audit on both the operation and the effectiveness of those controls. The audit reports are available to clients of
the firm and the report is reviewed annually by management. In accordance with their pricing policy, various recognised reputable
pricing sources are used including broker-dealers and pricing vendors. The pricing sources use bid prices where available, otherwise
indicative prices are quoted based on observable market trade data. The prices provided are compared to the investment managers’
pricing. The Group has not made any adjustments to any pricing provided by independent pricing services or its third-party investment
managers for either year ending 31 December.
The fair value of securities in the Group’s investment portfolio is estimated using the following techniques:
LEVEL (I)
Level (i) investments are securities with quoted prices in active markets. A financial instrument is regarded as quoted in an active market
if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency
and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The Group determines securities
classified as Level (i) to include highly liquid U.S. treasuries, certain highly liquid short-term investments and quoted equity securities.
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FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
10. INVESTMENTS CONTINUED
LEVEL (II)
Level (ii) investments are securities with quoted prices in active markets for similar assets or liabilities or securities valued using other
valuation techniques for which all significant inputs are based on observable market data. Instruments included in Level (ii) are valued
via independent external sources using modeled or other valuation methods. Such methods are typically industry accepted standard
and include:
• broker-dealer quotes;
• pricing models or matrix pricing;
• present values;
• future cash flows;
• yield curves;
• interest rates;
• prepayment speeds; and
• default rates.
Other similar quoted instruments or market transactions may be used.
The Group determines securities classified as Level (ii) to include short-term and fixed maturity investments and certain derivatives
such as:
• Fixed income funds;
• 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, options, forward foreign exchange contracts, interest rate swaps, credit default swaps and swaptions.
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LEVEL (III)
Level (iii) investments are securities for which valuation techniques are not based on observable market data. The Group classifies
hedge funds as Level (iii) assets as the valuation technique incorporates both observable and unobservable inputs.
The estimated fair values of the Group’s hedge funds are determined using a combination of the most recent NAVs provided by each
fund’s independent administrator and the estimated performance provided by each hedge fund manager. Independent administrators
provide monthly reported NAVs with up to a one-month delay in valuation. The most recent NAV available for each hedge fund is
adjusted for the estimated performance, as provided by the fund manager, between the NAV date and the reporting date. Historically
estimated fair values incorporating these performance estimates have not been significantly different from subsequent NAVs. Given the
Group’s knowledge of the underlying investments and the size of the Group’s investment therein, we would not anticipate any material
variance between estimated valuations and the final NAVs reported by the administrators.
The Group determines whether transfers have occurred between levels of the fair value hierarchy by re-assessing the categorisation
at the end of each reporting period based on the lowest level input that is significant to the fair value measurement as a whole.
The fair value hierarchy of the Group’s investment holdings is as follows:
As at 31 December 2015
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
– 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
Total investments
Level (i)
$m
Level (ii)
$m
Level (iii)
$m
Total
$m
10.9
–
393.3
–
–
–
–
–
–
–
–
–
404.2
–
15.6
–
9.7
11.4
–
65.4
5.2
3.9
113.9
143.8
21.8
28.8
115.0
653.8
1,172.7
24.8
–
–
419.8
1,197.5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
156.0
156.0
20.6
11.4
393.3
65.4
5.2
3.9
113.9
143.8
21.8
28.8
115.0
653.8
1,576.9
24.8
15.6
156.0
1,773.3
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FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
10. INVESTMENTS CONTINUED
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
Level (i)
$m
Level (ii)
$m
Level (iii)
$m
Total
$m
30.3
–
363.0
–
–
–
–
–
–
–
–
–
–
393.3
–
15.8
–
–
0.1
15.4
–
84.0
28.9
17.5
184.1
168.0
20.8
2.4
39.6
127.9
705.1
1,393.8
31.2
–
–
0.7
409.1
1,425.7
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
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
Hedge funds
$m
–
150.0
2.1
152.1
18.1
(12.9)
(1.3)
156.0
There have been no transfers between Levels (i) and (ii), therefore no reconciliations have been presented.
The table below analyses the movements in hedge funds classified as Level (iii) investments:
As at 31 December 2013
Purchases
Total net gains recognised in profit or loss
As at 31 December 2014
Purchases
Sales
Total net losses recognised in profit or loss
As at 31 December 2015
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 31 December 2015, the Group’s total
interest in unconsolidated structured entities was $511.8 million (31 December 2014 – $619.7 million). The Group does not sponsor any
of the unconsolidated structured entities.
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Lancashire Holdings Limited | Annual Report & Accounts 2015
A summary of the Group’s interest in unconsolidated structured entities is as follows:
As at 31 December 2015
Fixed income securities
– Asset backed securities
– U.S. government agency mortgage backed securities
– Non-agency 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
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 associate
$m
Total
$m
113.9
143.8
21.8
28.8
308.3
156.0
156.0
–
464.3
–
–
–
–
–
–
–
47.5
47.5
113.9
143.8
21.8
28.8
308.3
156.0
156.0
47.5
511.8
Investments
$m
Interest in associate
$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 consolidated balance sheet in that fair value is determined by market supply and demand. This is in turn driven
by investor evaluation of the credit risk of the structure and changes in term structure of interest rates which change investors’ expectation
of the cash flows associated with the instrument and, therefore, its value in the market. Risk management disclosure for these financial
instruments and other investments is provided on pages 123 to 135. The total assets of these structured entities are not considered
meaningful for the purpose of understanding the related risks and therefore have not been presented.
The maximum exposure to loss in respect of these structured entities would be the carrying value of the instruments that the Group
holds as at 31 December 2015 and 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 addition 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.
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FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
11. INTERESTS IN STRUCTURED ENTITIES CONTINUED
As at 31 December 2015 the Group has a commitment of $50.0 million (31 December 2014 – $nil) in respect of a credit facility fund.
The Group, via the fund, provides collateral for revolving credit facilities purchased at a discount from financial institutions and is at
risk for its portion of any defaults on those revolving credit facilities. The Group’s proportionate share of these revolving credit facilities
purchased by the fund as at 31 December 2015 is $14.3 million (31 December 2014 – $nil), which currently remains unfunded. The
maximum exposure to the credit facility fund is $50.0 million and as at 31 December 2015 there have been no defaults under this facility.
12. REINSURANCE ASSETS AND LIABILITIES
As at 31 December 2013
Net deferral for prior years
Net deferral for current year
Other
As at 31 December 2014
Net deferral for prior years
Net deferral for current year
Other
As at 31 December 2015
Unearned
premiums ceded
$m
Amounts payable
to reinsurers
$m
Other
receivables
$m
14.9
(14.9)
24.7
–
24.7
(24.7)
30.2
–
30.2
(30.9)
10.8
–
–
(3.3)
(34.2)
–
–
7.6
(26.6)
–
–
(5.5)
5.3
–
–
(2.6)
2.7
Total
$m
(5.2)
(14.9)
24.7
(8.8)
(4.2)
(24.7)
30.2
5.0
6.3
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Lancashire Holdings Limited | Annual Report & Accounts 2015
13. 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
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 2015
Losses and
loss adjustment
expenses
$m
Reinsurance
recoveries
$m
Net losses and
loss adjustment
expenses
$m
853.4
(183.0)
670.4
(40.8)
278.7
(11.8)
226.1
265.8
61.1
326.9
752.6
(101.4)
278.9
4.9
182.4
210.0
54.0
264.0
671.0
6.4
(17.8)
0.8
(10.6)
(76.4)
(4.8)
(81.2)
(112.4)
(6.3)
(15.5)
0.8
(21.0)
(40.7)
(8.8)
(49.5)
(83.9)
(34.4)
260.9
(11.0)
215.5
189.4
56.3
245.7
640.2
(107.7)
263.4
5.7
161.4
169.3
45.2
214.5
587.1
Further information on the calculation of loss reserves and the risks associated with them is provided in the risk disclosures section from
page 120. 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 $134.2 million (2014 – $150.5
million) increase in gross loss reserves. There was no change to the Group’s reserving methodology during the year. The split of losses
and loss adjustment expenses between notified outstanding losses, ACRs assessed by management and IBNR is shown below:
As at 31 December
Outstanding losses
Additional case reserves
Losses incurred but not reported
Total
2015
$m
286.0
162.1
222.9
671.0
%
42.6
24.2
33.2
100.0
2014
$m
369.3
159.7
223.6
752.6
%
49.1
21.2
29.7
100.0
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T
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The Group’s reserve for unpaid losses and loss adjustment expenses as at 31 December 2015 and 2014 had an estimated duration
of approximately two years.
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www.lancashiregroup.com
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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 in 2013, the Group
assumed additional loss reserves relating to 2001 and subsequent years.
Accident year
Gross Group losses
Estimate of ultimate liability1
2006
and prior
$m
2007
$m
2008
$m
2009
$m
2010
$m
2011
$m
2012
$m
2013
$m
2014
$m
2015
$m
Total
$m
At end of accident year
39.1
154.8
444.6
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
417.4
377.5
345.1
340.8
355.6
350.9
353.6
131.2
103.5
94.8
83.5
81.0
87.6
87.8
86.6
34.7
32.0
27.6
27.2
24.4
24.0
60.6
58.6
56.5
280.0
274.8
276.0
259.8
226.7
224.0
250.3
350.4
338.8
326.9
397.0
371.9
447.0
450.4
460.0
297.4
209.4
204.2
235.8
229.4
231.4
163.3
107.8
73.1
66.0
89.1
81.7
72.9
Current estimate of cumulative
liability
56.5
86.6
353.6
72.9
231.4
460.0
326.9
224.0
226.7
276.0 2,314.6
Paid
(30.2)
(81.2)
(339.5)
(60.4)
(201.0)
(331.2)
(249.6)
(173.7)
(122.8)
(54.0)(1,643.6)
Total Group gross liability
26.3
5.4
14.1
12.5
30.4
128.8
77.3
50.3
103.9
222.0
671.0
(1) Adjusted for revaluation of foreign currencies at the exchange rate as at 31 December 2015.
Accident year
Reinsurance
Estimate of ultimate recovery1
At end of accident year
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Current estimate of cumulative
recovery
Paid
Total Group gross recovery
2006
and prior
$m
2007
$m
2008
$m
2009
$m
2010
$m
2011
$m
2012
$m
2013
$m
2014
$m
2015
$m
Total
$m
–
–
–
–
–
–
–
25.1
25.1
24.7
24.7
(3.1)
21.6
15.3
17.8
14.1
9.9
8.9
8.8
48.9
121.8
122.0
121.2
56.2
52.6
92.4
88.9
103.3
33.8
23.6
24.1
33.5
34.4
34.6
1.6
1.3
0.7
0.7
10.0
7.0
2.5
40.7
47.1
43.1
40.9
38.1
40.7
39.8
40.4
3.6
6.2
4.0
3.5
3.3
3.1
4.0
4.1
4.1
4.1
40.4
2.5
34.6
103.3
121.2
(3.6)
(39.0)
(0.8)
(30.7)
(70.0)
(116.2)
0.5
1.4
1.7
3.9
33.3
5.0
8.8
(5.9)
2.9
14.1
(7.0)
7.1
15.3
369.0
(8.8)
(285.1)
6.5
83.9
(1) Adjusted for revaluation of foreign currencies at the exchange rate as at 31 December 2015.
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Lancashire Holdings Limited | Annual Report & Accounts 2015
Accident year
Net Group losses
Estimate of ultimate liability1
At end of accident year
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
2006
and prior
$m
2007
$m
2008
$m
2009
$m
2010
$m
2011
$m
2012
$m
2013
$m
2014
$m
2015
$m
Total
$m
260.7
257.0
212.6
270.1
250.9
215.2
201.4
228.6
216.8
205.7
340.8
319.3
354.6
361.5
356.7
263.6
185.8
180.1
202.3
195.0
196.8
161.7
106.5
72.4
65.3
79.1
74.7
70.4
403.9
370.3
334.4
304.2
302.7
314.9
311.1
313.2
151.2
125.0
99.5
91.3
80.2
77.9
83.6
83.7
82.5
39.1
34.7
32.0
27.6
27.2
24.4
24.0
35.5
33.5
31.8
Current estimate of cumulative
liability
31.8
82.5
313.2
70.4
196.8
356.7
205.7
215.2
212.6
260.7 1,945.6
Paid
(27.1)
(77.6)
(300.5)
(59.6)
(170.3)
(261.2)
(133.4)
(167.8)
(115.8)
(45.2)(1,358.5)
Total Group net liability
4.7
4.9
12.7
10.8
26.5
95.5
72.3
47.4
96.8
215.5
587.1
(1) Adjusted for revaluation of foreign currencies at the exchange rate as at 31 December 2015.
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
2014 accident year
Total favourable development
2015
$m
1.6
1.1
(2.1)
4.1
(3.5)
17.1
10.8
35.4
43.2
107.7
2014
$m
1.8
(0.3)
3.6
4.3
5.7
(6.1)
11.1
14.3
–
34.4
The favourable prior year development in 2015 arose primarily from general IBNR releases across most lines of business plus additional
recoveries on our 2011 Thai flood losses. 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.
14. INSURANCE, REINSURANCE AND OTHER RECEIVABLES
All receivables are considered current other than $53.8 million (2014 – $71.3 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.
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FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
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 2013
Net deferral during the year
As at 31 December 2014
Net deferral during the year
As at 31 December 2015
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
Incurred
$m
73.8
30.8
104.6
(17.4)
87.2
Ceded
$m
(0.2)
0.1
(0.1)
(0.2)
(0.3)
2015
$m
(4.6)
14.6
3.3
13.6
0.6
(1.9)
25.6
Net
$m
73.6
30.9
104.5
(17.6)
86.9
2014
$m
(3.2)
15.1
13.3
16.0
0.2
(2.7)
38.7
Deferred tax assets are recognised to the extent that realising the related tax benefit through future taxable profits is likely. It is
anticipated that sufficient taxable profits will be available within the Group in 2016 and subsequent years to utilise the deferred tax
assets recognised when the underlying temporary differences reverse.
A deferred tax asset of $14.1 million (2014 – $18.7 million) has not been recognised in relation to unused tax losses carried forward
in LHL, because at present the related tax benefit is not expected to be realised through future taxable profits.
The UK government has announced its intention to legislate to reduce the rate of corporation tax to 19.0 per cent with effect from
1 April 2017 and to 18.0 per cent with effect from 1 April 2020. These rates have been reflected in the closing deferred tax position
on the consolidated balance sheet.
All deferred tax assets and liabilities are classified as non-current.
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17. INVESTMENT IN ASSOCIATE
The Group holds a 10.0 per cent interest in the preference shares of each segregated account of KHL, a company incorporated
in Bermuda. KHL’s operating subsidiary, KRL, is authorised by the BMA as a Special Purpose Insurer. KRL commenced writing
insurance business on 1 January 2014. As at 31 December 2015, the carrying value of the Group’s investment in KHL was $47.5 million
(31 December 2014 – $52.7 million). The Group’s share of comprehensive income for KHL for the period was $4.1 million
(31 December 2014 – $4.7 million). Key financial information for KHL is as follows:
Assets
Liabilities
Shareholders’ equity
Gross premium earned
Comprehensive income
2015
$m
495.0
19.4
475.4
73.4
41.2
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.
During the year ended 31 December 2014, AHL and SHL were placed into member’s voluntary liquidation. The Group’s share of
comprehensive income for AHL for the period was $nil (31 December 2014 – $1.1 million). The Group’s share of comprehensive
income for SHL for the period was $nil (31 December 2014 – $0.1 million).
Refer to note 27 for details of transactions between the Group and its associates.
18. PROPERTY, PLANT AND EQUIPMENT
Cost
Accumulated depreciation
Net book value
19. INTANGIBLE ASSETS
Net book value as 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 as at 31 December 2014
Net book value as at 31 December 20151
(1) During the year ended 31 December 2015 the amortisation charge was $nil.
Value of
in-force business
$m
Syndicate
participation
rights
$m
23.4
(15.0)
(8.4)
–
–
82.6
–
–
82.6
82.6
2015
$m
20.5
(13.3)
7.2
Goodwill
$m
71.2
–
–
71.2
71.2
2014
$m
551.2
24.6
526.6
79.8
47.0
2014
$m
19.3
(10.2)
9.1
Total
$m
177.2
(15.0)
(8.4)
153.8
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 three- year period. The
most significant assumptions used to derive the projected cash flows include an assessment of business prospects, projected loss ratios, outwards
reinsurance expenditure and investment returns. A discount rate of 6.8 per cent (31 December 2014 – 8.0 per cent) has been used to discount
the projected pre 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 three- 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 assets’ 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 2015 (31 December 2014 – $nil).
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FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
20. INSURANCE LIABILITIES
As at 31 December 2013
Net deferral for prior years
Net deferral for current year
Other
As at 31 December 2014
Net deferral for prior years
Net deferral for current year
Other
As at 31 December 2015
21. INSURANCE, REINSURANCE AND OTHER PAYABLES
Other payables
Accrued interest payable
Total other payables
Insurance contracts – other payables
Amounts payable to reinsurers
Total payables
Unearned
premiums
$m
Other payables
$m
442.1
(330.5)
367.5
–
479.1
(345.1)
265.2
–
399.2
28.9
–
–
11.9
40.8
–
–
(4.6)
36.2
2015
$m
64.8
2.2
67.0
36.2
26.6
Total
$m
471.0
(330.5)
367.5
11.9
519.9
(345.1)
265.2
(4.6)
435.4
2014
$m
81.2
2.3
83.5
40.8
34.2
129.8
158.5
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 $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 CSX admitted to the official list the LHL U.S. dollar and
Euro subordinated loan notes due 2035.
In 2013, the Group assumed loan notes, issued by CCHL and listed on the ISE, as part of the Cathedral acquisition. The loan notes
acquired are set out as follows:
• €12.0 million floating rate subordinated loan note issued on 18 November 2004 and repayable in September 2034, paying interest
quarterly based on a set margin, 3.75 per cent, above three-month EURIBOR;
• $10.0 million floating rate subordinated loan note 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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Lancashire Holdings Limited | Annual Report & Accounts 2015
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
2015
$m
130.0
97.0
26.2
11.7
10.0
23.7
23.7
2014
$m
130.0
97.0
29.2
13.0
10.0
23.7
23.7
322.3
326.6
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 130.
The fair value of the long-term debt is estimated as $328.8 million (2014 – $347.2 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 $2.2 million (2014 – $2.3 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 129 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 $4.8 million liability (2014 – $4.9 million). Further information
is provided on pages 127 and 129. Cash settlements are completed on a quarterly basis and the total of the next cash settlement in the first
quarter of 2016 on these instruments is $0.6 million. The net impact from cash settlement and changes in estimated fair value are
included in financing costs.
The interest rate swaps are held at estimated fair value, priced using observable market inputs, and are therefore classified as Level (ii)
securities in the fair value hierarchy.
Refer to note 7 for the net impact from cash settlement and changes in estimated fair value included in financing costs.
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FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
22. LONG-TERM DEBT AND FINANCING ARRANGEMENTS CONTINUED
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 2015 and 2014:
• 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 2015 and 2014; and
• a $50.0 million bi-lateral uncommitted LOC facility with Citibank Europe PLC as at 31 December 2014, which has now expired.
The existing facility is available for the issue of LOCs to ceding companies. The facility is also available for LICL to issue LOCs to LUK
to collateralise certain insurance balances.
The terms of the $350.0 million LOC facility include standard default and cross-default provisions which require certain covenants
to be adhered to. These include the following:
• an A.M. Best financial strength rating of at least B++; and
• a maximum debt to capital ratio of 30.0 per cent, where the LHL 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 following LOCs have been issued:
As at 31 December
Issued to third parties
LOCs are required to be fully collateralised.
2015
$m
44.5
2014
$m
31.8
SYNDICATE BANK FACILITIES
As at 31 December 2015 and 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 $40.0 million can be utilised by way
of an LOC and up to $40.0 million by way of an RCF to assist Syndicate 2010’s gross funding requirements.
As at 31 December 2015 and 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 and up to $20.0 million by way of an RCF to assist Syndicate 3010’s gross funding requirements.
The total combined maximum borrowings available to Syndicate 2010 and Syndicate 3010 under these facilities are $100.0 million and
the total combined maximum that can be utilised by way of an LOC is $50.0 million and by way of an RCF is $50.0 million to assist in
both Syndicates’ gross funding requirements.
There are no balances outstanding under either of the syndicate bank facilities as at 31 December 2015 or 2014. 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 and for the years
ended 31 December 2015 and 2014, LICL had been granted authorised or trusteed reinsurer status in all states. The MBRT is subject to
the rules and regulations of the aforementioned states and the respective 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 2015 and 2014, the Group was in compliance with all covenants under its trust facilities.
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Lancashire Holdings Limited | Annual Report & Accounts 2015
The Group is required to hold a portion of its assets as FAL to support the underwriting capacities of Syndicate 2010 and Syndicate 3010.
FAL are restricted in their use and are only drawn down to pay cash calls to syndicates supported by the Group. FAL requirements are
formally assessed twice a year and any funds surplus to requirements may be released at that time. See note 29 for more information
regarding FAL requirements.
In addition to the FAL, certain cash and investments held by Syndicate 2010 and Syndicate 3010 are only available for paying the syndicate
claims and expenses. See note 29 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:
Cash and cash
equivalents
$m
2015
Fixed income
securities
$m
Equity
securities
$m
Cash and cash
equivalents
$m
2014
Fixed income
securities
$m
Equity
securities
$m
As at 31 December
MBRT accounts
In 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 2015 and 2014
Allocated, called up and fully paid
As at 31 December 2013
Shares issued
As at 31 December 2014
Shares issued
As at 31 December 2015
Own shares
As at 31 December 2013
Shares distributed
Shares repurchased
Shares donated to trust
As at 31 December 2014
Shares distributed
Shares purchased by trust
As at 31 December 2015
0.6
0.9
7.4
6.0
11.3
9.4
35.6
31.3
21.7
43.4
0.3
201.4
85.8
383.9
–
–
–
–
15.6
–
15.6
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
Number
3,000,000,000
Number
185,445,809
6,666,789
192,112,598
9,229,320
201,341,918
–
–
–
–
15.8
–
15.8
$m
1,500
$m
92.7
3.4
96.1
4.6
100.7
$m
36.8
25.0
8.1
43.3
(22.2)
9.3
30.4
The new common shares issued during 2015 and 2014 were to satisfy the exercises of warrants and to fund future RSS exercises.
Number held
in treasury
3,513,325
(666,434)
2,498,433
(2,394,377)
2,950,947
(1,109,421)
$m
24.6
Number held
in trust
906,339
$m
Total number
of own shares
12.2
4,419,664
(5.0)
(1,643,647)
(21.6)
(2,310,081)
(26.6)
25.0
–
(16.8)
2,394,377
27.8
1,657,069
–
2,498,433
24.9
15.5
–
4,608,016
(9.7)
(1,354,535)
(12.5)
(2,463,956)
–
–
1,000,000
1,841,526
18.1
1,302,534
9.3
12.3
1,000,000
3,144,060
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The number of common shares in issue with voting rights (allocated share capital less shares held in treasury) as at 31 December 2015
was 199,500,392 (31 December 2014 – 189,161,651).
www.lancashiregroup.com
www.lancashiregroup.com
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FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
23. SHARE CAPITAL CONTINUED
SHARE REPURCHASES
At the AGM held on 29 April 2015, the Group’s shareholders approved a renewal of the Repurchase Programme authorising the
repurchase of a maximum of 20,034,191 shares, with such authority to expire on the conclusion of the 2016 AGM or, if earlier,
15 months from the date the resolution approving the Repurchase Programme was passed.
During the year ended 31 December 2015 no shares were repurchased by the Group under the Share Repurchase Programme. During
the year ended 31 December 2014 $25.0 million (2,498,433 shares) were repurchased by the Group at a weighted average share price
of $10.02.
In 2015, the trustees of the EBT acquired 1,000,000 shares (2014 – nil) in accordance with the terms of the trust and distributed
1,354,535 (2014 – 1,643,647). 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:
Type
Final
Special
Interim
Special
Final
Special
Interim
Special
Per share amount
Record date
Payment date
$0.10
21 Mar 2014
16 Apr 2014
$0.20
21 Mar 2014
16 Apr 2014
$0.05
29 Aug 2014
24 Sep 2014
$1.20
28 Nov 2014
19 Dec 2014
$0.10
20 Mar 2015
15 Apr 2015
$0.50
20 Mar 2015
15 Apr 2015
$0.05
28 Aug 2015
25 Sep 2015
$0.95
27 Nov 2015
18 Dec 2015
$m
21.1
42.1
10.4
247.4
19.8
99.2
9.9
188.6
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Lancashire Holdings Limited | Annual Report & Accounts 2015
24. OTHER RESERVES
Other reserves consist of the following:
As at 31 December 2013
Share premium reclassification
Purchase of shares from non-controlling interest
Distributed by trust
Shares donated to trust
Warrant exercises
RSS compensation
Equity based compensation – tax
Equity based compensation – exercises
Equity based compensation – expense
As at 31 December 2014
Purchase of shares by trust
Distributed by trust
Warrant exercises
Equity based compensation – tax
Equity based compensation – exercises
Equity based compensation – expense
As at 31 December 2015
Contributed surplus
$m
633.1
192.2
(0.6)
(28.3)
8.1
22.4
(9.8)
–
21.3
–
838.4
8.8
(17.2)
(4.2)
–
13.8
–
839.6
Equity based
compensation
$m
67.8
–
–
–
–
(16.7)
–
(4.4)
(21.3)
23.3
48.7
–
–
(9.6)
0.1
(13.8)
15.8
41.2
Total other
reserves
$m
700.9
192.2
(0.6)
(28.3)
8.1
5.7
(9.8)
(4.4)
–
23.3
887.1
8.8
(17.2)
(13.8)
0.1
–
15.8
880.8
Equity based compensation reserves represent the fair value, at the grant date, of all outstanding RSS options and management team
ordinary and performance warrants held by employees, adjusted for any applicable performance conditions. Refer to note 6 for changes
in the number of warrants held by employees.
Given the equity nature of the Founder warrants, they are recorded net within other reserves. Founder warrants exercised during the
year ended 31 December 2015 were $39.4 million (31 December 2014 – $10.6 million). The changes in the number of warrants held
by non-employees are as follows:
Outstanding and exercisable as at 31 December 2013
Exercised
Outstanding and exercisable as at 31 December 2014
Exercised
Outstanding and exercisable as at 31 December 2015
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
19,074,787
648,143
2,350,000
(4,042,108)
–
–
15,032,679
648,143
2,350,000
(15,032,679)
(648,143)
(2,350,000)
–
–
–
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2015
–
$9.98
2014
1.0 year
$11.25
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www.lancashiregroup.com
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FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
25. COMMITMENTS
A. LEASE COMMITMENTS
The Group has payment obligations in respect of operating leases for certain items of office equipment and office space. Operating
lease expenses for the year were $3.4 million (2014 – $3.8 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
2015
$m
1.1
12.7
36.6
50.4
2014
$m
1.1
11.4
41.2
53.7
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.
B. CREDIT FACILITY FUND
At as 31 December 2015 the Group has a commitment of $50.0 million (31 December 2014 – $nil) relating to a credit facility fund
(refer to note 11).
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
Earnings per share
Basic
Diluted
2015
$m
181.1
2015
Number
of shares
2014
$m
229.3
2014
Number
of shares
195,649,042
185,558,086
2,982,711
2,442,255
–
10,112,990
198,631,753
198,113,331
2015
$0.93
$0.91
2014
$1.24
$1.16
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.
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Lancashire Holdings Limited | Annual Report & Accounts 2015
27. RELATED PARTY DISCLOSURES
The consolidated financial statements include LHL and the entities listed below:
Name
Subsidiaries1
LICL
KCML2
KCMMSL
LIHL
LIMSL
LISL
LUK
LMSCL
CCIL3
CCHL
CCL
CCL 1998
CCL 1999
CCL 20004
CCML5
CCSL
CUL
Associate
KHL
Other controlled entities
LHFT
EBT
Principal Business
Domicile
General insurance business
Insurance management services
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
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
Holding company
Bermuda
Trust
Trust
United States
Jersey
(1) Unless otherwise stated, the Group owns 100 per cent of the ordinary share capital and voting rights in its subsidiaries listed below.
(2) 92.68 per cent owned by the Group.
(3) CCIL was dissolved on 4 February 2016.
(4) CCL 2000 was dissolved on 4 February 2016.
(5) CCML was dissolved on 4 February 2016.
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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 trustee of the EBT. The Facility is an interest
free revolving credit facility under which the trustee can request advances on demand, within the terms of the Facility, up to a maximum
aggregate of $60.0 million. The Facility may only be used by the trustee for the purpose of achieving the objectives of the EBT. During
the year ended 31 December 2015, the Group had made advances of $9.0 million (2014 – $5.0 million) to the EBT under the terms of
the Facility.
During the year ended 31 December 2015, the Group issued 1,000,000 shares to the EBT at a total par value of $0.5 million. During
the year ended 31 December 2014, the Group donated 2,394,377 treasury shares to the EBT at the prevailing market rate. The total
value of the treasury share donation was $24.9 million.
LICL holds $308.1 million (2014 – $346.1 million) of cash and cash equivalents and fixed income securities in trust for the benefit of
LUK relating to intra-group reinsurance agreements.
During 2014, LHL and members of the Group’s senior management team purchased shares in KCML from Richard Brindle, the Group’s
former CEO. 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
2015
$m
4.1
3.3
1.9
9.3
2014
$m
3.3
7.5
2.2
13.0
(1) The year ended 31 December 2014 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 for the year ended 31 December 2014 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. 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 $nil (2014 – $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.
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Lancashire Holdings Limited | Annual Report & Accounts 2015
TRANSACTIONS WITH ASSOCIATES
In relation to transactions with ARL, the following amounts were included in the consolidated statement of comprehensive income:
For the year ended
Consolidated statement of comprehensive income
Outwards reinsurance premiums
Insurance loss and loss adjustment expenses recoverable
Insurance acquisition expenses ceded
2015
$m
–
–
–
2014
$m
0.6
(6.9)
6.8
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 2015,
the Group recognised $12.9 million (31 December 2014 – $6.2 million) of service fees and profit commissions in other income in relation
to this agreement.
During 2015, the Group committed an additional $23.5 million (31 December 2014 – $27.8 million) of capital to KHL. During 2015,
KHL returned $32.8 million (31 December 2014 – $nil) of capital to the Group.
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.
Refer to note 17 for further details on the Group’s investment in associate.
28. NON-CASH TRANSACTIONS
During 2015, the Group issued new common shares to satisfy the exercises of warrants and future exercises of RSS in the amount of
$4.6 million (31 December 2014 – $3.4 million); refer to note 23. On 25 June 2014, following shareholder approval on 30 April 2014,
LHL transferred $192.2 million from share premium to contributed surplus. Refer to note 24 for further details.
I
F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S
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www.lancashiregroup.com
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FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
29. 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 shareholders 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
2015
LICL
$m
938.1
128.9
LUK
$m
165.6
35.5
2014
LICL
$m
1,009.5
233.7
LUK
$m
182.2
37.2
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 2015 and 2014 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.
Solvency II, a new regulatory regime for (re)insurance in the European Economic Area, introduces a new basis for assessing capital.
This assessment includes a market-consistent economic balance sheet and an SCR, using either an internal model or the standard
formula. It will impact the Group, LUK and CCL (as part of Lloyd’s) and is effective from 1 January 2016. The Group has implemented
the new requirements and, as part of the preparatory phase, provided interim information on this basis to regulators in 2015. This
information demonstrated that the Group and LUK were more than adequately capitalised for supervisory and regulatory purposes
under Solvency II regulations.
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. Solvency II internal models have been used to determine capital requirements for Syndicate 2010 and
Syndicate 3010 based on the uSCR. Lloyd’s has the discretion to take into account other factors at 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 and this is regarded as the minimum capital requirement for the business.
Lloyd’s then uses each syndicate’s ECA as a basis for determining member level capital requirements, which are backed by FAL.
For the 2016 calendar year the Group’s initial FAL requirement was set at 56.8 per cent (2015 – 53.9 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 £157.3 million as at 31 December 2015
(31 December 2014 – £149.3 million).
As at 31 December 2015 and 2014 the capital requirements of all the regulatory jurisdictions were met.
30. COMPARATIVE INFORMATION
Certain comparative figures have been re-presented to conform to the presentation adopted for 2015.
31. SUBSEQUENT EVENTS
DIVIDEND
On 17 February 2016 the Board of Directors declared the payment of an ordinary dividend of $0.10 per common share to shareholders of
record on 26 February 2016, with a settlement date of 23 March 2016. The ordinary dividend payable will be approximately $19.8 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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SHAREHOLDER INFORMATION
ANNUAL GENERAL MEETING
The Company’s AGM is scheduled for 4 May 2016. 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”, “likely”, “will”, “seeks”,
“should” or, in each case, their negative or comparable
terminology and similar statements are of a future or forward-
looking nature. All forward-looking statements address matters
that involve 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;
changes by central banks regarding the level of interest rates;
the impact of inflation or deflation in relevant economies in
which the Group operates; the effect, timing and other
uncertainties surrounding future business combinations within
the insurance and reinsurance industries; the impact of terrorist
activity in the countries in which the Group writes risks; a rating
downgrade of, or a market decline in, securities in its investment
portfolio; changes in governmental regulations or tax laws in
jurisdictions where the Group conducts business; Lancashire or its
Bermudian subsidiaries becoming subject to income taxes in the
United States or the Bermudian subsidiaries becoming subject to
income taxes in the United Kingdom; the inapplicability to the
Group of suitable exclusions from the UK CFC regime; any change
in the UK government policy which impacts the CFC regime or
other tax changes. 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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FINANCIAL STATEMENTS
GLOSSARY
ABS
Asset backed securities
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
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
AGM
Annual General Meeting
AHL
Accordion Holdings 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
ANP
All natural perils
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
CATHEDRAL; CATHEDRAL GROUP
Refers to CCL and all direct and indirect subsidiaries of CCL
CCHL
Cathedral Capital Holdings Limited
CCIL
Cathedral Capital (Investments) Limited
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CEDED
To transfer insurance risk from a direct insurer to a reinsurer
and/or from a reinsurer to a retrocessionaire
CEND
Confiscation, Expropriation, Nationalisation and Deprivation
CEO
Chief Executive Officer
CFC
Controlled Foreign Company
CFO
Chief Financial Officer
CGU
Cash generating unit
CMBS
Commercial mortgage backed securities
THE CODE
UK Corporate Governance Code published by the UK FRC
COMBINED RATIO
Ratio, in per cent, of the sum of net insurance losses, net
acquisition expenses and other operating expenses to net
premiums earned
CONSOLIDATED FINANCIAL STATEMENTS
Includes the independent auditors’ report, consolidated primary
statements, accounting policies, risk disclosures and related notes
CONSOLIDATED PRIMARY STATEMENTS
Includes the consolidated statement of comprehensive income,
consolidated balance sheet, consolidated statement of changes in
shareholders’ equity and the statement of consolidated cash flows
COVERHOLDER AT LLOYD’S
A coverholder is a company or partnership authorised by a
managing agent to enter into a contract or contracts of insurance
to be underwritten by the members of a syndicate managed by
it in accordance with the terms of a binding authority
CRO
Chief Risk Officer
CSX
Cayman Islands Stock Exchange
CUL
Cathedral Underwriting Limited
CUO
Chief Underwriting Officer
FAL
Funds at Lloyd’s
FCA
Financial Conduct Authority
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
DIVIDEND YIELD
Calculated by dividing the annual dividends per share by the
share price on the last day of the given year
DURATION
Duration is the weighted average maturity of a security’s cash flows,
where the present values of the cash flows serve as the weights
The effect of the convexity, or sensitivity, of the portfolio’s response
to changes in interest rates is also factored in to the calculation
EARNINGS PER SHARE (EPS)
Calculated by dividing net profit for the year attributable to
shareholders by the weighted average number of common
shares outstanding during the year, excluding treasury shares
and shares held by the EBT
EBT
Lancashire Holdings Employee Benefit Trust
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
FRC
Financial Reporting Council
FSMA
The Financial Services and Markets Act 2000 (as amended
from time to time)
FULLY CONVERTED BOOK VALUE PER SHARE (FCBVS)
Calculated by dividing the value of the total shareholders’ equity
plus the proceeds that would be received from the exercise of all
dilutive equity compensation awards, by the sum of all shares,
including equity compensation awards assuming all are exercised
FVTPL
Fair value through profit or loss
G10
Belgium, Canada, Germany, France, Italy, Japan, the Netherlands,
Sweden, the United Kingdom, and the United States
GOM
Gulf of Mexico
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
ECA
Economic Capital Assessment
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
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
THE GROUP
LHL and its subsidiaries
HMRC
Her Majesty's Revenue & Customs
ICA
Individual capital assessment
ICG
Individual capital guidance
ICM
International Care Ministries
IFRIC
International Financial Reporting Interpretations Committee
IFRS
International Financial Reporting Standard(s)
IGPIA
International Group of Protection and Indemnity Associations
ILS
Insurance linked securities
www.lancashiregroup.com
www.lancashiregroup.com
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FINANCIAL STATEMENTS
GLOSSARY CONTINUED
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
LHL (THE COMPANY)
Lancashire Holdings Limited
LIBOR
London Interbank Offered Rate
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
ISA
International Standards on Auditing (UK and Ireland)
ISE
Irish Stock Exchange
KCML
Kinesis Capital Management Limited
KCMMSL
KCM Marketing Services Limited
KHL
Kinesis Holdings I Limited
KINESIS
The Group’s third-party capital management division
encompassing KCML, KCMMSL and the management of KHL
and KRL
KRL (KINESIS RE)
Kinesis Reinsurance I Limited
LANCASHIRE COMPANIES
Refers to the Group excluding Cathedral and Kinesis
LANCASHIRE FOUNDATION OR FOUNDATION
The Lancashire Foundation is a charity registered in England
and Wales
LHFT
Lancashire Holdings Financing Trust I
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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
LTIP
Long-term incentive plan
LUK
Lancashire Insurance Company (UK) Limited
M&A
Mergers and acquisitions
MBRT
Multi-beneficiary reinsurance trust
MBS
Mortgage backed securities
MOODY’S INVESTORS SERVICES (MOODY’S)
Moody's Corporation is the parent company of Moody's Investors
Service, which provides credit ratings and research covering debt
instruments and securities, and Moody's Analytics, which offers
software, advisory services and research for credit and economic
analysis and financial risk management
NAMES
An individual member underwriting with unlimited liability.
Since 6 March 2003 no person has been admitted as a new
member to underwrite on an unlimited basis
NAV
Net asset value
GLOSSARY CONTINUED
events which have taken place, but for which no losses have yet
been reported. IBNR also includes a reserve for possible adverse
development of previously reported losses
INDUSTRY LOSS WARRANTY (ILW)
A type of reinsurance or derivative contract through which one
party will purchase protection based on the total loss arising
from an event to the entire insurance industry rather than their
own losses
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
Internal rate of return
Investment Risk and Return Committee
International Standards on Auditing (UK and Ireland)
IRR
IRRC
ISA
ISE
KCML
KCMMSL
KHL
KINESIS
and KRL
Irish Stock Exchange
Kinesis Capital Management Limited
KCM Marketing Services Limited
Kinesis Holdings I Limited
KRL (KINESIS RE)
Kinesis Reinsurance I Limited
LANCASHIRE COMPANIES
LIBOR
LICL
LIHL
LIMSL
LISL
LSE
LTIP
LUK
M&A
MBRT
MBS
London Interbank Offered Rate
Lancashire Insurance Company Limited
Lancashire Insurance Holdings (UK) Limited
Lancashire Insurance Marketing Services Limited
Lancashire Insurance Services Limited
LISTING RULES
The listing rules made by the FCA under part VI of FSMA
(as amended from time to time)
Lancashire Management Services (Canada) Limited
LLOYD’S
The Society of Lloyd’s
LMSCL
LOC
Letter of credit
LOSSES
London Stock Exchange
Long-term incentive plan
Demand by an insured for indemnity under an insurance contract
Lancashire Insurance Company (UK) Limited
Mergers and acquisitions
Multi-beneficiary reinsurance trust
Mortgage backed securities
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
The Group’s third-party capital management division
MOODY’S INVESTORS SERVICES (MOODY’S)
encompassing KCML, KCMMSL and the management of KHL
Moody's Corporation is the parent company of Moody's Investors
Refers to the Group excluding Cathedral and Kinesis
NAMES
LANCASHIRE FOUNDATION OR FOUNDATION
The Lancashire Foundation is a charity registered in England
An individual member underwriting with unlimited liability.
Since 6 March 2003 no person has been admitted as a new
member to underwrite on an unlimited basis
and Wales
LHFT
Lancashire Holdings Financing Trust I
NAV
Net asset value
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INCURRED BUT NOT REPORTED (IBNR)
LHL (THE COMPANY)
These are anticipated or likely losses that may result from insured
Lancashire Holdings Limited
NBS
New Bridge Street (a trading name of Aon Hewitt Limited)
RSS
Restricted share scheme
NET ACQUISITION COST RATIO
Ratio, in per cent, of net acquisition expenses to net
premiums earned
NET LOSS RATIO
Ratio, in per cent, of net insurance losses to net premiums earned
NET OPERATING 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
PRO-RATA/PROPORTIONAL
Reinsurance or insurance where the reinsurer or insurer shares
a proportional part of the original premiums and losses of
the reinsured or insured
RCF
Revolving credit facility
RDS
Realistic Disaster Scenarios
RETROCESSION
The reinsurance of a reinsurance account
RETURN ON EQUITY (RoE)
The IRR of the change in FCBVS in the period plus
accrued dividends
RMBS
Residential mortgage backed securities
RMS
Risk Management Solutions
RPI
Renewal Price Index
RRC
Risk and Return Committee
RROC
Regulatory Reporting Oversight Committee
RSC
Reinsurance Security Committee
SATEC
SATEC Underwriting, a privately owned insurance underwriting
agency operating at national and international level in specialty
classes of business. SATEC Underwriting is a coverholder at Lloyd’s
SCR
Solvency Capital Requirement
SHARP
Lancashire’s in house aggregation system
SHL
Saltire Holdings I Limited
SRL (SALTIRE)
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
THE SYNDICATES
Syndicate 2010 and 3010
TOTAL SHAREHOLDER RETURN (TSR)
The IRR of the increase/ (decrease) in share price in the period,
measured in U.S. dollars, adjusted for dividends
TREATY REINSURANCE
A reinsurance contract under which the reinsurer agrees to offer
and to accept all risks of a certain size within a defined class
UK
United Kingdom
UMCC
Underwriting and Marketing Conference Call
UNEARNED PREMIUMS
The portion of premium income that is attributable to periods
after the balance sheet date that is deferred and amortised to
future accounting periods
UNL
Ultimate net loss
USCR
Ultimate solvency capital requirement
U.S. GAAP
Accounting principles generally accepted in the United States
VALUE AT RISK (VAR)
A measure of the risk of loss of a specific portfolio of
financial assets
www.lancashiregroup.com
www.lancashiregroup.com
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FINANCIAL STATEMENTS
KINESIS
Kinesis Capital Management Limited
Power House
7 Par-la-Ville Road
Hamilton HM 11
Bermuda
Phone: + 1 441 278 8950
Fax: + 1 441 278 8951
LEGAL COUNSEL TO THE COMPANY
AS TO ENGLISH AND U.S. LAW:
Willkie Farr & Gallagher (UK) LLP
City Point
1 Ropemaker Street
London EC2Y 9AW
United Kingdom
AS TO BERMUDA LAW:
Conyers Dill & Pearman Limited
Clarendon House
2 Church Street
Hamilton HM 11
Bermuda
AUDITORS
Ernst & Young LLP
25 Churchill Place
Canary Wharf
London E14 5EY
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 2015
Lancashire Holdings Limited | Annual Report & Accounts 2015
Visit our corporate website for more information:
http://www.lancashiregroup.com
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www.lancashiregroup.com