BALANCE
IS OUR FOCUS
Annual Report & Accounts 2016
L
a
n
c
a
s
h
i
r
e
H
o
l
d
i
n
g
s
L
i
m
i
t
e
d
A
n
n
u
a
l
R
e
p
o
r
t
&
A
c
c
o
u
n
t
s
2
0
1
6
STRATEGIC REPORT
Overview
2 Our investment proposition
10 Chairman’s statement
12 Our business model
Strategy
14 Chief Executive’s review
16 Our strategy
Performance
18 Financial review
20 Key performance indicators
22 Underwriting review
24 Business review
31 Enterprise risk management
34 Principal risks
36 Corporate responsibility
GOVERNANCE
42 Chairman’s introduction
44 Board of Directors
47 Corporate governance report
50 Committee reports
61 Directors’ remuneration report
80 Directors’ report
84 Statement of Directors’ responsibilities
FINANCIAL STATEMENTS
85 Independent auditors’ report
91 Consolidated primary financial statements
95 Accounting policies
101 Risk disclosures
129 Notes to the accounts
Additional information
155 Shareholder information
156 Glossary
160 Contact information
RETURN ON
EQUITY
COMBINED
RATIO
PROFIT
AFTER TAX
13.5%
(2015: 10.9%)*
76.5%
(2015: 72.1%)
$153.8m
(2015: $181.1m)
(2015: 0.7%)
TOTAL
INVESTMENT
RETURN
2.1%
DIVIDEND
YIELD
10.5%
(2015: 17.3%)
TOTAL
SHAREHOLDER
RETURN
2.4%
(2015: 25.9%)
.
1
8
9
*
1
6
7
*
.
7
0
2
.
6
8
7
.
6
3
9
.
.
1
3
9
*
1
3
5
.
.
1
0
9
*
7
6
5
.
7
2
.
1
2
3
4
9
.
2
2
9
3
.
2
2
2
5
.
3
.
1
1
7.
8
1
7.
3
2
1
.
6
2
1
.
3
2
5
9
.
2
.
1
1
2
3
.
8
3
.
1
0
5
.
.
2
4
-
2
4
2
.
1
8
1
.
1
1
5
3
8
.
1
.
0
0
7
.
0
3
.
12 13 14 15 16
12 13 14 15 16
12 13 14 15 16
12 13 14 15 16
12 13 14 15 16
12 13 14 15 16
* RoE excluding the impact of warrants was 13.5% in 2015, 14.7% in 2014, 18.9% in 2013 and 17.1% in 2012.
FOCUS ON
MAINTAINING
BALANCE
Lancashire is a provider of global specialty insurance and reinsurance products operating
in Bermuda and London across three platforms: rated insurers, Lloyd’s and collateralised
security. The Group focuses on short-tail, mostly direct, specialty (re)insurance risks
under five general categories: Property, Energy, Marine, Aviation and Lloyd’s.
Markets continue to be difficult to navigate, yet we have again delivered strong returns
by staying focused on balancing our risks to maximise returns while remaining ready for
a change in market conditions. We are guided by our three consistent strategic maxims:
• underwriting comes first;
• effectively balance risk and return; and
• operate nimbly through the cycle.
We manage the insurance cycle so we can continue to deliver greater value for our clients
and shareholders.
www.lancashiregroup.com
1
OVERVIEW
OUR INVESTMENT PROPOSITION
OUR STRATEGY
IS BALANCED…
… to produce a consistently high
performance in volatile markets
Lancashire has one of the best performances and yet lower
volatility in the London and Bermudian markets, and has
a proven record of returning excess capital to shareholders.
… to deliver superior returns
across the cycle
Our strategy is designed to cope with hard and soft
markets, managing capital and exposures to provide
superior risk-adjusted returns across the cycle.
(1) RoE including the impact of warrants.
… by the experience of our underwriters,
to produce higher returns across the cycle
Group management and our underwriters have
decades of experience in rated companies, Lloyd’s
and collateralised markets.
(1) Ten-year average based on 2007 to 2016 reporting periods. Lancashire ratios weighted by annual
net premiums earned. Annual sector ratios are weighted by annual net premiums earned.
(2) Sector includes Arch, Argo, Aspen, Axis, Beazley, Everest, Hanover, Hiscox, Novae,
Renaissance Re and Validus. 2016 results for Hiscox and Novae not available at time of report.
Source: Company reports
2
Lancashire Holdings Limited | Annual Report & Accounts 2016
PROVEN RECORD OF ACTIVE CAPITAL MANAGEMENT
500
400
)
m
$
(
300
200
100
0
300
250
200
150
100
50
0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Share repurchases
Special dividend
Ordinary dividends
Percentage of IPO capital returned
TEN-YEAR RETURN ON EQUITY1
y
t
i
u
q
E
n
o
n
r
u
t
e
R
35
30
25
20
15
10
5
0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
TEN-YEAR COMBINED RATIO
o
i
t
a
r
d
e
n
b
m
o
C
i
120
100
80
60
40
20
0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Lancashire
Sector2 average
Lancashire – 10-year average1
Sector average – 10-year average1
… across sectors
and geographies
A well-diversified portfolio across multiple lines and
geographies as a base to trade across the cycle.
GROSS PREMIUMS WRITTEN BY CLASS AND REGION
PROPERTY
LLOYD’S
ENERGY
MARINE
AVIATION
34.6%
33.9%
19.9%
5.9%
5.7%
U.S. AND CANADA
WORLDWIDE OFFSHORE
WORLDWIDE, INCLUDING
THE U.S. AND CANADA
EUROPE
FAR EAST
WORLDWIDE, EXCLUDING
THE U.S. AND CANADA
MIDDLE EAST
REST OF WORLD
28.4%
25.5%
18.2%
7.4%
4.6%
2.4%
2.1%
11.4%
… by diversification across our platforms
RETURN ON EQUITY BY PLATFORM
and delivering on all three
.
9
3
%
9
.
1
%
Each of our platforms makes a positive contribution
to the Group’s RoE.
.
3
6
%
.
3
4
%
.
0
8
%
.
0
8
%
2015 2016
Lancashire
Cathedral
Kinesis
15 16
Note: 2015 RoE is excluding warrants.
15 16
15 16
… to protect our assets
INVESTMENT ASSET ALLOCATION
We hedge our interest rate risk with risk assets and aim
to minimise the downside on our investment portfolio.
DURATION
1.8 years
CASH AND SHORT-TERM
INVESTMENTS
U.S. GOVERNMENT BONDS
AND AGENCY DEBT
OTHER GOVERNMENT BONDS
CORPORATE AND BANK LOANS
NON-AGENCY STRUCTURED
PRODUCTS
AGENCY STRUCTURED
PRODUCTS
HEDGE FUNDS
OTHER
10.7%
21.1%
4.4%
39.1%
7.3%
6.4%
7.0%
4.0%
TOTAL PORTFOLIO AT 31 DECEMBER 2016
CREDIT QUALITY
$1,840.5
A+
www.lancashiregroup.com
3
OVERVIEW
DISCIPLINED
UNDERWRITING
MAINTAINING
BALANCE
4
Lancashire Holdings Limited | Annual Report & Accounts 2016
UNDERWRITING COMES FIRST
Maintaining the right balance between discipline and creativity
is key for success. Underwriting discipline in challenging
markets means we continue to focus on the profitability of our
book, and therefore produce a market leading combined ratio.
We remain creative in being able to provide tailored insurance
and reinsurance products and solutions to our core clients
across the three platforms of our business.
CONSISTENT COMBINED RATIO
OUTPERFORMANCE
COMBINED RATIO
The Group’s combined ratio has always been significantly below 100%,
despite the softening market rates of recent years. The Group has
consistently achieved combined ratios that have outperformed the market.
76.5%
5 YEAR AVERAGE: 70.3%
76.5
70.2
68.7
72.1
63.9
2012
2013
2014
2015
2016
www.lancashiregroup.com
5
OVERVIEW
REDUCING
VOLATILITY
MAINTAINING
BALANCE
6
Lancashire Holdings Limited | Annual Report & Accounts 2016
EFFECTIVELY BALANCE RISK AND RETURN
Balancing risk and return means not seeking top line growth
for the sake of it in markets where we do not believe the right
opportunities exist. We match our capital to the risk we are
prepared to underwrite, not the other way around. We bring
together all our disciplines to look at how different parts of
our operations are working together. Then we stress test our
business plans and gauge where we can be most effective
without undue volatility.
ATTRACTIVE RISK-ADJUSTED TOTAL RETURNS
OVER THE LONG TERM
RETURN ON EQUITY
A strong result, despite a difficult market and the incidence of risk
losses, helped by further enhancements in the Group’s outwards
reinsurance programme.
13.5%
18.9*
16.7*
5 YEAR AVERAGE: 14.8%
13.9*
13.5
10.9*
2012
2013
2014
2015
2016
* RoE excluding the impact of warrants was 13.5% in 2015, 14.7% in 2014, 18.9% in 2013 and 17.1% in 2012. The five year average was 15.5%.
www.lancashiregroup.com
7
OVERVIEW
REMAINING
NIMBLE
MAINTAINING
BALANCE
8
Lancashire Holdings Limited | Annual Report & Accounts 2016
OPERATE NIMBLY THROUGH THE CYCLE
Our speed and agility in the way we manage volatility
help us underwrite our core portfolio profitably through
the challenges of the cycle, yet seize opportunities when
they present themselves. As capital continues to enter 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.
PROVEN OUTPERFORMANCE IN
CHALLENGING TIMES
PERCENTAGE OF COMPREHENSIVE INCOME RETURNED TO SHAREHOLDERS
The Group continues to exercise the discipline of giving back capital it cannot profitably
deploy, while maintaining sufficient headroom to take advantage of new opportunities
as they emerge.
113.3%
5 YEAR
AVERAGE:
140.7%
171.4
152.3
187.0
79.7
INCEPTION
TO DATE: 103.4%*
113.3
2012
2013
2014
2015
2016
* The inception to date percentage is calculated on a paid basis; including the final dividend of $0.10, the percentage increases to 104.2%.
www.lancashiregroup.com
9
OVERVIEW
CHAIRMAN’S STATEMENT
ENSURING
BALANCE
Lancashire’s results, in a challenging
market, are a testament to our
steadfast maintenance of our core
business and disciplined trimming
of risk, as we prepare for the day
the market hardens.
PETER CLARKE
Non-Executive Chairman
What were the challenges for the business
during 2016?
Has Lancashire’s dividend and capital
management strategy changed?
The insurance business environment has remained difficult
during 2016, as described elsewhere in this report. Against
this background I congratulate our management team on
an excellent set of results. The Board has debated long and
hard about the implementation of strategy in these difficult
insurance and investment market environments, and
unexpected developments in the global political and
economic spheres have added their own depth and colour
to this complex picture. We are wholly supportive of Alex and
his management team in seeking to maintain the Group’s
core book of business at this challenging point in the
insurance cycle, whilst managing exposures through prudent
underwriting and the strategic purchasing of reinsurance.
This requires experience, discipline, patience and an
acknowledgement that over the short to medium term the
returns in our business may be lower than those that we have
aimed to achieve over the full span of the insurance cycle.
Another challenge and opportunity for the Group during
2016 was the project to refresh our Lloyd’s business. I explain
the work that has been done in recruiting new independent
Non-Executive Directors to the Board of CUL in my introduction
to the Governance section of this Annual Report and Accounts
(see page 43), and Alex has described the work that is being
carried out in refreshing and refocusing the Cathedral
management and underwriting teams in his review
(see page 15).
I am pleased that Lancashire has declared ordinary and special
dividends for the 2016 year amounting in total to $0.90 per
common share. In the current environment the Board has
decided to return slightly more than the comprehensive
income for the year, whilst maintaining more than sufficient
capital reserves to implement our current underwriting
strategy. As a business we carefully consider the balance of risk
and return when setting our capital levels, and this has enabled
us to return earnings plus a little bit of our risk capital. An
important element to this active capital management strategy
is the flexibility afforded to us by shareholders during the last
five years to issue up to 15 per cent of Lancashire’s shares on a
non pre-emptive basis. The best opportunities in the insurance
and reinsurance sectors arise following major loss events, and
the flexibility afforded by this mechanism (to issue shares and
raise capital relatively quickly) is a central pillar of our business
strategy, and will help Lancashire maximise underwriting
opportunities for the business. Once again the Company is
seeking shareholder support for resolutions at the 2017 AGM
allowing this capital management flexibility, and I would
encourage all shareholders to vote in favour.
10
Lancashire Holdings Limited | Annual Report & Accounts 2016
Has the UK’s Brexit vote affected
Lancashire’s business?
Why is Lancashire proposing a change of
auditors in 2017?
It is fair to say that the outcome of the UK Brexit
referendum surprised many, and that there will remain
areas of uncertainty for the next several years. Lancashire’s
earnings are predominantly in U.S. dollars, so the devaluation
of Sterling in the wake of the vote had a beneficial outcome for
our UK investors and was largely neutral for our international
shareholders. In terms of business flows, the Group has a
proportionately smaller exposure to European-situated risks
and insurers than to other geographic areas. I remain confident
that, whether through our London, Lloyd’s or Bermuda
offices, Lancashire will continue to have opportunities
and a range of options to underwrite European risks for
the foreseeable future. When there is clarity around what
Brexit really means we will take any necessary actions.
At Lancashire’s 2017 AGM the Board will be proposing
a resolution to our shareholders to appoint KPMG as our
external auditors. EY have served as our external auditors since
Lancashire’s foundation in 2005. As part of our focus on
strong corporate governance, the Board, led by the Audit
Committee, conducted a rigorous tender process with several
audit firms during the spring and summer of 2016 (see page
54 of the Audit Committee report for more detail). This has
resulted in the recommendation to appoint KPMG as our
auditors. I would like to thank all the participating audit
firms for the time and resources devoted to the process
and EY for their service over the years.
“We are wholly supportive of Alex and his
management team in seeking to maintain
the Group’s core book of business at this
challenging point in the insurance cycle.”
Peter Clarke
Non-Executive Chairman
What are Lancashire’s expectations for 2017?
Lancashire’s Board has considered the challenges of the
current market. Within this context the Group has, since its
inception to the end of 2016, generated compound annual
RoE, excluding the impact of warrants, of 18.6 per cent
which exceeds our stated long-term objective of generating
a risk-adjusted RoE of 13 per cent in excess of the risk-free
rate over the insurance cycle. The ‘insurance cycle’ is not
difficult to understand in terms of its drivers and outputs, the
flows of capital and the economic laws of supply and demand,
but it is more difficult to define in terms of its expected or
anticipated duration. What we know is that we are now at a
point in the insurance cycle where an excess of capital and
historically low investment returns mean that all disciplined
insurers are operating on tighter margins and generating
lower returns than they have done historically. The coming
year will continue to be about implementing a core defensive
strategy, ensuring that Lancashire is ready for the day when the
market hardens. In this environment we expect Lancashire’s
returns for the near future to be lower than our stated
cross-cycle objective.
GOVERNANCE STATEMENT
Lancashire strives to implement simple yet effective
systems of corporate governance in a way that helps
shape strategy, monitors its implementation, balances
support and challenge for management and the
business and embeds a positive and open corporate
culture throughout the Group.
Total investment return
Dividend yield
2.1%
10.5%
Read pages 20 and 21
www.lancashiregroup.com
11
OVERVIEW
OUR BUSINESS MODEL
THREE PLATFORMS
BALANCED BY ONE 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.
A N C A S H I R E HOLDINGS LIMITED
L
RESP
O
N
SIBILITY
S
T
N
E
I
L
C
LANCASHIRE
N
R
U
T
E
R
UNDERWRITING
AND CAPITAL
MANAGEMENT
M
A
R
K
E
T
S
CATHEDRAL
KINESIS
R
I
S
K
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 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 36 to 41).
12
Lancashire Holdings Limited | Annual Report & Accounts 2016
Lancashire
Cathedral
Kinesis
KEY STRENGTHS
• Strong brand with clients and brokers
• Recognised for significant capacity and
• Manages two active syndicates
• Strong relationships with clients
leadership ability in well-defined
business sectors
• Proven track record of supplying
capacity across the cycle with
consistently high performance
• A lean business operation allows
us to remain nimble and make
decisions efficiently
• A profitable core book of business and
disciplined underwriting allows us to
produce an excellent combined ratio
• Strong record of capital management
actions to optimise and adjust capital
and navigate market cycles
and brokers
• Recognised for long-term consistency
of relationships
• Efficient Lloyd’s capital model allowing
Cathedral greater premium leverage than
for rated companies
• Worldwide licensing maintained
by Lloyd’s allows Cathedral to write
business worldwide with limited
regulatory overheads
• Use of world’s oldest insurance
third-party capital – the Names –
who pay underwriting fees, costs
and profit commission
• Experienced management team with
• Proven track record with more than three
proven ability
years under Lancashire ownership
• Experienced, fully dedicated
management with strong relationships
with clients, brokers and investors
• Ability to leverage Group data,
relationships and reputation with
investors and clients
• Highly specialised multi-class product
with barriers to entry in terms of data
and modeling expertise
• Ability to raise and deploy capital quickly
• Expanding investor base following
a strong underwriting performance
since the first capital raise in 2014
• Proven track record with Kinesis now
in its fourth year
GOALS
• Maintain key client, broker and reinsurer
relationships to ensure the continued
flow of business
in a climate of ever increasing
competition
• Continue the use of reinsurance
• Continue to look for new opportunities
solutions to uphold risk-adjusted balance
in softening markets
for bolt on business lines in both
syndicates
• Maintain core portfolios in the syndicates
• Ensure product is correctly calibrated
to meet clients’ needs in terms of
responding to events and providing
capital relief
• Deliver returns in line with expectations
for modeled ranges given market losses
and pricing
• Leverage the Group’s balance sheet and
cross-sell where opportunities arise
• Continue to increase investor club
members
• Provide bespoke and flexible products
to match investor appetite
• Retain ‘underwriting comes first’ culture
and discipline without being tempted
into innovation or diversification for
its own sake
RISKS
• Influx of new capacity, and further
• Pressure on signings and participation
• Increased competition from traditional
development of broker facilities with less
robust underwriting controls
• Continuing rate pressures in softening
markets
given relatively small line sizes
• Expanded burden of regulatory oversight
or overlapping regulation from Lloyd’s,
the PRA and the FCA
• Widening terms and conditions being
accepted by the insurance market
without adequate pricing or exclusions
and collateralised markets, with attempts
to replicate the Kinesis product
• Possible waning of investor interest in
insurance allocations as interest rates
begin to increase and yields return to
capital markets
• Resistance to complex reinsurance
products amongst clients, given cheap
availability of traditional products
RETURN
72.5%
83.7%
0.8%
Lancashire Companies’ combined ratio
Cathedral’s combined ratio
Kinesis contribution to Group RoE
www.lancashiregroup.com
13
OVERVIEW
CHIEF EXECUTIVE’S REVIEW
BALANCING
RISK AND
REWARD
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 to us.
RETURN ON EQUITY
13.5%
COMBINED RATIO
76.5%
PROFIT AFTER TAX
$153.8m
Did Lancashire perform as you expected in 2016?
We’ve had a good set of results for 2016 with an RoE of
13.5 per cent and a combined ratio of 76.5 per cent. Whilst
these figures are the product of our disciplined underwriting
and risk selection, they do tend to mask a difficult trading
environment. I have spoken regularly about the current
over-supply of capital and the resulting imbalance which
this generates, leading to downwards pressure on pricing
and coverage terms within the international insurance and
reinsurance markets. Those conditions persisted in 2016,
influenced in part by another year of modest catastrophe
losses across the insurance industry. There has been little sign
of improvement as we enter 2017, other than some evidence
of a slowing of the rate of decline in pricing, principally in
the property catastrophe reinsurance lines.
14
Lancashire Holdings Limited | Annual Report & Accounts 2016
ALEX MALONEY
Group Chief Executive Officer
Are these market conditions ‘the new normal’?
I firmly believe that the insurance business is cyclical. We are
now trading through what I consider to be a low point in the
cycle. For a moment in early October 2016 the world watched
as Hurricane Matthew caused devastation and tragic loss of life.
It moved through the Caribbean to then skirt along the Florida
coast and make landfall in South Carolina. As events developed
the trajectory took the storm towards less densely populated
areas. What might have been a major loss to the industry, in
excess of those losses we have seen in recent years, in fact
caused insured losses of a more attritional nature. There was
erosion of earnings rather than serious capital impairment.
However, Matthew illustrates that the market is operating
at the very margins of profitability and that any material
catastrophe loss could result in meaningful capital impairment.
Macro-economic conditions and capital flows will change and
catastrophe loss events will occur. Sooner or later the balance
of capital and underwriting opportunity will readjust.
Has Lancashire’s strategy changed in the face of
the current market challenges?
Lancashire’s strategy has remained constant, but our
tactical implementation of strategy has changed over time,
to rebalance the risk and return equation, to address current
market conditions. Our strategy remains: to balance the risk
that we assume against the potential return; to exercise our
experience and be professional in our underwriting; and to
demonstrate nimble capital management throughout the
insurance cycle. During 2016 this meant that our underwriters
worked hard to service the ongoing needs of our clients, whilst
“Our business is equipped with the right expertise
and relationships, with our clients, their brokers
and our capital providers, to remain a relevant
and important provider of insurance and
reinsurance solutions, wherever we find
ourselves in the insurance cycle.”
showing discipline on both pricing and terms of coverage. On
the other side of the equation, reinsurance can be an efficient
form of capital management which allows us to maintain or
reduce our aggregate risk exposures. This inevitably depresses
returns in the current market, but I am confident that our
tactical implementation of strategy will enable Lancashire to
manage this stage of the cycle, protect its balance sheet, and
meet the challenge of the next market moving event, when it
does come. Our business is equipped with the right expertise
and relationships, with our clients, their brokers and our capital
providers, to remain a relevant and important provider of
insurance and reinsurance solutions, wherever we find
ourselves in the insurance cycle.
What are your plans for Lancashire’s Lloyd’s
platform for the coming year?
In late December 2016 we welcomed Jon Barnes as the new
designated Active Underwriter for Syndicate 2010, and last
autumn we appointed John Spence as the Active Underwriter
for Syndicate 3010. We have also appointed a further four
new underwriters, Heather McKinlay as the CUL CFO,
Emma Woolley as CUL’s Director of Compliance and we have
promoted Adam Beardon to the role of CUL CRO. Andrew
McKee will join as the new CEO for our Lloyd’s business in
June 2017. I am particularly pleased to have attracted individuals
of such high calibre, as it demonstrates Lancashire’s ability
not only to cultivate home grown talent but also to attract
the very best people from across the industry. Peter Clarke
has described the parallel work which has been carried out
in renewing and refreshing the CUL Board (see page 43).
Therefore, as we enter 2017, Cathedral continues to be a
Lloyd’s business not only with a reputation for its underwriting
expertise, client service and ability to generate returns for its
investors, but with a reinvigorated board, management and
business team more closely aligned to Lancashire’s thinking
and strategic objectives. These changes have not come easily,
but the work of rebuilding has begun to create a business with
more open lines of communication, better integrated strategic
thinking and improved management and governance.
Does Lancashire remain distinctive?
We are still different to our competitors. Lancashire has had
some excellent results over many years, but my management
team is not interested in accolades, rather in identifying the
challenges of the present moment and doing what needs to be
done quickly and effectively. Our headcount remains around
200 globally and that helps promote a very lean and nimble
business culture. Without cutting corners we still have the
ability to move very quickly to develop opportunities and/or
address areas of risk. There is a ‘can do’ attitude amongst our
employees who like our culture and working environment and
the financial rewards and career opportunities that they can
bring. I also believe that our business structure, with respected
Lancashire (re)insurance operating companies in London and
Bermuda, our Lloyd’s platform and the Kinesis third-party
capital management facility, gives us the ability to trade on
at least equal terms with competitors who may operate far
more complex and intrinsically costly businesses.
What are the biggest threats and opportunities
for Lancashire?
I have already spoken about the corrosive effect of excess
capital in our sector. There has been much debate around the
threat of ‘disruptors’ within the insurance industry, whether
that is through alternative technologies, forms of distribution,
underwriting or capital. Change in one form or another is
a certainty, but I believe that Lancashire’s commitment to
offering bespoke, tailored specialty insurance products to our
clients will help mitigate these threats. The ability to add value
in a transaction and to service client requirements will remain
central to our future success. To that end we will continue
to service and protect our core book of business and seek to
retain and reward all those people who are key to the success
of our operations. This requires patience and discipline.
The last couple of years have seen instances of insurance
businesses effectively changing themselves through mergers
and rationalisation of existing operations. That approach may
buy time for some. However, the insurance industry cannot
afford to operate on such tight margins over the longer term,
in particular faced with the threat of a material upturn in
global insured catastrophe losses, which will materialise sooner
or later. Lancashire is ready for that moment of opportunity.
Alex Maloney
Group Chief Executive Officer
www.lancashiregroup.com
15
STRATEGY
OUR STRATEGY
MAINTAINING
CONSISTENCY
OUR STRATEGY
The Group executes its strategy by concentrating on three strategic priorities that
enable the Group to meet its goal of maximising risk-adjusted returns for shareholders:
underwriting comes first; effectively balance risk and return; and operate nimbly through
the cycle. These strategic priorities enable the Group to serve clients and brokers with
significant capacity across the cycle, not just in the core business the Group aims to renew
every year, but also in times or in areas where capacity is scarce: the opportunistic part of
the Group’s portfolio. The Group maintains a lean structure and keeps overheads under
strict control so that resources may be refocused quickly. The Group tests its assumptions
and performance constantly through its structure using its daily underwriting calls or
exception reporting to management, its fortnightly RRC meeting with all disciplines
within the Group represented, and a series of supporting committees at management
and Board levels. The Group’s risk function and internal audit supply challenge
and assurance to management and the Boards through a simple and continuous
reporting process.
Description
UNDERWRITING COMES FIRST
We focus on maintaining our portfolio
structure, with the bulk of our exposures
balanced towards market moving events, and
a strong commitment to core clients. We use
the principle of peer review throughout the
Group, usually pre-underwriting for LICL,
LUK and Kinesis, the platforms that accept
larger net exposures, and post-underwriting at
Cathedral, with its much smaller net exposures.
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.
Underwriting
comes first
Operate nimbly
through the cycle
Effectively balance
risk and return
Cross-cycle
return of risk-free plus 13%
Profitable 4 years out of 5
Peak-zone
PML limits of 25% of capital
SHAREHOLDER
RETURN
OUR CULTURE – THE BEDROCK OF OUR STRATEGY
Lancashire encourages a culture of cooperation and respect based on open
challenge. This can be seen clearly in the LICL and LUK daily underwriting and
marketing call where junior and senior underwriters debate the risks they want to
write and their fit to the portfolio and market. It also characterises the Group-wide
RRC which brings together underwriting, actuarial, modeling, finance, treasury,
risk and operations to challenge the assumptions used in all areas of our business.
16
Lancashire Holdings Limited | Annual Report & Accounts 2016
Description
Achievements
Performance
Associated strategic risks
UNDERWRITING COMES FIRST
We focus on maintaining our portfolio
structure, with the bulk of our exposures
balanced towards market moving events, and
a strong commitment to core clients. We use
the principle of peer review throughout the
Group, usually pre-underwriting for LICL,
LUK and Kinesis, the platforms that accept
larger net exposures, and post-underwriting at
Cathedral, with its much smaller net exposures.
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.
KPI
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 and the number
of cedants to double figures.
At 1 January 2017 Cathedral was
successful in renewing its business,
despite intense competition.
COMBINED RATIO
GROSS PREMIUMS WRITTEN
76.5%
A market leading combined
ratio, even in difficult
markets, evidencing
the continued focus on
underwriting, superior
risk selection and
portfolio construction.
$633.9m
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.
The key risk in the current market
phase is the loss of relevance to
brokers and clients. With so much
surplus capacity, insurers need to
have a unique selling point. For
the Group, that is found in its
mixture of underwriting capacity,
leadership capability, significant
reinsurance expenditure and
multiple balance sheet options.
We have had to reduce income
in some areas of our business in
response to a weakening market.
However, we have been able
to find substantial outwards
reinsurance opportunities that
allowed us to mitigate some of
the effects of price reductions,
and reduce our net exposures
until the time is right for us to
retain more risk.
Lancashire renewed its 15 per cent
disapplication of pre-emption
rights at the 2016 AGM to assist
potential future capital raises.
KPI
RETURN ON EQUITY
PROBABLE MAXIMUM LOSS
13.5%
A good result despite a
challenging market and
the incidence of risk
losses, helped by our
improved outwards
reinsurance programme.
$157.5m*
We continued to reduce our
exposure to key catastrophe
perils as the market has
become more competitive,
demonstrating our discipline
and nimbleness.
* 1 in 100 year Gulf of Mexico Hurricane
expected net loss at 1 January 2017.
KPI
KPI
The key issue for Lancashire is to
continue to serve our clients and
brokers with significant capacity,
whilst ensuring that the portfolio
is balanced. This means constantly
re-assessing our business mix, and
testing key risk assumptions.
PERCENTAGE OF
COMPREHENSIVE
INCOME RETURNED
TO SHAREHOLDERS
113.3%
Lancashire continues to
exercise the discipline of
giving back capital it cannot
profitably deploy, but remains
open to new opportunities.
Read more on page 21
KPI
DIVIDEND YIELD
10.5%
Whilst buying back shares
can be a part of right-sizing
capital, special dividends
allow the Group to make
substantial capital
adjustments when
these are justified.
Lancashire has developed an
expectation among its shareholders
that it will produce a consistent
return and pay ordinary dividends
and special dividends when
it makes sense to do so. All
shareholders understand that
in hard markets Lancashire will
retain, and even raise, capital
to take full advantage of
underwriting opportunities.
Read about our Risk Management on
page 31
www.lancashiregroup.com
17
STRATEGY
FINANCIAL REVIEW
MAINTAINING STRONG
PERFORMANCE
How has Lancashire maintained balance
during 2016?
In the current phase of the cycle there are many factors to
consider – it really is a bit of a balancing act. We want to have
enough capital to be able to write the deals we think still look
attractive, while managing broker and client relationships to
decline those we do not. We don’t want to carry too much
capital, but in the current environment we are a little defensive
and carry a bit more of a buffer than we typically would. There
is a lot of uncertainty in the markets just now. That uncertainty
also impacts our investment portfolio, but we continue to
ignore the noise and invest for the longer term, protecting
our capital and making tactical adjustments as necessary. On
the expense side, we have always chosen to be leanly staffed
so we are appropriately structured for all aspects of the cycle.
With only two physical locations in Bermuda and London we
are also better able to communicate and respond more quickly
than some larger international companies might. It’s a careful
balance, but one that is paying off.
So how would you sum up 2016 performance?
2016 has been another year of attrition hurting the industry –
a number of events have impacted the market, but none have
been large enough either individually or collectively to drive
any meaningful change in pricing, let alone a hardening of
the market. We have continued to focus on both superior
risk selection and our core clients’ needs, while managing our
exposures through reinsurance. We increased our reinsurance
spend again this year, taking advantage of well-priced
opportunities there. While there is undeniably a cost to that,
we have reaped the benefits of increased recoveries this year,
particularly on our energy book. On a risk-adjusted basis we
are still able to produce an acceptable return, yet manage our
downside risk. Our RoE for the year was 13.5 per cent and
our combined ratio, excluding fee income, was 76.5 per cent.
Including fee income our combined ratio was 72.3 per cent.
Lancashire contributed 9.1 per cent to our RoE, with Cathedral
and Kinesis contributing 3.6 per cent and 0.8 per cent
respectively. In short, it’s a strong performance in
difficult markets.
Are the Group’s three platforms performing in line
with expectations?
The short answer is yes. The original Lancashire (London and
Bermuda) platform continues to produce the majority of the
Group’s return. When we purchased Cathedral in November
2013, we said we expected it to contribute 2 to 3 per cent per
annum to our RoE. Ignoring acquisition adjustments in the
earlier years, it is actually exceeding those expectations. Kinesis
is opportunity driven and could get to a size where it also
ELAINE WHELAN
Group Chief Financial Officer
Both insurance and investment markets
continue to be challenging, but we have
remained patient and maintained our
discipline. That has produced an RoE
of 13.5 per cent, a combined ratio of
76.5 per cent and an investment return
of 2.1 per cent: strong performance
in a tough environment.
18
Lancashire Holdings Limited | Annual Report & Accounts 2016
FINANCIAL HIGHLIGHTS
Gross premiums written
Net premiums written
Net premiums earned
Net insurance losses
Net underwriting income
Net investment income
Net realised (losses) gains 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 hedge.
contributes 2 to 3 per cent to our RoE, but that’s a hard
market contribution. We currently expect around 1.0 per cent,
subject to loss performance and collateral releases. It is
currently performing right in line with those expectations.
How have the departures of Cathedral employees
impacted financial performance?
Well we haven’t lost any business as a result of the departures,
but did incur some costs early in 2016 – about $1.7 million.
We’ve fully re-staffed now and expect the ongoing cost base
for Cathedral to be pretty stable. There were a number of RSS
awards granted to certain Cathedral employees on acquisition
– a total of £18.7 million. A large portion of those have been,
or will be, forfeited as individuals have left, or are leaving, prior
to vesting. Of the original awards issued, only £6.4 million
remain for future exercise. While the forfeits don’t impact
RoE there is a benefit to EPS and also simply an economic
benefit from no longer having to settle those awards or the
dividend equivalents on them.
How does the decline in Sterling impact
the business?
As a U.S. dollar company, with about 60 to 70 per cent of our
cost base in Sterling, we will see some benefit from the fall in
Sterling. The extent of that obviously depends on how low
2016
$m
633.9
458.7
488.1
142.5
213.5
29.8
(2.4)
144.0
153.8
4.1
157.9
178.9
$0.76
$0.71
$5.98
13.5%
13.5%
29.2%
27.1%
20.2%
76.5%
46.2%
2.1%
2015
$m
641.1
481.7
567.1
155.7
265.2
29.8
(2.8)
173.4
181.1
(11.3)
169.8
317.5
$0.91
$0.87
$6.07
10.9%
13.5%
27.5%
25.8%
18.8%
72.1%
46.0%
0.7%
2014
$m
907.6
742.8
715.6
226.5
335.7
28.6
(5.9)
231.9
229.3
(2.1)
227.2
321.0
$1.16
$1.17
$6.96
13.9%
14.7%
31.7%
21.4%
15.6%
68.7%
35.9%
1.0%
2013
$m
679.7
557.6
568.1
188.1
254.2
25.4
12.6
184.2
222.5
(32.5)
190.0
325.6
$1.17
$0.97
$7.50
18.9%
18.9%
33.1%
22.1%
15.0%
70.2%
36.1%
0.3%
2012
$m
724.3
576.1
582.6
174.1
289.1
32.5
11.8
220.3
234.9
17.8
252.7
201.4
$1.29
$1.21
$7.83
16.7%
17.1%
29.9%
20.5%
13.5%
63.9%
34.6%
3.1%
Sterling falls and for how long. For the 2016 financial year,
as compared to 2015, we have a saving of approximately
$10.0 million in our operating expenses.
How has capital been managed in 2016?
Our capital philosophy remains unchanged. We work out what
business we want to write, and 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. As I mentioned,
occasionally we will hold a little more of a buffer in times of
market stress or where we think there may be an impact from
other external factors that are out of our control. We are
currently carrying a little more of a buffer than we typically
would as we think 2017 is going to be an interesting year in a
number of respects. Even with that buffer, we have returned
a total of $178.9 million this year or 113.3 per cent of
comprehensive income. That’s a dividend yield of 10.5 per
cent. Including the dividend declared on 15 February 2017,
our capital return since inception stands at $2.7 billion or
104.2 per cent of comprehensive income.
Elaine Whelan
Group Chief Financial Officer
www.lancashiregroup.com
19
PERFORMANCE
KEY PERFORMANCE INDICATORS
RETURN ON EQUITY*
COMBINED RATIO
TOTAL INVESTMENT RETURN
Aim
The Group’s aim is to provide
shareholders with a risk-adjusted return
on equity of 13 per cent in excess of the
risk-free rate over the longer term.
The Group aims to price its business to
ensure that the combined ratio in any
year is significantly 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 premiums earned and is a measure of an
insurance company’s operating performance.
It is calculated as the sum of the loss ratio, the
acquisition cost ratio and the expense ratio.
These ratios are defined in our glossary.
Total investment return measures
investment income and net realised
and unrealised gains and losses
produced by the Group’s managed
investment portfolio.
Performance 13.5%
76.5%
2.1%
18.9*
16.7*
5 year average*
13.9*
13.5
10.9*
70.2
68.7
72.1
76.5
3.1
63.9
12
13
14
15
16
12
13
14
15
16
12
2.1
1.0
0.7
14
15
16
0.3
13
Risk
management
Our market in 2016 remained in a soft
phase. We recognise that whilst we have
attained very high RoEs 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 2016 we continued to buy more
reinsurance and retrocession protection
to reduce our exposures to protect our
balance sheet for the eventual market turn.
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.
Please refer to the Directors’
Remuneration Report on page 69
for further details.
Whilst the combined ratio in 2016 was
above the five-year average, it was still an
excellent result compared to some typical
market combined ratios above the 90 per cent
mark. In the context of a softening market
and corresponding downward pressure on
premiums, we would expect the combined
ratio to increase.
In 2016, Lancashire continued to monitor
risk-on/risk-off volatility and maintained
the allocation to risk assets in the surplus
portfolio as a hedge against the interest
rate risk inherent in the significant
fixed maturity allocation of the portfolio.
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 models, their experience and knowledge
of past loss experience, industry trends and
current circumstances. This allows them to
estimate the premiums sufficient to meet likely
losses and expenses. Peer reviews of risks are
conducted through the daily underwriting
call or peer review, depending on risk impact,
enabling the Group to ensure careful risk
selection, limits on concentration and
appropriate portfolio diversification. The RRC
then monitors performance at a portfolio level.
The investment strategy places an
emphasis on the preservation of invested
assets and provision of sufficient liquidity
for the prompt payment of claims, in
conjunction with providing a reasonably
stable income stream. These objectives
are reflected in the Group’s investment
guidelines and its conservative asset
allocation. Management reviews the
composition, duration and asset allocation
of the investment portfolio on a regular
basis in order to respond to changes in
interest rates and other market conditions.
* RoE excluding the impact of warrants was 13.5% in 2015, 14.7% in 2014, 18.9% in 2013 and 17.1% in 2012. The five-year average was 15.5%.
20
Lancashire Holdings Limited | Annual Report & Accounts 2016
TOTAL SHAREHOLDER RETURN
The Group’s aim is to maximise RoE
over the longer term and we would
expect that to be reflected in our share
price and multiple. This is a long-term
goal, recognising that the cyclicality and
volatility of both the insurance market
and the financial markets in general will
impact management’s ability to maximise
the share multiple in the immediate term.
Total shareholder return is measured in
terms of the internal rate of return of the
increase/decrease in share price in the
period, measured in U.S. dollars and
adjusted for dividends.
PERCENTAGE OF COMPREHENSIVE
INCOME RETURNED TO
SHAREHOLDERS
The 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.
DIVIDEND YIELD
The Group aims to maintain a strong balance
sheet whilst generating an attractive risk-adjusted
return for shareholders. Lancashire’s dividend
yield demonstrates our ability to operate nimbly
through the cycle through the active capital
management that underpins our business model.
We 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.
Dividend yield is measured by dividing the
annual dividends per share by the share price
on the last day of the given year.
2.4%
113.3%
10.5%
Aim
Measurement
Performance
21.6
21.3
25.9
187.0
171.4
152.3
2.4
79.7
17.8
17.3
113.3
12.3
8.3
5 year average
10.5
-24.2
12
13
14
15
16
12
13
14
15
16
12
13
14
15
16
Volatility in the markets, continued
insurance M&A activity and the UK Brexit
vote have all impacted the U.S. dollar
share price in 2016.
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 outside the core book.
During 2016 we paid annual ordinary dividends
of $0.15 per share and a special dividend of
$0.75 per share.
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 all
eligible to receive RSS awards. The
participation of employees in the RSS
ensures that there is a strong focus on
sustainable long-term shareholder value.
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 2016, Lancashire maintained
its A rating.
As capital continues to accumulate in the
(re)insurance market, the need to be nimble
is more important than ever. This means being
ready to deploy capital quickly when it is needed
and having the discipline to return it when
it is not. The Group has to ensure that all
shareholders understand that in hard markets
the Group will want to retain, and even raise,
capital to take full advantage of
underwriting opportunities.
Risk
management
KPI linked to Executive Directors’ remuneration. For more information see pages 61 to 79.
www.lancashiregroup.com
21
PERFORMANCE
UNDERWRITING REVIEW
BALANCING THE CYCLE
DELIVERING RETURNS
PROPERTY REINSURANCE
The trend of recent years continued in the reinsurance
industry with an absence of significant monetary losses in the
sector. Mother Nature was certainly not quiet, with earthquakes
in Italy, New Zealand, Japan and Ecuador, hurricanes and
storms in the U.S. and the Caribbean and wildfires in Canada.
Whilst these events sadly led to loss of life, the financial impact
to the industry was relatively modest, and certainly not at the
levels required to change market conditions. None of the
aforementioned events created industry losses in excess of
$5 billion. This prolonged period of historically benign loss
activity has meant that the property reinsurance market
continues to be a challenging environment in which to
operate. Despite a general realisation that macro-market
margins are too tight to sustain any real uptick in loss frequency
or severity, the levels of competitive pressure dictate that rates
continue to fall, albeit the pace of change is certainly slowing.
Notwithstanding these conditions, our portfolio of property
reinsurance risk across the Group continues to perform well,
acknowledging of course the benign loss environment. In
these difficult trading conditions leveraging the strong client
and broker relationships we have across the Group becomes
even more important, so being better and more efficient with
our Group offering will only benefit the underwriting result.
ENERGY
The ‘perfect storm’ of 2015 meant that the waters remained
very choppy throughout 2016. The oil price stabilised
somewhat and the retraction of demand was certainly less
severe than the prior year. However, the demand and
supply imbalance remained in 2016, hence the continuation
of extremely challenging market conditions. In the space of
24 months, the premium into the upstream energy market
has more than halved due to both rate reductions and demand
slippage. The poor loss experience of 2015 continued through
2016 with a number of small to medium-sized losses as well as
what could be the largest upstream energy loss since Deepwater
Horizon in 2010. In summary, the last two years in the upstream
energy market have been challenging, with premium
haemorrhaging from the market and loss activity increasing in
both frequency and severity. That said, the Group is fortunate
to have relationships with strong and well-run companies, and
as a result has been able to weather the storm. A continued
focus on risk selection and being unconcerned about top line
premium helps deliver underlying results that outperform the
macro-market metrics. Energy has always been a core pillar of
the Group’s strategy and will continue to be so. We understand
and accept that the energy market is a volatile place but remain
committed to both the market and, more importantly, our
clients and their brokers. Together we will work through these
tougher times and come out the other side stronger as a result.
PAUL GREGORY
Group Chief Underwriting Officer
2016 was a turbulent year. The volatility
within the market and its softening
conditions made for an environment that
required careful navigation. The Lancashire
Group has the underwriting teams, with the
appropriate client and broker relationships,
to balance these factors while delivering
strong returns.
22
Lancashire Holdings Limited | Annual Report & Accounts 2016
TERRORISM, POLITICAL VIOLENCE AND POLITICAL RISKS
The world was a volatile place during 2016 with a continuation
of uncertainty and instability across the globe. Sadly, the
activity of certain terrorist groups shows no signs of ceasing
and the world witnessed atrocities during 2016. These included
numerous well publicised attacks across Europe in France,
Germany and Belgium as well as a continuation of wars in
various countries including Ukraine, Syria and Yemen. In
addition to this, there have been the perceived seismic political
events of Brexit and the U.S. elections which create a world of
increased uncertainty. This creates challenges for underwriting
the terrorism and political risk classes of business. However,
the events of recent years have not created any significant
losses to the insurance market, and therefore capacity has
continued to enter the class, creating more competition.
We accept that ultimately it is demand and supply that dictate
market direction and unfortunately the market will not correct
itself purely based upon the logic of being in a more unstable
political environment. Given this, risk selection remains
paramount and, as with other classes of business, we have
built up a profitable core portfolio of business which is ours to
defend and which is far easier than trying to build out a new
portfolio in a challenging market. We continue to choose not
to support broker facilities whereby we are required to ‘give
our pen away’, something that we will continue to resist as long
as possible in order to maintain our underwriting standards
and therefore control the risk we put onto our consolidated
balance sheet. The Group uses its ability to offer significant
capacity across multiple platforms to ensure it is providing
both clients and brokers with a fully rounded product and
service which allows it to maintain its underwriting principles
despite the many challenges the markets contain.
PROPERTY DIRECT & FACULTATIVE
Much like the property reinsurance portfolio, the direct
property market has seen a number of small events impact the
profitability of the class. The Canadian wildfires and Hurricane
Matthew are the most obvious examples, but nothing sufficient
to create a market dislocation and positive change to the rating
environment. Therefore the property insurance market
remains competitive, albeit different parts of the market are
experiencing different levels of competition, and this is
highlighted within our portfolio. The Group’s portfolio is
made up of two parts, commercial open market property
risks and binders. The market conditions of this sector are
predominantly driven by the demand and supply dynamics
within the class, more so than any other external factors
that you may see in other classes. Over the past few years the
appetite of the insurance market for open market business
has increased dramatically and consequently that part of the
market has witnessed intense competitive pressures, driving
rates downwards. This part of the Group’s portfolio reduced
through the course of 2016, as underwriting discipline was
maintained and risks that no longer met the return hurdles
were declined. Where possible, facultative reinsurance is used
to modify the impact of market conditions and help the Group
maintain long-standing client relationships, but this is not
always possible. In contrast, the binder portfolio has been
far less competitive and more stable and now forms a larger
part of the overall portfolio as the rate reductions are far less
severe and the long-standing nature of client relationships
means there is less pressure on each risk. The dual impact of
a reducing open market book and a consistent binder book
creates a portfolio where, for the first time in many years,
the binder percentage of the portfolio will be greater than
the open market risks. This is expected in the softer part
of the cycle and it demonstrates the value of the consistently
performing binder book as it allows the Group to maintain its
underwriting discipline on the open market risks. When the
market environment changes this trend will likely reverse,
but in the softer market this allows the portfolio to maintain
its profitability.
MARINE
The cargo market can be seen as the barometer for world
trade and if there is economic uncertainty then demand
will be impacted. This has certainly been the case in recent
years. Market conditions, as in all other lines of business,
are competitive with a surplus of capacity. However, the core
portfolio of business has been defended, rate reductions have
been manageable, and the portfolio profitable. Without the
pressure to grow top line income, the portfolio is stable
and will ebb and flow with both the demand and rating
environment. The hull, builders’ risk and war portfolios are
historically very stable portfolios of business that have changed
very little since the inception of the Group. Much like the
cargo portfolio, the size of this book will rise and fall in line
with market conditions and, once again, the profitable
portfolio of risks has been defended. Whilst market conditions
remain as they are, the underwriting appetite will not change.
Making an underwriting profit in marine classes is historically
the exception rather than the rule, and we intend to remain
the exception.
AVIATION
The Group underwrites both aviation insurance and
reinsurance, and both markets are extremely challenging.
During 2014 and 2015, losses to the aviation markets increased
in frequency and severity. 2016 had fewer and less severe
market losses. Rates continue to be under pressure but in some
areas of the class it is starting to feel like the bottom may be
getting close, albeit we are not there yet. In the aviation war
market for example, the broker line slips that are so prevalent
to the class no longer have the same levels of capacity available
to them. That means that more risks have to come to the
open market underwriters who tend to resist the trend for
deteriorating pricing. It is small changes like this that can start
to make a difference to the market dynamics. That said, like
any other market, until such time as the demand and supply
dynamic changes, the market conditions will not change
fundamentally. So until this happens, we continue to focus
on risk selection and protecting our portfolio of risks with
appropriate reinsurance. Given the team we have throughout
the Group, we certainly have the expertise to maximise any
opportunity that may arise in the future.
www.lancashiregroup.com
23
PERFORMANCE
BUSINESS REVIEW
STRIKING A
BALANCE
HAYLEY JOHNSTON
Chief Underwriting Officer, LUK
SYLVAIN PERRIER
Chief Underwriting Officer, LICL
Striking a balance during a difficult year
for underwriting.
24
Lancashire Holdings Limited | Annual Report & Accounts 2016
BUSINESS ENVIRONMENT AND OUTLOOK
2016 was yet another difficult year for underwriting as we
are now firmly in the soft phase of the underwriting cycle.
Our strategy has remained unchanged as we are working to
maintain our long-term profitable underwriting relationships
whilst managing our outwards exposure through the purchase
of well-priced, targeted reinsurance.
Our business model was always 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
during 2016 and allowed us to return profits, based on our
continued commitment to focusing first on our underwriting
and our capital management.
Our outlook for 2017 is a continuation of current market
trends. However, we expect to be able to continue to maintain
our core book and consequently operate to a similar capital
level as 2016, albeit with a bit more of a buffer than we
normally carry given the current environment.
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.
PREMIUMS
Gross premiums written decreased by 1.1 per cent in 2016
compared to 2015. The Group’s five principal segments, and
the key market factors impacting them, are discussed below.
PROPERTY
Property gross premiums written increased by 11.3 per cent
for the year ended 31 December 2016 compared to the year
ended 31 December 2015. The majority of the increase was
driven by new business in the political risk and property
catastrophe excess of loss classes, partly offset by reductions
due to the impact of non-annual policies in the political risk
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
2016
37
111
70
72
103
38
61
2015
41
118
81
82
117
43
68
2014
44
125
91
91
132
48
76
2013
49
136
97
89
152
52
81
2012
55
140
100
86
157
55
84
2011
59
140
97
79
131
57
83
2010
62
139
88
80
121
60
81
2009
68
137
84
82
127
66
83
2008
69
64
68
80
86
71
76
2007
80
80
80
88
97
86
86
2006
100
100
100
100
100
100
100
2016
2015
Gross premiums written
Net premiums earned
Net loss ratio
Net acquisition cost ratio
Expense ratio
Combined ratio
Marine
$m
37.2
35.4
Energy
$m
126.0
105.5
Aviation
$m
36.2
25.5
Property
Total
$m
$m
219.5
641.1
148.5
567.1
9.2% 39.3% 41.8% (4.7)% 42.6% 29.2% 10.6% 37.0% 13.8% 57.8% 33.4% 27.5%
18.9% 45.1% 27.4% 30.6% 22.5% 27.1% 18.4% 37.4% 34.2% 26.3% 23.0% 25.8%
18.8%
28.1% 84.4% 69.2% 25.9% 65.1% 76.5% 29.0% 74.4% 48.0% 84.1% 56.4% 72.1%
Property
$m
197.2
171.3
Aviation
$m
36.6
33.4
Lloyd’s
$m
215.0
173.2
Total
$m
633.9
488.1
Energy
$m
112.0
126.5
Lloyd’s
$m
247.7
198.2
Marine
$m
47.6
37.7
20.2%
–
–
–
–
–
–
–
–
–
–
and terrorism classes. Business flow in the political risk class is
generally less predictable than other classes of business due to
the lead time and specific nature of each deal. Rates continued to
experience pressure in the property catastrophe excess of loss class.
ENERGY
Energy gross premiums written increased by 12.5 per cent for
the year ended 31 December 2016 compared to the year ended
31 December 2015. The Gulf of Mexico book was responsible for
most of the increase during 2016. Some new business was added
in this class, but the vast majority of the increase was driven by
the timing impact of multi-year deals plus the cancellation and
replacement of certain contracts. The worldwide offshore book
continued to experience price and exposure reductions due to the
relatively low oil price, offset somewhat by the timing of renewal of
non-annual deals.
MARINE
Marine gross premiums written decreased by 21.8 per cent for
the year ended 31 December 2016 compared to the year ended
31 December 2015. The majority of the decrease across the class
during 2016 was driven by the timing of non-annual renewals,
together with a reduction in prior underwriting year risk-attaching
business due to changes in the underlying exposure.
AVIATION
Aviation gross premiums written decreased by 1.1 per cent for
the year ended 31 December 2016 compared to the year ended
31 December 2015. The decrease was mainly due to the timing
of satellite launches on contracts written in previous years.
LLOYD’S
In the Lloyd’s segment gross premiums written decreased by
13.2 per cent for the year ended 31 December 2016 compared to
the year ended 31 December 2015. The decrease was primarily due to
reductions across all lines of business, with rates continuing to come
under pressure due to over-capacity in the market. In addition, the
energy and marine cargo lines were both impacted by the low oil
price. The decline in marine cargo premiums was due to the lower
value of oil in transit. In the energy line, less oil production and
exploration has reduced exposure.
CEDED
Ceded premiums increased by $15.8 million, or 9.9 per cent, for
the year ended 31 December 2016 compared to the year ended
31 December 2015. Favourable conditions in the reinsurance market
have generally allowed both Lancashire and Cathedral to buy more
reinsurance limit, by adding new layers and attaching at lower loss
levels for around the same outlay. The increased spend was largely
due to higher cessions to various outwards facilities and additional
reinstatement premiums.
EARNED
Net premiums earned as a proportion of net premiums written
were 106.4 per cent for the year ended 31 December 2016, compared
to 117.7 per cent for the year ended 31 December 2015. The reduced
earnings percentage was due to an increase in longer tenor business
written plus increased reinsurance spend.
www.lancashiregroup.com
25
PERFORMANCE
BUSINESS REVIEW CONTINUED
LOSSES
The Group’s net loss ratio was 29.2 per cent for the year
ended 31 December 2016 compared to 27.5 per cent for the
year ended 31 December 2015. The 2016 accident year loss
ratio, including the impact of foreign exchange revaluations,
was 46.2 per cent compared to 46.0 per cent for the year
ended 31 December 2015. While there were no major losses
in either 2016 or 2015, both years experienced a few mid-sized
losses, primarily across the property and energy classes.
Attritional losses for both years were otherwise low.
Prior year favourable development was $85.8 million for
the year ended 31 December 2016 compared to favourable
development of $107.7 million for the year ended
31 December 2015. Despite some adverse development on
prior accident year marine and energy claims in 2016, the
overall favourable development was primarily due to general
IBNR releases across most lines of business due to a lack of
reported claims. Experience in 2015 was similar in terms of
releases, plus there was a further benefit of additional
recoveries on the 2011 Thai flood losses.
The table below provides further detail of the prior years’
loss development by class, excluding the impact of foreign
exchange revaluations:
LOSS DEVELOPMENT BY CLASS
Property
Energy
Marine
Aviation
Lloyd’s
Total
Note: Positive numbers denote favourable development.
ACCIDENT YEAR LOSS RATIOS
Accident year loss ratio
Initial accident year loss ratio
Reduction in loss ratio post-accident year
Note: Adjusted for revaluation of foreign currencies at the exchange rate as at 31 December 2016.
Excluding the impact of foreign exchange revaluations,
previous accident years’ ultimate losses developed as follows
during 2016 and 2015:
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
2015 accident year
Total
2016
$m
0.3
(0.7)
1.6
(18.0)
3.2
9.9
13.5
(1.6)
19.9
57.7
85.8
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 34.6 per cent
as at 31 December 2016 compared to 35.2 per cent as at
31 December 2015.
2016
$m
36.6
17.3
1.9
3.9
26.1
85.8
2016
%
46.2
n/a
n/a
2015
$m
26.4
35.2
13.8
2.9
29.4
107.7
2015
%
35.7
46.0
10.3
2014
$m
19.8
5.4
(9.7)
0.9
18.0
34.4
2014
%
27.0
35.9
8.9
2013
$m
13.2
18.4
(23.4)
(1.4)
9.1
15.9
2013
%
28.5
36.1
7.6
2012
$m
(36.0)
37.4
25.9
0.1
n/a
27.4
2012
%
27.9
34.6
6.7
26
Lancashire Holdings Limited | Annual Report & Accounts 2016
ACQUISITION COSTS
The acquisition cost ratio was 27.1 per cent for the year
ended 31 December 2016 compared to 25.8 per cent for the
year ended 31 December 2015. The increase was largely due to
the additional reinsurance cover purchased in 2016 compared
to 2015, in addition to higher profit commissions on some of
our worldwide offshore business.
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 2016, our focus was
on managing our interest rate risk, the largest risk to our
predominantly fixed maturity portfolio. We continue to
maintain a short duration, mostly fixed maturity portfolio and
have been using our risk budget to add products to our portfolio
to help mitigate a rise in interest rates. We produced a total
investment return of 2.1 per cent compared to 0.7 per cent
MANAGED INVESTMENT PORTFOLIO ALLOCATIONS
Cash
Short-term investments
Fixed maturity funds
Government debt
Agency debt
Agency MBS, CMBS
Non-agency RMBS, ABS, CMBS
Corporate bonds
Bank loans
Fixed maturity – at FVTPL
Equity securities
Hedge funds – at FVTPL
Other investments
Total
for the year ended 31 December 2015. Our average annual
total investment return since inception is 2.9 per cent, and
we have made a positive investment return in every year since
inception, including 2008. Our portfolio mix illustrates our
conservative philosophy, as shown in the table below. With the
composition regulated by the Group’s investment guidelines,
we have three investment portfolio categories: ‘core’, ‘core
plus’ and ‘surplus’. The core portfolio contains at least enough
funds required to meet near-term obligations and cash flow
needs following an extreme event. Assets in excess of those
required to be held in the core portfolio may be held in any
of the three portfolio categories, which are discussed further
on page 112. As at 31 December 2016 and 2015 the managed
portfolio was as follows:
Fixed maturity securities
Cash and cash equivalents
Hedge funds
Equity securities
Total
2016
%
10.4
0.3
0.8
20.3
4.4
6.4
7.3
32.5
6.6
2.8
1.2
7.0
–
100.0
2015
%
9.6
1.1
0.6
23.6
0.2
7.3
8.4
33.2
5.9
1.3
0.8
8.0
–
100.0
2014
%
10.6
1.4
0.7
21.4
0.8
7.7
11.0
31.7
5.8
1.4
0.7
6.8
–
100.0
2016
%
81.4
10.4
7.0
1.2
100.0
2013
%
14.7
9.8
1.1
14.6
4.1
10.9
8.4
29.7
4.5
1.3
0.7
–
0.2
100.0
2015
%
81.6
9.6
8.0
0.8
100.0
2012
%
11.1
5.4
–
18.8
6.2
19.2
5.3
32.2
1.8
–
–
–
–
100.0
www.lancashiregroup.com
27
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 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 political
environment closely.
INVESTMENT PERFORMANCE
Net investment income, excluding realised and unrealised
gains and losses, was $29.8 million for the year ended
31 December 2016, consistent with 2015. Total investment
return, including net investment income, net realised gains
and losses, impairments and net change in unrealised gains
and losses, was $38.4 million for the year ended 31 December
2016 compared to $14.4 million for 2015. For the year ended
31 December 2016, the investment portfolio returned 2.1 per
cent. The fixed maturity portfolios performed reasonably well
in 2016 primarily due to the narrowing of credit spreads which
more than offset the slight increase in treasury yields during
the year. Investment income was supported by strong returns
from the Group’s bank loans, equities and equity linked notes
during 2016. For the year ended 31 December 2015, the
investment portfolio returned 0.7 per cent, reflecting the
increase in treasury yields and the widening of 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.
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, profit
commissions, fee income and other returns from its associate,
and any capital raising activities performed in a given year
including the issuance of debt. Excess funds are invested in the
investment portfolio, which primarily consists of high-quality,
highly liquid fixed maturity securities of short duration.
Other cash inflows result from the sale and redemption
of investments.
The principal outflows for the Group are the settlement
of claims, the payment of premiums for reinsurance cover,
payment of general and administrative expenses, the servicing
of debt, the purchase of investment products, the distribution
of dividends and the repurchasing of shares.
In 2016, 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 $48.9 million
(2015 – $98.1 million).
KEY INVESTMENT PORTFOLIO STATISTICS
Duration
Credit quality
Market yield
Book yield
2016
1.8 years
A+
1.9%
1.8%
2015
1.5 years
AA–
1.9%
1.6%
2014
1.5 years
AA–
1.5%
1.5%
2013
1.0 year
AA–
1.2%
1.4%
2012
1.8 years
AA–
1.1%
1.8%
28
Lancashire Holdings Limited | Annual Report & Accounts 2016
LANCASHIRE THIRD-PARTY CAPITAL MANAGEMENT
The total contribution from third-party capital activities
consists of the following items:
Kinesis underwriting fees
Kinesis profit commission
Lloyd’s
fees & profit commission
Total other income
Share of profit of associate
Total third-party capital
managed income
2016
$m
4.4
6.2
9.9
20.5
5.1
25.6
2015
$m
5.6
7.3
7.0
19.9
4.1
24.0
The reduction in Kinesis underwriting fees year on year is
due to slightly less limit placed. The slightly lower Kinesis
profit commission during the year ended 31 December 2016
compared to 2015 was due to the retention of a portion of the
collateral held on the January 2015 underwriting cycle which
is awaiting the confirmation of claims quantum. We anticipate
receiving the remaining commission during the first quarter
of 2017. The share of profit of associate reflects Lancashire’s
10 per cent equity interest in the Kinesis vehicle.
The higher Lloyd’s fees and profit commission during the year
ended 31 December 2016 compared to 2015, was driven by the
timing of profit commission on the 2014 year of account,
together with profit commission on consortium business.
OTHER OPERATING EXPENSES
Employee remuneration costs
Other operating expenses
Total
2016
$m
61.4
37.1
98.5
2015
$m
64.3
42.3
106.6
Employee remuneration costs for the year ended
31 December 2016 were $2.9 million lower compared to
2015. A higher compensation expense due to Cathedral staff
departures was recorded in 2015. Otherwise 2016 benefited
from the depreciation of Sterling in the second half of 2016.
Other operating expenses were $5.2 million lower for the year
ended 31 December 2016 compared to the same period in
2015, primarily due to the depreciation in Sterling.
Equity based compensation expenses were $10.7 million for
the year ended 31 December 2016 compared to $15.8 million
for the year ended 31 December 2015. The decrease was
primarily due to the lapsing of restricted share scheme awards
of former employees of Cathedral on their departure from
the Group.
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 104.2 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 and the capital requirements of the
combination of a wide range of other risk categories. The key
aim of the capital management process is to maintain a strong
balance sheet, whilst:
• maintaining sufficient capital for underwriting opportunities
and to meet obligations to policyholders;
• maximising the risk-adjusted return to shareholders within
predetermined risk tolerances;
• maintaining adequate financial strength ratings; and
• meeting internal, regulatory and rating
agency requirements.
The subsidiary operating entities also conduct capital
requirement assessments under internal measures and
in compliance with local regulatory requirements.
Capital raising can include debt or equity, and returns of
capital may be made through dividends, share repurchases,
a redemption of debt or any combination thereof. All capital
actions require approval by the Board of Directors. The
retention of earnings generated also leads to an increase
in capital.
The composition of capital is driven by management’s appetite
for leverage, amongst other factors, including the cost and
availability of different types of capital.
Maintaining a strong balance sheet will be the overriding
factor in all capital management decisions. The Solvency II
regulatory regime for (re)insurance in the EEA introduced
a new basis for assessing regulatory capital requirements and
became effective from 1 January 2016. The Group is more
than adequately capitalised for supervisory and regulatory
purposes under the Solvency II regime.
www.lancashiregroup.com
29
PERFORMANCE
BUSINESS REVIEW CONTINUED
CAPITAL
As at 31 December 2016, total capital available to the
Group was $1.528 billion, comprising shareholders’ equity of
$1.207 billion and $320.9 million of long-term debt. Tangible
capital was $1.374 billion. Leverage was 21.0 per cent on total
capital and 23.3 per cent on total tangible capital. Total capital
and total tangible capital as at 31 December 2015 were
$1.542 billion and $1.388 billion respectively.
DIVIDENDS
During 2016, the Lancashire Board declared a final dividend
of $0.10 per common share in respect of the 2015 financial
year, an interim dividend of $0.05 and a special dividend of
$0.75 per common share in respect of 2016. With the final
dividend in respect of 2016 of $0.10 per common share,
total capital returns since inception amount to $2.7 billion,
or 274.7 per cent of initial capital raised. The final dividend
of $0.10 per common share has been declared and will be
paid on 22 March 2017 to the shareholders of record on
24 February 2017.
NON PRE-EMPTIVE ISSUE OF SHARES
As part of the Group’s flexible approach to capital
management the Board has in recent years requested and
received from shareholders authority to issue up to 15 per cent
of its shares on a non pre-emptive basis. Lancashire believes
that this ability to raise capital quickly is important in securing
first mover advantage in the catastrophe insurance and
reinsurance business in which it underwrites. The Board
proposes to put similar requests for authority to shareholders
in resolutions at the 2017 AGM to be held on 3 May 2017.
LETTERS OF CREDIT
Lancashire has a standard syndicated LOC facility which
in total amounts to $300.0 million, with a $75.0 million
loan sub-limit available for general corporate purposes.
During 2016, Syndicate 2010 and Syndicate 3010 each had
a catastrophe facility in place to assist in paying claims and
gross funding of catastrophes. These facilities amounted 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. For 2017,
this facility is in place for Syndicate 2010 only, providing in
aggregate up to $80.0 million with a total of $40.0 million
available by way of LOCs and $40.0 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.
30
Lancashire Holdings Limited | Annual Report & Accounts 2016
ENTERPRISE RISK MANAGEMENT
BALANCING
THE ELEMENTS OF ERM
LOUISE WELLS
Group Chief Risk Officer
Balancing all the elements of ERM is
essential if we are to emerge from this
soft market ready to maximise
any opportunities.
THE ONGOING BALANCING ACT
With the continued soft market in 2016 it has been even more
important to ensure that we are balancing the risk we take on
with the reward we receive for that risk. Our focus, therefore,
has been on ensuring risk management remains inherent
within our everyday processes and procedures; and that those
processes and procedures continue to operate effectively
and efficiently.
THIS YEAR’S ERM JOURNEY
Early in 2016 we completed the implementation of our new
risk system, the ‘Governance Portal’, which has enhanced our
quarterly risk and controls’ affirmation process. In addition,
Internal Audit now use the system to record all audit findings
and link them to the relevant risk and control. The control
affirmations have not identified any significant failings or
weaknesses in our key controls or associated processes.
As at 31 December 2016, all Group entities were operating
within their board-approved risk tolerances. No new risks have
been identified and there have not been any material changes
in our existing risks. Our risk preferences reduced during 2016
as a result of the market conditions, as we work to maintain
our risk and return balance.
Our quarterly own risk solvency assessment reports
prepared by the CRO to the main Board, known as ORSA
reports, provide a timely analysis of current and potential risks,
compared to risk tolerances, along with their associated capital
requirements. The third annual ORSA report was reviewed,
challenged and approved by the Board during the fourth
quarter of 2016 and submitted to the PRA in line with
supervisory requirements.
As a Lloyd’s Managing Agent Cathedral falls within the Society
of Lloyd’s for Solvency II reporting, preparing ORSA reports
for each syndicate. Cathedral has its own ERM framework to
ensure adherence to Lloyd’s minimum standards.
For the first time this year, the CRO reported to the
Remuneration Committee regarding risk and remuneration,
recognising the importance of the design of the remuneration
structure in driving desired behaviours over both the short-
term and the longer-term business planning periods.
LOOKING FORWARD AND MAINTAINING THE BALANCE
A detailed review of the ERM framework across the Group
is planned for early 2017. This review will take into account
how the existing framework has served us, current market best
practice, and how the Group plans to operate going forward,
with the aim of ensuring that the risk management framework
meets the challenge of balancing the Group’s risks and returns
during the soft market and beyond.
www.lancashiregroup.com
31
PERFORMANCE
ENTERPRISE RISK MANAGEMENT CONTINUED
The diagram below illustrates how we balance our ERM and ORSA activities. Our risk culture is driven from the top down via the Board and
executive management to the business, with the RRC central to these processes.
ERM & ORSA
KEY ACTIVITIES
• Review of business strategy with challenge from the Board
• Annual approval of a business strategy paper by the Board
• CRO report to Board and
Executive Management
Committee
• Production of ORSA report
and review and approval by
the Board
• Capital and liquidity
management frameworks
• Review of BLAST policies,
capital and solvency
appetites
• Full/proxy
capital assessments
• Rating agency
capital assessments
• Stress and scenario testing
STRATEGY REVIEW
& CHALLENGE
RISK SOLVENCY &
ASSESSMENT
CAPITAL
MANAGEMENT
C U LTURE &
BOARD
RRCRRC
RRC
OVERN A N C E
G
RISK ID &
ASSESSMENT
RISK APPETITE &
TOLERANCES
RISK & BUSINESS
MANAGEMENT
BUSINESS
PLANNING
• Risk identification and assessment
• Quarterly risk and control
affirmations
• Quarterly Internal Audit reports to
the Audit Committee per a three
and four-year rolling programme
• External audit reports to the
Audit Committee
• Audit Committee annual review
of the effectiveness of financial
controls
• Review of risk strategy
and ‘attitude to risk’
• Review of risk appetite
and limits
• Review of Group
risk tolerances
• Review of risk
management policies
• Review and approval
of business plan by the Board
• Assessment of risk management
• Stress and scenario testing
framework maturity
• Integrated assurance assessment
• Emerging risk assessment
(business plan)
• Assessment of
management 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 are aligned with the business cycle. The RRC reports its
principal findings to the Board through the CRO’s quarterly
ORSA reports.
BLAST
We continue to challenge the assumptions used in BLAST and
make changes where appropriate.
EMERGING RISK
As ever in 2016, the Group strove to foresee potential areas of
new risk, or developments in existing risks that could threaten
the Group. The political and economic outlook remains
uncertain following the results of both the UK’s referendum
on leaving the European Union and the U.S. Presidential
Election. Whilst we don’t expect either to have a material
impact on the Group, we continue to monitor the position.
Cyber risk remains a hot topic and under scrutiny, both in
our operating exposure and via our inwards insurance risk.
Terrorism is an area of core business focus for the Group, and
is well understood, but the continued increase in the diversity
of targets and modes of attack from terrorist groups means
we maintain a watch on developing trends.
32
Lancashire Holdings Limited | Annual Report & Accounts 2016
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 that within our investment portfolio we can see
the value of investments fall. We cannot avoid these risks
so we focus on the correlated operational risks and seek to
mitigate them. 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,
with review by the RRC and regular ORSA reports to
the Board.
• 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 which 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 non-financial category of risks such
as reputational risk or communication risk which cannot
necessarily be mitigated by holding capital since such risks
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
Underwriting
Investment
c
i
s
n
i
r
t
n
I
e
r
o
C
e Reserving
r
o
c
-
n
o
N
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
(Re)Insurance counterparty
Liquidity
Operational
Strategic
Group
Emerging
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 either to magnify the adverse impacts of intrinsic risks or
to crystallise separately in their own right.
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
33
PERFORMANCE
PRINCIPAL RISKS
BALANCING OUR
RISKS AND OPPORTUNITIES
As described under our review of the Risk Universe, our
classification of risks as Intrinsic Core and Intrinsic Non-Core,
Operational and Other helps us to focus on our management
and mitigation of those risks. Further details concerning
these risks can be found on pages 101 to 128. 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 in
particular as to the specifics of timing and quantum of catastrophe
loss events. Additionally, we write lines of business that are subject
to accumulations, including accumulations of individual risk losses
arising from a single event such as several property catastrophe
excess of loss programmes being affected by a windstorm or
earthquake, and accumulations between business lines such as a
9/11 type event impacting both the terrorism and AV52 portfolios.
Losses can also exceed expectations in terms of both frequency and
severity. So, although we model losses, for example using the RMS
and AIR stochastic models, we know that these projections can and
will be wrong in many instances.
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. Independent external reviews of our
reserves look at the overall levels of expected losses, as well as
individual large events, including benchmarking analyses to
provide assurance over the level of reserves booked.
34
Lancashire Holdings Limited | Annual Report & Accounts 2016
MITIGATION
Modeling: We apply loads to, and stress test, stochastic models and
develop alternative views of losses using exposure damage ratios.
RRC: The RRC considers accumulations, clashes and
parameterisation of losses and models.
Capital: We set our internal capital requirements at a level that
allows for buffers above accumulations of extreme events and the
Board considers capital requirements on at least a quarterly basis.
Investment strategy: Our strategy is that investment income is
not expected to be a significant driver of our returns. Our primary
focus remains on underwriting as the engine of profits. Investment
strategy is approved annually and monitored on a quarterly basis by
the Investment Committee and Board.
IRRC: The IRRC forms an integral part of our risk management
framework, meeting at least quarterly and reporting to the RRC.
External advisers: Lancashire’s Board and management recognise
that the Group’s principal expertise lies in underwriting so we use
the services of internationally recognised investment managers who
are experts in their fields.
MITIGATION
Short-tail business: Lancashire’s focus is on short-tail lines of
business where losses are usually known within, or shortly after,
the policy period with a reasonable degree of certainty.
Experience data: We have access to a lot of data, both our own and
from the industry as a whole, about losses and loss trends. Actuarial
and statistical data are used to set estimates of future losses, and
these are reviewed by underwriters, claims staff and actuaries to
ensure that they reflect the actual experience of the business.
External review: Insurers typically facilitate an independent,
external review of their loss reserves. Lancashire retains the services
of one of the leading industry experts, and our appetite is defined
so as to set reserves within a range of reasonable estimates based
on both internal and external review. The Audit Committee of
the Board reviews reserve adequacy at its quarterly meetings.
INTRINSIC RISK: NON-CORE CONTINUED
TYPE
Reinsurance and intermediary counterparty: Almost all the
insurance policies which we write are brought to us by brokers,
who act as intermediaries between us and the client and handle
the transaction of payments of claims and premiums on our behalf.
This exposes us to the risk of mishandling by, or failure of, the
broker concerned. In order to make our portfolio as efficient as
possible, we buy reinsurance to protect against severity, frequency
and accumulation of losses. Again, this exposes us to the risk that
our counterparties may have the inability or unwillingness to pay us
in the event of a loss.
Liquidity: In order to satisfy claims payments we need to ensure that
sufficient assets are held in a readily realisable form. This includes
holding cash accounts for the expected level of attritional losses, as
well as ensuring that we can meet claims payment requirements in
extreme events.
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
Counterparty credit limits: We use counterparty credit limits, seek to
deal with reputable reinsurers, with minimum rating standards, and
use collateral agreements where appropriate. The operating entities
of the Group that contract for reinsurance separately maintain and
report their own counterparty credit limits at the entity level. The
RSC is responsible for approving counterparties and monitoring
aggregate limits. The Broker Vetting Committee is responsible for
the broker vetting approval process and monitoring credit risk in
relation to brokers. In addition, the Lancashire companies conduct
broker business using non risk transfer TOBAs. This mitigates the
risk due to non-payment by brokers and intermediaries as monies
are held in separated client accounts.
Portfolio management: The Group maintains liquidity in excess
of the Board agreed tolerances. This is achieved through the
maintenance of a highly liquid portfolio with short duration
and high creditworthiness. We monitor this through the use
of stress tests and mitigate risks through the quality of the
investments themselves.
MITIGATION
Capacity: We mitigate IT availability risk by adding redundancy to
the capacity we need and using backups of data including off-site
storage that we test regularly.
Testing and access: We mitigate the integrity risk by using
independent external penetration tests, and by restricting access
to key systems to only those people who are qualified and need to
use them.
Personnel: We mitigate the risks associated with staff retention
and key-man risk through a combination of resource planning
processes and controls. Examples include targeted retention
packages, documented position descriptions and employment
contracts, resource monitoring and the provision of appropriate
compensation and training schemes. The Board regularly reviews
succession planning arrangements and remuneration structures.
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 ORSA
reports made by the CRO to the Board include standing items
on Emerging Risk.
www.lancashiregroup.com
35
PERFORMANCE
CORPORATE RESPONSIBILITY
SUPPORTING COMMUNITIES –
OUR RESPONSIBILITY
TO OTHERS
WHY CORPORATE RESPONSIBILITY IS IMPORTANT TO LANCASHIRE
Corporate responsibility is an integral part of Lancashire’s approach to its
business. We recognise the need to balance our commitment to our shareholders,
employees and more immediate stakeholders with a responsibility to support the
wider communities whether within our neighbouring areas or further afield. The
Lancashire Foundation, our charitable grant making body, is the cornerstone of our
support. The channelling of the talents and energy of our staff in helping others in
this way helps benefit and build Lancashire’s business and a positive culture.
Lancashire has a relatively low headcount (fewer 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. During 2016, the Board approved a
statement addressing modern slavery and human trafficking
concerns, which is published on the Lancashire website. The
Board has recently reviewed the statement on slavery and
human trafficking and concluded that it remains fit
for purpose.
OUR APPROACH
Lancashire tries to improve society and our environment using
such tools as donations by the Foundation and the allocation
of staff charity days to work on local improvement projects.
We limit the negative impact of our carbon footprint through
mitigation strategies and offsets. As well as the direct benefits,
we believe that Lancashire reaps indirect benefits in terms of
its attraction as an ethical and compassionate employer, and
the positive and long lasting team-building benefits of the
activities undertaken. In terms of governance, the Board
sets the policy for corporate donations to the Foundation
and reviews reports on its activities. The day-to-day activities
of the Foundation are delegated to a Donations Committee
comprised of staff members from across our operating
platforms, which monitors and reports on the activities of the
charities to which donations are made and brings a mixture of
passion and pragmatism to our charitable giving. The Board
also sets the policy for the operation of the HR function, and
the environmental impact of the business.
WE FOCUS ON THE FOLLOWING FOUR AREAS:
COMMUNITY
$17.4m
donated by the Lancashire
Foundation since inception
See page
37
ENVIRONMENT
100%
of our 2016
CO2 emissions offset
See page
39
MARKETPLACE
100%
WORKPLACE
10
of our employees are eligible for
RSS awards
different countries represented
by our workforce
See page
40
See page
41
36
Lancashire Holdings Limited | Annual Report & Accounts 2016
COMMUNITY
We remain strongly committed to engaging with our local
communities in Bermuda and the UK, including those that are
near to our London office, and we continue to support local
initiatives and activities, 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. We believe that our
mixture of financial support and voluntary engagement provides
greater satisfaction for our staff and greater value to our charities.
In 2016, 79 of our staff members across the Group participated
in one or more of the volunteering opportunities offered by
Lancashire. 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 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 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 support
some of the poorest communities in the Philippines with ICM.
We also make donations to charities suggested by staff and indeed
by clients and brokers. In 2016, we supported Back Up Trust,
Batten Disease Family Association, Skiing with Heroes, National
Brain Appeal, Prostate Cancer Research Centre, Action Medical
Research, Udaan India Foundation and SCARS, 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 2016 such matched funds from the Foundation amounted
to $27,373 and supported 13 charities.
CORPORATE RESPONSIBILITY IN ACTION
School Home Support
School Home Support (SHS) is an education charity. It works
to ensure children are in school and ready to learn. SHS works
with schools, local authorities and other children’s settings to
provide personalised support to children and families, tackling
the underlying barriers to a successful education to improve
the life chances of children.
SHS has also developed an innovative new ‘early help’
programme that supports both children and parents during
transition from home or nursery into primary school and from
primary to secondary school. Part of the work involves raising
aspirations and helping parents and children understand the
link between doing well at school and future employment.
On 19 October 2016, Lancashire took part in an SHS
Aspiration Session to introduce the idea of employment in the
City of London to a small group of ten year old children from a
primary school in south London, providing an insight into the
corporate environment. SHS Aspiration Sessions are designed
to raise ambitions for future employment and to overcome any
misconceptions and fears that children (and their parents)
have around working within a corporate environment.
“It was really helpful for the children to hear what the Lancashire
employees’ jobs involve on a daily basis and what it is like to be
working for the Lancashire Group. I would also like to take this
opportunity to thank them for answering all of the children’s and
adults’ questions. They were extremely patient with us and gave
explanations that the children could really understand.”
Tracy, SHS Practitioner
“Thank you for the amazing trip and I thoroughly enjoyed it and
definitely enjoyed looking at London’s amazing architecture. I would
love to visit the building again and hope your company does well in
the future. I loved the gift as well.”
Boy – aged ten
“Thank you for making our trip unforgettable. I know that I want to
visit Lancashire Insurance Group again because of how you made it
enjoyable and interesting. Plus you gave an amazing gift bag. You
made me start to think more about my future. Thank you.”
Girl – aged ten
Paul Russell and Louise Byrne with the primary school children who took part in the School Home
Support Aspiration Session.
www.lancashiregroup.com
37
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 2016 Project Transform volunteers
have reflected on their experience and summarised their
thoughts below:
48
members of staff have volunteered to participate in ICM’s Project
Transform in the Philippines since 2010.
“The Project Transform trip is well known amongst Lancashire
employees as the experiences of previous participants are shared with
such enthusiasm. However, being part of the trip first hand is another
thing entirely.
The communities we visited, in spite of having so many limitations
in terms of food, shelter and opportunity, were incredibly friendly,
positive and determined, and exceptionally humbling to be around.
The tireless and selfless work of the ICM staff was also eye-opening,
and there is a real focus not just at making improvements for people
within the communities in the short term, but also at creating an
overall environment in which long-term progress can be made
– through education, cooperation and ongoing support.
We returned from the trip feeling honoured to have been selected,
and hopeful that our individual and combined contributions
helped improve, in some way, the lives of people less privileged
than ourselves.”
The 2016 Project Transform team pictured from left to right – Mark Carvalho, Alannah Brown, Edward Pycraft, Caroline Palmer, Chris Sharkey, Vikram Singh, Andrew Kemp and Richard Lopez.
38
Lancashire Holdings Limited | Annual Report & Accounts 2016
ENVIRONMENT
Despite a small increase in reporting scope, total emissions for
2016 have decreased by 9.0 per cent compared to 2015, with
emissions per full-time employee (FTE) falling by 12.2 per cent.
With operations in London and Bermuda, and with clients and
brokers around the globe, the Lancashire Group incurs the
bulk of its carbon footprint as a result of airline travel, which is
offset through an organised programme. The Group operates
out of two offices, at 20 Fenchurch Street, London, and in
Bermuda. The Group is also responsible for an apartment in
Bermuda, which is used for temporary accommodation, for
which data has been collected and reported for the first time
this year.
Types of Emissions
Direct (Scope 1) Gas (kWh)
Refrigerant
Activity
Indirect (Scope 2) Electricity (kWh)
Indirect (Scope 3) Business Travel (km)
Additional Upstream
Activities
Other
Gross emissions
Gross emissions tCO2e per FTE
Carbon Credits
Net emission after offset
2016
tCO2e
90.5
0.0
488.5
1,624.3
308.7
50.3
2,562.3
12.9
(2,563)
-
2015
tCO2e
60.4
0.0
590.2
1,754.4
346.6
63.7
2,815.3
14.7
(2,816)
-
OUR APPROACH
The figures in this report are calculated over a 12-month
period from 1 January 2016 to 31 December 2016. Lancashire
uses the number of full-time employees (FTE) as its intensity
metric, which this year shows a decrease of 12.2 per cent to
12.9 tCO2e per FTE, compared to 14.7 tCO2e per FTE in 2015.
Where data was not available for 2016, values have been
extrapolated by using available data or calculated 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.
The Group’s UK operations recently achieved BREEAM
excellence for the offices at 20 Fenchurch Street,
which has supported an overall improvement in
environmental performance.
Therefore, results show that GHG emissions in the year
were 2,562.3 tonnes of CO2e, comprised of direct emissions
(Scope 1) amounting to 90.5 tonnes of CO2e, and indirect
emissions (Scope 2) amounting to 488.5 tonnes of CO2e. The
source of other indirect emissions (Scope 3) comprised 1,983.3
tonnes of CO2e. Scope 2 emissions decreased by 17.2 per cent
compared with 2015 due to a 7.2 per cent reduction in overall
consumption and the decarbonisation of the UK power grid.
Scope 3 emissions have also decreased compared with 2015
due to a reduction in air travel, most notably domestic and
short haul flights. Scope 1 emissions have increased by 49.8 per
cent due to 2016 being a colder year than 2015, resulting in
an increase in gas usage at the Fenchurch Street office.
Lancashire has purchased carbon credits to reduce its gross
GHG emissions by 2,562.3 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 in a project to supply low-
smoke cooking stoves to communities in the Darfur region
of Sudan. These offsetting proposals were discussed and
agreed with the Group’s CEO.
www.lancashiregroup.com
39
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 2016, our employees have given
talks at industry conferences, investor days and symposia, and
market education programmes. As noted on page 37, we also
donate to many of the causes supported by our industry
partners through the Foundation.
OUR APPROACH
We believe 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 is active within the Lloyd’s market.
With our clients and their brokers, we are happy to welcome
them to our offices, but we also travel to see them and their
businesses all around the world.
OUR FOCUS AREAS
Regulators: we recognise the need to engage closely with our
regulators at the PRA, FCA, BMA and at Lloyd’s and seek to
be transparent in all our dealings with them.
Clients: we strive to offer clear, fairly priced and useful
products that meet their needs across our range of
underwriting operations.
Brokers: we are fully committed to supporting a ‘broker
market’ and prize our broker relationships very highly, right
across the Group.
Investors: we continue to work hard at investor relations and
have an active programme of engagement with investors
around the globe.
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 promote 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
and in fostering a positive and productive working environment.
Compulsory training is provided to new permanent staff
and fixed term contract staff in relation to a number of topics
as follows:
• Tax/Regulatory Operating Guidelines;
• Disclosure (including share dealing);
• Inspections;
• Financial Crime;
• ERM; and
• Communications etiquette.
Other training may be held on an ad hoc, one-off or
refresher basis.
CORPORATE RESPONSIBILITY IN ACTION
Internship Programme
In 2014, both the Group and the Foundation jointly sponsored two
internship positions for Bermuda resident college graduates. These graduates
were afforded the opportunity to spend two years working and learning about
insurance in the Group’s London office and completed their placements during
2016. One of these graduates is now a full-time employee within Lancashire and
the other has obtained a role at another market insurer in Bermuda. The Group
is pleased to confirm that we have welcomed one further graduate in the
summer of 2016.
Andrew Fleming, Intern
“The opportunities afforded to me in being selected for the Lancashire Foundation Graduate Development Programme have thus far proven themselves
to be boundless. Through Lancashire Group’s international presence, I am able to both grasp a firm understanding of how the Bermuda market
functions, as well as explore the dynamic London market – all while building the skills that I will need to be successful in the (re)insurance industry.
This, combined with a company culture that encourages questions and champions open communication, has made it both incredibly easy and
interesting to learn about the different aspects of the business. Indeed, though underwriting comes first at Lancashire, the exposure to the greater
picture that the rotation in the Lancashire Foundation Graduate Development Programme offers, provides a sound foundation from which I can
launch my career and a future that is geared towards success.”
40
Lancashire Holdings Limited | Annual Report & Accounts 2016
The training is designed to ensure that all personnel who are
employed by the Group are provided with the skills, knowledge
and expertise appropriate to their responsibilities.
Among the full-time staff, the turnover for the Group for 2016
was 20.1 per cent (an increase from 8.9 per cent in 2015), and
as at 31 December 2016, 13.1 per cent of the workforce was
composed of third-party contractors, an increase from 3.5 per
cent in 2015. The relatively high rate of staff turnover and
third-party contractors was driven principally by changes in
our Lloyd’s platform, where there was a process of refreshment
and renewal implemented during the year (see the CEO
statement and Chairman’s governance introductory
statement on pages 14 and 42 for further discussion).
Lancashire complies with all relevant local Bermudian and
UK legal requirements, in particular with respect to rights of
freedom of association, collective bargaining and working
time regulations.
OUR FOCUS AREAS
Our focus in 2016 has been to maintain the success of our
employees through ongoing training and coaching – provided
both internally and externally. During 2016 almost 32 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 2016 approximately 9.6 per cent of our
employees were promoted within the Group supported by
the training and development opportunities provided. An
area for further development during 2017 will be greater
standardisation of the appraisal and training frameworks
across the Group.
EMBRACING DIVERSITY
We are committed to being an equal opportunities employer.
The Group is currently represented by employees from
ten different nations. The gender split of males to females
(see page 56) within the Group is 61/39 per cent respectively.
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.
CORPORATE RESPONSIBILITY IN ACTION
Bermuda Zoological
Society
The Bermuda Zoological Society (‘BZS’) is
the support charity for the Bermuda Aquarium,
Museum & Zoo (‘BAMZ’). Their mission statement
is: “The shared mission of BAMZ and the BZS is to inspire
appreciation and care of island environments. We fulfill
our mission through our animal habitat exhibits, which
focus on species from oceanic islands, as well as related
environmental education, conservation projects and
research programmes.”
On 16 September 2016 Bermuda staff spent
their annual day of giving on Trunk Island,
the BZS living classroom and nature reserve.
In 2015, BZS purchased a 2.4 acre lot on the
island and have spent considerable time creating a
comprehensive restoration plan under the guidance
of Dr David Wingate. He is a well known Bermudian
ornithologist, naturalist and conservationist and
under his direction the staff culled invasive species
as well as performed general landscaping tasks.
“Trunk Island provides numerous and unique educational
opportunities for Bermuda school students and the
community. However, it does require significant people
power to maintain and improve the island. We at the
Bermuda Zoological Society could not do it without the
support of our corporate community. The Lancashire
Group has been a major supporter of this project and we
are very grateful for everything that they have helped us
with. We look forward to working with them in the future
and showing the many improvements that they helped to
make happen!”
Dr Ian Walker, Principal Curator
“Thank you to the Lancashire Group for their support
of Trunk Island. You accomplished a lot and kept our
staff and volunteers busy with your enthusiasm and
commitment. Please come back again!”
Joanne Chrisnall, Volunteer Co-ordinator
Lancashire Bermuda staff at their annual day of giving on Trunk Island.
www.lancashiregroup.com
41
PERFORMANCE
CHAIRMAN’S INTRODUCTION
GOOD GOVERNANCE AND
A POSITIVE CULTURE
How does the Board set and monitor
the governance objectives for the Group?
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 and Accounts for the 2016 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. In 2016 the PRA became the
Group supervisor in accordance with the requirements of
the UK’s Solvency II regime.
I am pleased to be able to report that there are no areas
of material non-compliance with the Code. As a Board and
business we seek to use the formal consideration of governance
and regulatory requirements not merely as a ‘box ticking’
exercise, but as useful tools for the structuring of agendas and
the consideration of matters of risk and opportunity that are
of real commercial and strategic benefit to the Group.
Is the Board effective in shaping a positive
corporate culture?
Lancashire strives to implement simple yet effective systems
of corporate governance in a way that helps shape strategy,
monitors its implementation, balances support and challenge
for management and the business and embeds a positive and
open corporate culture throughout the Group.
Good strategic debate and decision-making remain central
to the work of any board. At Lancashire we are fortunate in
having a nimble strategy and a simple ‘flat’ structure with a
total employee headcount at 31 December 2016 of 198. This
means that all our Directors have regular opportunities to
meet with both the members of our management team and
other employees within the business. That helps inform our
Board’s active understanding of the business, its needs
and challenges.
Further to the requirements of Solvency II, UK regulated
insurers are required to prepare an ORSA report. Both the
management team and the Board have engaged fully with
the ORSA process, and use it as a tool to help deepen our
understanding of our business, better understand the risks and
opportunities facing it and to refine and focus Lancashire’s
strategic thinking and priorities.
PETER CLARKE
Non-Executive Chairman
Governance, when done well, helps
facilitate clear communication, constructive
challenge and debate and creative strategic
decision making. It cultivates a positive,
open and balanced culture throughout
our business.
In my opening statement I discussed those areas in which our business
and Board addressed the challenges of 2016 within the context of our
strategic objectives. The following section focuses on the formal work
carried out by the Board and its Committees in exercising effective
oversight, taking decisions and providing support and constructive
challenge to the business.
42
Lancashire Holdings Limited | Annual Report & Accounts 2016
During 2016 our Board once again used the services of
Lintstock Limited (a third-party provider of board evaluation
services) in facilitating a review of 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 enable them 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. I would like to thank all
of our Directors for their hard work during the year.
What changes have there been to the Board and
governance teams during 2016?
At our AGM in 2016 I became LHL Chairman in planned
succession to Martin Thomas. Martin had served in that role
since 2006, soon after the Company’s formation. In July 2016
Emma Duncan stepped down as a Non-Executive Director
after six years’ service on the Board. Both Martin and Emma
have contributed to Lancashire’s success as a respected
international specialty insurer and reinsurer and an
established member of the FTSE 250 with a track record of
generating superior returns for its investors. Our good wishes
and thanks go to them. We have also been fortunate to have
recruited Robert Lusardi and Michael Dawson to our Board.
They bring a wealth of underwriting and insurance industry
experience to our Board.
On our subsidiary boards, 2016 witnessed a changing of the
guard at CUL. Tony South (the CUL Chairman), Robin Oakes
and Elvin Patrick have left the CUL Board after many years’
service and we were delighted to welcome Nick Davenport
and Lance Gibbins as new independent Non-Executive
Directors of CUL. Simon Fraser, the Group’s Senior
Independent Non-Executive Director, also joined the CUL
Board. In February 2017, Nick will assume the role of CUL
Chairman from Tony Minns, who has decided to step down
having served as a CUL Non-Executive Director for many
years, and latterly as CUL Chairman.
Following Martin’s departure, Steve Smart assumed the
Chairmanship on the LUK Board and we also welcome
Adrian Colosso as a valued member of that Board. Samantha
Hoe-Richardson, Chairman of the Group’s Audit Committee,
also joined the LUK Board as a Non-Executive Director.
Peter Clarke
Non-Executive Chairman
OUR GOVERNANCE STRUCTURE
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 50
Page 55
Page 57
Page 58
Page 59
Operational
Boards
LUK
BOARD
LICL
BOARD
KCML
BOARD
CUL
BOARD
www.lancashiregroup.com
43
GOVERNANCE
BOARD OF DIRECTORS
A WELL-BALANCED
BOARD
Peter Clarke
Non-Executive Chairman
Alex Maloney
Chief Executive Officer
Elaine Whelan
Chief Financial Officer
Michael Dawson
Non-Executive Director
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 joined Lancashire
in March 2006 and leads both the
Group finance function and the
Bermuda subsidiary, reporting to
the Group Chief Executive Officer.
Ms Whelan was previously Chief
Accounting Officer of Zurich
Insurance Company, Bermuda
Branch. Prior to joining Zurich,
Ms Whelan was an Audit Manager at
PricewaterhouseCoopers, Bermuda,
where she managed a portfolio of
predominantly (re)insurance and
captive insurance clients. Ms Whelan
graduated from the University of
Strathclyde in 1994 with a BA in
Accounting and Economics and
gained her Chartered Accountancy
qualification from the Institute of
Chartered Accountants of Scotland
in 1997.
Michael Dawson has more than 35
years’ experience in the insurance
industry, having started his career
at Lloyd’s in 1979. He joined Cox
Insurance in 1986 where he was the
Chief Executive from 1995 to 2002.
In 1991, Mr Dawson formed and
became the underwriter of Cox’s and
subsequently Chaucer’s specialist
nuclear syndicate 1176. Between
2005 and 2008 Mr Dawson was
appointed Chief Executive of
Goshawk Insurance Holdings PLC
and its subsidiary Rosemont Re, a
Bermuda reinsurer. Mr Dawson
served on the Council of Lloyd’s
from 1998 to 2001 and on the Lloyd’s
Market Board from 1998 to 2002. He
is a Non-Executive Director of Pool
Re (Nuclear) Limited and Deputy
Chairman of the management
committee of Nuclear Risk
Insurers Limited.
Peter Clarke 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 AXA
Investment Managers S.A., RWC
Partners Limited and Lombard
Odier Asset Management. He is a
member of the Treasury Committee
of King’s College London. Mr Clarke
took a first in Law at Queens’
College, Cambridge and is a
qualified solicitor, having practised
at Slaughter and May, and has
experience in the investment
banking industry, working at
Morgan Grenfell and Citibank.
44
Lancashire Holdings Limited | Annual Report & Accounts 2016
Simon Fraser
Senior Independent
Non-Executive Director
Simon Fraser was Head of
Corporate Broking at Merrill
Lynch and subsequently
Bank of America Merrill
Lynch until his retirement
in 2011. He began his career
in the City in 1986 with BZW
and joined Merrill Lynch in
1997. He led Initial Public
Offerings, Rights Issues,
Placings, Demergers and
Mergers and Acquisitions
transactions during his
career and advised many UK
companies on stock market
and LSE issues. Mr Fraser
has an MA degree in modern
history from the University
of St Andrews. He is also
a Non-Executive Director
of Legal and General
Investment Management
(Holdings) Limited and
Senior Independent Director
of Derwent London plc,
where he chairs the
Remuneration Committee
and sits on the Audit and
Nominations Committees.
Mr Fraser also serves
as a Non-Executive
Director of Cathedral
Underwriting Limited.
Samantha Hoe-Richardson
Non-Executive Director
Robert Lusardi
Non-Executive Director
Tom Milligan
Non-Executive Director
Christopher Head
Company Secretary
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.
Ms Hoe-Richardson is also
a Non-Executive Director
of LUK.
Robert Lusardi is currently
a private investor and has
spent his career as a senior
executive in the financial
services industry. From
1980 until 1998 he was
an investment banker with
Lehman Brothers, ultimately
as Managing Director in
charge of the insurance and
asset management practices.
From 1998 until 2005 he was
a member of the Executive
Management Board of XL
Group plc, first as Group
CFO then as CEO of one
of their three operating/
reporting segments; from
2005 until 2010 he was an
EVP of White Mountains
(an insurance merchant
bank) and CEO of certain
subsidiaries; and from 2010
to 2015 he was CEO of
PremieRe Holdings LLC.
He has been a director of a
number of insurance related
entities including Symetra
Financial Corporation,
Primus Guaranty Ltd.,
OneBeacon Insurance
Group Ltd., Esurance Inc.,
Delos Inc. and FSA
International Ltd. He is
also on the board of Oxford
University’s 501(c)3
charitable organisation.
He received his BA and MA
degrees in Engineering and
Economics from Oxford
University and his MBA
from Harvard University.
Tom Milligan 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 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 joined
Lancashire in September
2010. He was appointed
Company Secretary of
Lancashire Holdings Limited
in 2012 and advises on issues
of corporate governance and
generally on legal affairs for
the Group. He also advises
on the structuring of
Lancashire’s third-party
capital underwriting
initiatives which have
included the Accordion
and Kinesis facilities. Prior
to joining Lancashire, he was
in-house Counsel with the
Imagine Insurance Group,
advising specifically on the
structuring of reinsurance
transactions. He transferred
to Max at Lloyd’s in 2008
as Lloyd’s and London
Counsel. Between 1998
and 2006 Mr Head was
Legal Counsel at KWELM
Management Services
Limited, where he managed
an intensive programme
of reinsurance arbitration
and litigation for insolvent
members of the HS Weavers
underwriting pool.
Mr Head is a UK solicitor
having worked until 1998
at Barlow Lyde and Gilbert
in the Reinsurance and
International Risk Team.
Mr Head has a history MA
and legal qualification from
Cambridge University.
www.lancashiregroup.com
45
GOVERNANCE
OUR BOARD’S YEAR
HIGHLIGHTS OF
THE BOARD’S YEAR
FEBRUARY / Q1 MEETING
JUNE / BOARD STRATEGY DAY
• In light of Martin Thomas’s planned
retirement as a Director and Chairman
of the Board at the conclusion of the 2016
AGM, the Board decided to appoint
Peter Clarke as his successor. The Board
approved the appointment of Simon
Fraser as a Non-Executive Director
of CUL.
• The Board reviewed and approved the
Group’s 2016 business plan that had been
updated in light of the 1 January renewals
and then current market conditions.
• Following its quarterly review of capital
management, the Board declared a final
ordinary dividend of $0.10 per common
share in respect of the year ended 31
December 2015.
• The Board reviewed the Group’s 2016
framework for executive remuneration.
• The Board approved 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 2015, for presentation to
shareholders for approval at the
2016 AGM.
• The Board approved the Annual Report
and Accounts 2015.
APRIL / Q2 MEETING
• The Board approved the Solvency II
opening submissions as at 1 January 2016
for submission to the PRA.
• The Board reviewed and adopted
the Group’s 2016 investment strategy.
• The Board received an annual investor
relations presentation from the Group’s
corporate brokers.
• The Company’s 2016 AGM was held at its
Head Office on 4 May 2016. All resolutions
were duly passed.
• The objective of the 2016 strategy day
was to consider the key decisions to be
made in the preparation of the Group’s
three-year strategic plan. The agenda for
the day included:
• review of the current strategy, including
the underwriting, investment and
capital management strategies;
• a presentation on the London
and International specialty and
reinsurance markets;
• consideration of the business’s
resourcing and training needs;
• review of the emerging and strategic
risks identified during the past
12 months; and
• discussion of the strategic themes
and options for the business.
JULY / Q3 MEETING
• The Board approved the appointment
of Robert Lusardi as a Non-Executive
Director and acknowledged the retirement
of Emma Duncan.
• The Board approved the Group’s 2016
reforecast business plan in light of market
conditions and expectations following 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 and adopted
the Group’s three-year strategic plan,
including the Group’s risk, and capital
and solvency appetites.
• The Board approved and adopted the
three-year strategy and business plan for
the Cathedral group of companies.
• The Board approved and adopted the
Company’s ERM strategic objectives
and plan.
• The Board received and approved
a recommendation from the Audit
Committee that a recommendation
be made to shareholders for approval
at the 2017 AGM to appoint KPMG
as the Company’s external auditors.
46
Lancashire Holdings Limited | Annual Report & Accounts 2016
• The Board approved and adopted a
Group-Wide Share Dealing Policy and
a revised Group Share Dealing Code
following the implementation of the
Market Abuse Regulation in July 2016.
• The Board approved and adopted
an updated division of responsibilities
between the Chairman and the CEO
together with 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 amendments to the
Group’s investment portfolio guidelines.
• The Board approved the change of the
Group’s corporate brokers to Morgan
Stanley and received a presentation
from their team on the current market
conditions and outlook, particularly
in light of the Brexit vote.
NOVEMBER / Q4 MEETING
• The Board declared a special dividend
for 2016 of $0.75 per common share.
• The Board approved and adopted
the Group’s 2017 business plan.
• The Board approved the
appointment of Michael Dawson
as a Non-Executive Director.
• The Board approved and adopted
the Group’s updated succession plan.
• The annual performance evaluation
of the Board and its Committees and
individual Directors was commissioned,
to be facilitated by Lintstock Limited.
• The Board approved the appointment
of Samantha Hoe-Richardson as a
Non-Executive Director of LUK.
DECEMBER
• The Board approved the Group ORSA
report for submission to the PRA.
CORPORATE GOVERNANCE REPORT
BOARD
COMMITTEES
THE DIRECTORS
Appointments to the Board are made on merit, against
objective criteria and with due regard for the benefits of
diversity on the Board, including gender. The Board considers
all of the Non-Executive Directors to be independent within
the meaning of the Code.
Michael Dawson, Simon Fraser, Samantha Hoe-Richardson,
Robert Lusardi and Tom Milligan are independent, as each
is independent in character and judgement and has no
relationship or circumstance likely to affect his or her
independence. Peter Clarke was independent upon
his appointment as Chairman on 4 May 2016. At the
Board meeting held on 15 February 2017, 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.
During 2016 the Board noted Alex Maloney’s acquisition of
an interest in a Lloyd’s Nameco (further details of which are
set out on page 154), and the resultant alignment with the
Names on Syndicate 2010.
In accordance with the provisions of the Code, all the
Directors of the Company are submitting themselves for
re-election at the 2017 AGM.
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 an updated formal
division of responsibilities between the Chairman and the
CEO. The Chairman is responsible for the leadership and
management of the Board and for providing appropriate
support and advice to the CEO. The CEO is responsible
for the management of the Group’s business and for the
development of the Group’s strategy and commercial
objectives. The CEO is responsible, along with the
executive team, for implementing the Board’s decisions.
The Board and its Committees meet on at least a quarterly
basis. At the regular quarterly Board meetings, the Directors
review all areas of the Group’s business and receive reports
from management on underwriting, reserving, finance, 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. A Board strategy day
was held in June 2016.
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
47
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 2014
performance evaluation was conducted internally, whilst in
2015 and 2016 the evaluations were facilitated by Lintstock
Limited, a London-based corporate advisory firm with no
other connection to the Group.
The 2016 evaluation process involved each Director
as well as the Company Secretary, the Group CRO and the
Group General Counsel completing a confidential online
questionnaire designed by Lintstock and with input from the
LHL Chairman and the Chairmen of each of the relevant
Committees. Responses to the completed questionnaires were
collated by Lintstock, who then prepared a suite of summary
reports that were discussed in draft with the Chairman before
being distributed to each of the Directors.
48
Lancashire Holdings Limited | Annual Report & Accounts 2016
In February 2017, 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 2016
evaluation reports, the Board concluded that it operates
effectively and has a good blend of insurance, financial
and regulatory expertise. All Non-Executive Directors are
committed to the continued success of the Group and to
making the Board and its Committees work effectively.
Attendance at Board meetings was found to be excellent.
The CEO and the CFO, the Company’s Executive Directors,
were also found to be operating effectively.
Appropriate infrastructure, processes and governance
mechanisms are in place to support the effective performance
of the Board and its Committees. The Board is considered to
manage risk effectively. The number of Directors on the
Board is considered to be appropriate.
The evaluation process proved a useful learning exercise.
Amongst the principal themes identified, the Board
considered the attributes required in future Non-Executive
appointments, and agreed on the need to ensure sufficient
time for the discussion and exploration of strategy and to
continue to develop the understanding of the views of
shareholders. A number of areas in which to optimise
the focus of Board and Committee meetings were also
identified for action.
The Board will continue to review its procedures, training
requirements, effectiveness and development during 2017.
The Chairman’s performance appraisal was conducted by
the Senior Independent Director, who consulted with the
Non-Executive Directors with input from the Executive
Directors during November 2016. The discussion and feedback
was extremely positive regarding all aspects of the Chairman’s
performance. Particular mention was made of the time he
spends with the business and his support of the senior
executives. It was noted that the Chairman also attends (at
the invitation of the relevant Committee Chairman) meetings
of those Committees of which he is not an appointed member,
thus tracking the detail of Committees’ decision-making, as
well as providing strategic and high level leadership to
the Board.
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 2016 and to set targets for 2017. 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 61.
Non-Executive Directors
Peter Clarke1
Michael Dawson
Simon Fraser
Samantha Hoe-Richardson2
Robert Lusardi
Tom Milligan3
Executive Directors
Alex Maloney
Elaine Whelan
Original date of
appointment to Board
Board
Audit
Committee
Nomination
and Corporate
Governance
Committee
Investment
Committee
Underwriting
and Underwriting
Risk Committee
Remuneration
Committee
9 June 2014
3 November 2016
5 November 2013
20 February 2013
8 July 2016
3 February 2015
5 November 2010
1 January 2013
5/5
1/1
5/5
5/5
3/3
5/5
5/5
5/5
2/2
–
5/5
5/5
2/2
1/1
–
–
2/2
0/0
–
4/4
–
2/2
–
–
4/4
–
–
–
2/2
4/4
–
4/4
–
0/0
–
–
–
4/4
4/4
–
4/4
0/0
4/4
2/2
2/2
–
–
–
(1) Peter Clarke resigned as a member of the Audit Committee, and was appointed as Chairman and a member of the Nomination and Corporate Governance Committee, with effect from his appointment as Chairman of
the Board on 4 May 2016.
(2) Samantha Hoe-Richardson served as a member of the Remuneration Committee from 4 May 2016 to 3 November 2016.
(3) Tom Milligan served as a member of the Audit Committee from 4 May 2016 to 8 July 2016. He was appointed as a member of the Nomination and Corporate Governance Committee with effect from 8 July 2016.
RELATIONS WITH SHAREHOLDERS
During 2016, 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 2017 AGM.
The Company commissions regular independent shareholder
analysis reports together with independent research on
feedback from shareholders and analysts following the
Company’s results announcements. This research, together
with the analysts’ notes, is made available to all Directors.
ENTERPRISE RISK MANAGEMENT
The Board is responsible for setting the Group’s risk appetites,
defining its risk tolerances, and monitoring and ensuring
compliance with those risk tolerances. During 2016, 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 101 to 128.
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. During 2016 the Directors
participated in a number of training sessions addressing the
Board’s obligations under Solvency II and, in particular, with
regard to the review and approval of the Group ORSA and
solvency and risk regulatory reporting requirements. 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. 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 2016 and were considered to be in line with
current best practice. 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 2016 was as set out in the table
appearing above. A report from each of the Committees is set
out from page 50 to page 60.
www.lancashiregroup.com
49
GOVERNANCE
PRINCIPAL RESPONSIBILITIES OF THE COMMITTEE
• Monitors the integrity of the Group’s consolidated financial
statements and any other formal announcement relating to
the Group’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.
• Monitors developments in the Solvency II regulatory regime.
• 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.
• Makes a recommendation to the Board, to be put to
shareholders for approval at the AGM, in relation to the
appointment, re-appointment and removal of the Group’s
external auditors.
• Monitors and reviews the effectiveness of the Group’s
Internal Audit function in the context of the Group’s overall
risk management system.
• Reviews the adequacy and effectiveness of the Group’s
internal financial controls and internal control and risk
management systems (including financial, operational
and compliance controls).
• Reviews for adequacy and security the Group’s
‘whistleblowing’ arrangements, procedures for detecting
fraud and systems and controls for the prevention of bribery
and money laundering.
COMMITTEE REPORTS
AUDIT
COMMITTEE
SAMANTHA HOE-RICHARDSON
Chairman of the Audit Committee
‘The essential features of the Audit
Committee’s relationship with the Board,
with the executive management and with
internal and external auditors are a frank,
open working relationship and a high level
of mutual respect.’
(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 Audit
Committee as a whole has competence in the specialty insurance and
reinsurance sectors. The internal and external auditors have the right of
direct access to the Audit Committee. The Audit Committee’s detailed
Terms of Reference are available on the Company’s website.
Samantha Hoe-Richardson (Chairman)
Peter Clarke1
Simon Fraser
Robert Lusardi2
Tom Milligan3
Meetings attended
5/5
2/2
5/5
2/2
1/1
(1) Peter Clarke resigned as a member of the Audit Committee with effect from his appointment as Chairman of the
Board on 4 May 2016.
(2) Robert Lusardi was appointed as a member of the Audit Committee with effect from 8 July 2016.
(3) Tom Milligan served as a member of the Audit Committee from 4 May 2016 to 8 July 2016.
50
Lancashire Holdings Limited | Annual Report & Accounts 2016
HOW THE COMMITTEE DISCHARGED ITS RESPONSIBILITIES DURING 2016
FINANCIAL REPORTING
COMMITTEE RESPONSIBILITY
Monitors the integrity of the Group’s
consolidated financial statements and any
other formal announcement relating to the
Group’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
regulatory 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 143 for further details).
An annual paper is also presented to the Committee that details the areas of
judgement or estimation in the financial statements (see accounting policies page 95
for the details of these areas). The Committee also considers quarterly reports on the
financial statements from the external auditors, including an interim review results
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 2016, those
that were considered significant were loss reserving and the valuation of intangible
assets. These are explained in further detail on page 54. 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 2016 Annual Report and Accounts
at the February 2017 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 2016 to the Committee by the CRO detailing
the Group’s Solvency II activities and how the Group was meeting the requirements
of the new regime. The comprehensive training programme to ensure that all Board
members are able to discharge their Solvency II responsibilities was continued through
2016 and will be sustained in 2017.
www.lancashiregroup.com
51
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.
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 without management present to discuss any particular concerns or sensitivities
about the audit process, and with management without the external auditors present
to obtain feedback on the audit process. During 2016, an assessment of the effectiveness
of the external audit process was led by the Committee Chairman with input from the
Company’s senior management and the external auditors. The review enabled the
Audit Committee to determine that the external audit process was effective and to
note some minor development areas for future audits.
The Committee has approved and adopted a non-audit services policy that is reviewed
on an annual basis and was last updated in October 2016. The policy, which stipulates
rules around approvals required for various types of non-audit services, can be found
on the Company’s website. During 2016, EY provided non-audit services in relation
to UK taxation. Fees for non-audit services provided in 2016 totalled $0.1 million
representing 3.7 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.
– Makes a recommendation to the Board, to
be put to shareholders for approval at the
AGM, in relation to the appointment,
re-appointment and removal of the
Company’s external auditors.
It was disclosed in the Annual Report and Accounts 2015 that the contract for the
provision of external audit services commencing in the financial year 2017 would be
put out to tender during 2016 and a recommendation would be made to shareholders
at the 2017 AGM. Details of the external audit tender process and the results thereof
are disclosed on page 54.
52
Lancashire Holdings Limited | Annual Report & Accounts 2016
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 highest rated Lancashire and Kinesis risks are considered for audit
annually, moderate risks every two years and the lowest risks every three years. The
highest rated Cathedral risks are considered for audit biannually, moderate risks every
three years and the lowest risks every four 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. The Committee meets in executive
session with the Head of Internal Audit on at least an annual basis.
During 2016, 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 CRO, with a report
issued to the Committee. The Committee discussed the report and its findings with
the CRO 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.
INTERNAL CONTROLS AND RISK MANAGEMENT SYSTEMS
COMMITTEE RESPONSIBILITY
Reviews the adequacy and effectiveness
of the Group’s internal financial controls
and internal control and risk management
systems (including financial, operational
and compliance controls).
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 2016, the Committee was satisfied
that the Company’s internal control framework was operating effectively.
Reviews for adequacy and security the Group’s
‘whistleblowing’ arrangements, procedures
for detecting fraud and systems and controls
for the prevention of bribery and money
laundering.
During 2016, 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. There were no instances of whistleblower
reporting or financial crime recorded during the year.
The Committee also keeps under review the adequacy and effectiveness of the
Company’s legal and compliance function.
www.lancashiregroup.com
53
GOVERNANCE
COMMITTEE REPORTS CONTINUED
EXTERNAL AUDIT TENDER PROCESS
It was disclosed to shareholders in the Annual Report and
Accounts 2015 that a competitive external audit tender process
would be undertaken during 2016. EY have been the Group’s
external auditors since the Group’s formation in 2005 and the
provision of external audit services has not been subject to a
tender since then. Angus Millar has been the lead audit partner
since 2012.
EY was amongst the firms that were invited to participate in
the external audit tender process, which was as follows:
• The Audit Committee approved a detailed project plan
and approach.
• After an initial high level consideration of seven firms,
including three mid-tier organisations, the process was narrowed
down to three firms. It was considered that none of the mid-tier
firms had the breadth of insurance expertise necessary across
the UK and Bermuda to be considered further.
• A formal invitation to tender letter and request for information
questionnaire (‘RIQ’) was sent to the three firms.
• Following meetings with management and the Chairman of the
Audit Committee and scoring of the RIQ responses, the Audit
Committee agreed to reduce the number of firms to two for the
final part of the process. These firms were issued with a request
for proposal (‘RFP’).
• Both firms had meetings with members of the Audit Committee
and various members of the Group’s management and were
scored across a number of requirements.
• Responses to the RFPs were received from the tendering firms,
and also scored.
• Presentations were made by the tendering firms to the selection
panel, which included members of the Audit Committee.
• Following the presentations and a review of the firms’ scores a
decision was made by the Audit Committee to recommend to
the Board the appointment of KPMG as external auditors.
• The Board of Directors discussed the recommendation and
approved the proposal to recommend the appointment of
KPMG by shareholders at the 2017 AGM.
2016 AREAS FOR FOCUSED INQUIRIES
In addition to the regular cycle of activities, the Audit Committee
also initiated a number of focused inquiries into specific areas
during the year. A specialist from the Group senior management
team was invited to present a topic to the Committee to increase
the Committee’s understanding and facilitate discussion and
challenge within specific areas. During 2016 areas covered were:
• Review of the Group’s IT architecture and key risks
and controls.
• The application of judgements within the loss reserving process.
• A review of manual intervention in finance processes.
SIGNIFICANT AREAS OF JUDGEMENT OR ESTIMATION
LOSS RESERVES AND EXPENSES
As detailed on pages 143 to 145 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. EY conduct a high level review
of the Group’s loss reserves as part of their first and third
quarter review procedures. The Reserving Actuary,
independent actuary and EY present a comparison of
Lancashire’s reserves to their own best estimates at the second
and fourth quarter Audit Committee meetings. During 2016,
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 97 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
with management and EY that there was no impairment of
the Company’s intangible assets.
PRIORITIES FOR 2017
The Committee’s key priorities for 2017 are:
• To achieve a smooth transition of external auditors and
a constructive and productive relationship with KPMG
in that role.
• To ensure the continued effectiveness of the Group’s control
environment and the integrity of external financial reporting.
• To monitor the preparation by the Group for the
implementation of IFRS 17 following confirmation
by the IASB of the 1 January 2021 effective date.
54
Lancashire Holdings Limited | Annual Report & Accounts 2016
NOMINATION AND
CORPORATE GOVERNANCE
COMMITTEE
PETER CLARKE
Chairman of the Nomination and Corporate Governance Committee
The focus of the Committee during 2016
has been on succession planning and
consideration of the balance of skills,
experience, independence and knowledge
on the Board and talent management
across the business.
COMMITTEE MEMBERSHIP
A majority of the members of the Nomination and Corporate Governance
Committee are independent Non-Executive Directors. The Committee
Chairman is Peter Clarke, who is the Chairman of the Board.
Peter Clarke1 (Chairman)
Michael Dawson2
Samantha Hoe-Richardson
Tom Milligan3
Martin Thomas1
Emma Duncan3
Meetings attended
2/2
0/0
4/4
2/2
2/2
2/2
(1) Martin Thomas retired as a member of the Nomination and Corporate Governance Committee as of his
retirement from the Board on 4 May 2016. Peter Clarke succeeded Martin Thomas as Chairman of the Committee.
(2) Michael Dawson was appointed as a member of the Nomination and Corporate Governance Committee with effect
from 3 November 2016.
(3) Emma Duncan retired as a member of the Nomination and Corporate Governance Committee with effect from
8 July 2016. Tom Milligan succeeded Emma Duncan as a member of the Committee.
PRINCIPAL RESPONSIBILITIES OF THE COMMITTEE
• Reviews the structure, size and composition (including the
skills, knowledge, experience and diversity) of the Board.
• Considers succession planning for Directors and other
senior executives.
• Nominates candidates to fill Board vacancies.
• Makes recommendations to the Board concerning
Non-Executive Director independence, membership of
Committees, suitable candidates for the role of Senior
Independent Director and the re-election of Directors
by shareholders.
• Reviews the Company’s corporate governance arrangements
and compliance with the Code.
• Makes recommendations to the Board concerning the
charitable and corporate social responsibility activities of
the Company and donations to the Lancashire Foundation.
HOW THE COMMITTEE DISCHARGED ITS RESPONSIBILITIES
DURING 2016
BOARD COMPOSITION AND APPOINTMENT OF
NON-EXECUTIVE DIRECTORS
The Committee reviewed the composition of the Board to
ensure that the balance of skills, experience, independence,
knowledge and diversity continued to be appropriate for
the Group’s business to meet its strategic objectives. The
Committee also considered whether any additional skills
and experience were needed, to complement those already
on the Board.
In this regard, the Eliot Partnership, a global insurance
executive search firm with no other connection to the Group,
were engaged. They identified a number of potential candidates.
The Committee recommended the appointments of Robert
Lusardi and Michael Dawson as Non-Executive Directors.
The Committee recommended to the Board the various
changes to the composition of the Board Committees which
were made 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 2016 was the continued
buildout of the Group’s talent management and development
programme to ensure it is aligned with the overarching
business strategy.
www.lancashiregroup.com
55
GOVERNANCE
COMMITTEE REPORTS CONTINUED
APPOINTMENT OF DIRECTORS TO SUBSIDIARY BOARDS AND
SENIOR EXECUTIVE POSITIONS
The Committee monitored the composition of subsidiary
Boards during 2016, reviewing in particular the appointments
of Simon Fraser, Lance Gibbins and Nicholas Davenport as
Non-Executive Directors of CUL, the appointment of Beverley
Todd as the Non-Executive Director and Chair of LICL,
and the appointments of Adrian Colosso and Samantha
Hoe-Richardson as Non-Executive Directors of LUK. The
Committee also reviewed the appointments of Heather
McKinlay to the role of CUL CFO, Marion Madden as interim
Managing Director of CUL and Andrew McKee, who will be
joining the Group as the permanent CUL CEO in June 2017.
CORPORATE GOVERNANCE
The Committee keeps under review the Company’s corporate
governance, particularly compliance with the Code, and
is responsible for making recommendations to the Board
concerning the process for conducting and facilitating the
annual performance evaluation of the Board, its Committees
and the individual Directors – see page 48.
During 2016, the Committee recommended the approval by
the Board of a revised Group Share Dealing Code and new
Policy following the implementation of the Market Abuse
Regulation in July 2016.
The Committee also recommended the approval by the Board
of an updated protocol for the division of responsibilities and
roles of the Chairman and Group CEO and the responsibilities
and reporting lines of the CEOs of Group subsidiaries.
The Committee 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’ 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 also reviewed and approved the Chairman’s
statement on Slavery and Human Trafficking which is posted
on the Company’s website.
THE LANCASHIRE FOUNDATION
The Committee is responsible for monitoring and making
recommendations to the Board in relation to the Company’s
charitable giving policy and the operation of, and reporting
requirements for, the Lancashire Foundation. The Committee
held a meeting with the Trustees of the Lancashire Foundation
during the autumn of 2016 to receive a report on its charitable
activities and to discuss the ways in which the Foundation
engages with employees throughout the Group.
PRIORITIES FOR 2017
The Committee’s key priorities for 2017 are:
• To continue to review succession planning for Directors
and senior executives and to support management in the
development of the talent pipeline.
• To review the outcomes of the 2016 annual performance
evaluation of the Committees’ performance, the
composition of the Board, and agree and monitor
any necessary actions.
• To continue its focus on corporate governance requirements,
LHL BOARD MEMBERS
regulatory developments and compliance with the Code.
LHL BOARD MEMBERS
GROUP MANAGEMENT EXCLUDING
GROUP MANAGEMENT EXCLUDING
LHL NON EXECUTIVE DIRECTORS
LHL NON-EXECUTIVE DIRECTORS
Male
Female
OVERALL GROUP EMPLOYEES
Male
Female
OVERALL GROUP EMPLOYEES
Male: 6 (75%)
Female: 2 (25%)
Total: 8
Male: 12 (71%)
Female: 5 (29%)
Total: 17
Male: 120 (61%)
Female: 78 (39%)
Total: 198
56
Lancashire Holdings Limited | Annual Report & Accounts 2016
Male
Female
INVESTMENT
COMMITTEE
PETER CLARKE
Chairman of the Investment Committee
Our investment philosophy is to
preserve capital and to ensure liquidity
in our investments to complement our
underwriting operations and service
the needs of our clients.
COMMITTEE MEMBERSHIP
The Investment Committee comprises two independent Non-Executive
Directors, the Chairman of the Board, one Executive Director (the CFO)
and the Group Head of Investments and Treasury (who is not a Director).
Peter Clarke (Chairman)
Robert Lusardi1
Tom Milligan
Denise O’Donoghue
Elaine Whelan
Emma Duncan2
Meetings attended
4/4
2/2
4/4
4/4
4/4
2/2
(1) Robert Lusardi was appointed as a member of the Investment Committee with effect from 8 July 2016.
(2) Emma Duncan retired as a member of the Investment Committee with effect from 8 July 2016.
PRINCIPAL RESPONSIBILITIES OF THE COMMITTEE
• Recommends investment strategies, guidelines and policies
to the Board of the Company and other members of the
Group to approve annually.
• Recommends and sets risk asset definitions and risk
tolerance levels.
• Recommends to the relevant Boards the appointment of
investment managers to manage the Group’s investments.
• Monitors the performance of investment strategies within
the risk framework.
• Establishes and monitors compliance with investment
operating guidelines relating to the custody of investments
and the related internal controls.
HOW THE COMMITTEE DISCHARGED ITS RESPONSIBILITIES
DURING 2016
The Committee regularly discussed and kept under review
macro-economic and global political developments during
the year, in particular the effects of the UK Brexit vote and
the U.S. election on investment strategy and performance.
The Committee also considered regular reports on the
performance of the Group’s investment portfolios, including
asset allocation and compliance with pre-defined guidelines
and tolerances; and recommended amendments to portfolio
investment guidelines to the Board.
During the second quarter of 2016, the Committee undertook
a strategic asset allocation analysis and recommended the
2016/2017 investment strategy to the Board. During the fourth
quarter of 2016, the Committee approved the appointment of
a new hedge fund adviser.
PRIORITIES FOR 2017
The Committee’s key priorities for 2017 are:
• To maintain a continued focus on the preservation of
capital, the maintenance of liquidity and the mitigation
of interest rate risk.
• The continued management of the risk-on/risk-off balance
in the portfolio in anticipation of gradually increasing
interest rates and inflationary practices in the U.S., while
also protecting the portfolio in risk-off environments.
www.lancashiregroup.com
57
GOVERNANCE
COMMITTEE REPORTS CONTINUED
UNDERWRITING AND
UNDERWRITING RISK
COMMITTEE
PRINCIPAL RESPONSIBILITIES OF THE COMMITTEE
• Formulates Group underwriting strategy.
• Oversees the development of, and adherence to,
underwriting guidelines by operating company CUOs.
• Reviews underwriting performance.
• Reviews significant changes in underwriting rules
and policies.
• Establishes, reviews and maintains strict underwriting
criteria and limits.
• Monitors underwriting risk and its consistency with the
Group’s risk profile and risk appetite.
HOW THE COMMITTEE DISCHARGED ITS RESPONSIBILITIES
DURING 2016
Underwriting risk is the key risk 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. Lancashire continues to
prioritise good risk selection first and foremost, and the
Committee has been supportive of management’s strategic
priority of servicing the insurance requirements of a core
group of existing clients and their brokers. During 2016
the Group achieved greater efficiencies in the structuring
and pricing of outwards reinsurance protections, thereby
helping to effectively manage peak risk exposures across
the business. The Committee monitored the restructuring
of the underwriting teams within Cathedral, including the
appointments of the Active Underwriters of Syndicates 2010
and 3010 and the recruitment of new underwriters within
Cathedral during the year. The Committee also received
regular reports on the progress made in the development
of the Kinesis platform during 2016. The Committee also
received quarterly reports of significant claims and reserve
developments.
During 2016, 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 Group’s underwriting
performance appears in the Business review section of this
Annual Report and Accounts on pages 24 to 30.
PRIORITIES FOR 2017
The Committee’s key priorities for 2017 are:
• To 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.
• To work actively with management in the identification,
analysis and consideration of such new underwriters and/or
lines of business as may complement or enhance existing
underwriting strategy.
ALEX MALONEY
Chairman of the Underwriting and Underwriting Risk Committee
The Committee provides a forum for
discussing the state of the insurance and
reinsurance sectors in which the Group
operates, and determining and monitoring
the Group’s risk tolerances through the
insurance cycle.
COMMITTEE MEMBERSHIP
During 2016 the Underwriting and Underwriting Risk Committee
comprised one Executive Director (the Group CEO) and two Non-
Executive Directors together with the Group CUO, the CUO of LICL,
the CUO and Reinsurance Manager of LUK, the Active Underwriters
for Syndicates 2010 and 3010, and the Head of Capital Modeling
(who are not Directors).
Alex Maloney (Chairman)
Michael Dawson1
Paul Gregory2
Hayley Johnston
Tom Milligan
Sylvain Perrier
Ben Readdy
John Spence3
Richard Williams4
Meetings attended
4/4
0/0
3/4
4/4
4/4
4/4
4/4
1/1
2/3
(1) Michael Dawson was appointed as a member of the Underwriting and Underwriting Risk Committee with effect
from 3 November 2016.
(2) Paul Gregory was unable to attend the July 2016 Committee meeting due to planned medical leave of absence.
(3) John Spence was appointed as a member of the Underwriting and Underwriting Risk Committee with effect from
1 November 2016.
(4) Richard Williams was appointed as a member of the Underwriting and Underwriting Risk Committee with effect
from 28 April 2016.
58
Lancashire Holdings Limited | Annual Report & Accounts 2016
REMUNERATION
COMMITTEE
SIMON FRASER
Chairman of the Remuneration Committee
The Committee seeks to implement a
Remuneration Policy which ensures that
financial rewards are appropriately linked
to performance, and that there is a balance
which avoids the incentivisation of excessive
risk taking or a culture of short-termism.
COMMITTEE MEMBERSHIP
The Remuneration Committee comprises three independent
Non-Executive Directors and the Chairman of the Board.
Simon Fraser (Chairman)
Peter Clarke
Michael Dawson1
Robert Lusardi2
Emma Duncan3
Samantha Hoe-Richardson1
Meetings attended
4/4
4/4
0/0
2/2
2/2
2/2
(1) Samantha Hoe-Richardson was appointed as a member of the Remuneration Committee on an interim basis with
effect from 4 May 2016. Michael Dawson succeeded Samantha Hoe-Richardson as a member of the Committee
with effect from 3 November 2016.
(2) Robert Lusardi was appointed as a member of the Remuneration Committee with effect from 8 July 2016.
(3) Emma Duncan retired as a member of the Remuneration Committee with effect from 8 July 2016.
PRINCIPAL RESPONSIBILITIES OF THE COMMITTEE
• Sets the remuneration policy for, and determines the
total individual remuneration packages, including pension
arrangements, of the Company’s Chairman, the Executive
Directors, Company Secretary and other designated senior
executives, to deliver long-term benefits to the Group.
• Agrees personal objectives for each Executive Director
and the related performance and pay-out metrics for
the performance element of the annual bonus.
• Determines each year whether awards will be made under
the Group’s 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.
• Ensures that contractual terms on termination or
retirement, and any payments made, are fair to the
individual and the Company.
• Oversees any major changes in employee benefit structures
throughout the Group.
HOW THE COMMITTEE DISCHARGED ITS RESPONSIBILITIES
DURING 2016
During 2016, the Committee reviewed the Group incentive
packages to ensure that remuneration was structured
appropriately to promote the long-term success of the
Company. The Committee also reviewed the RSS structure
for Executive Directors to ensure that the performance
metrics continue to align the interests of the Company with
its investors and management. The Committee considered
the salary and bonus awards for 2016 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 a minimum qualifying holding for all Executive
Directors of not less than 200 per cent of salary, thereby
further increasing the alignment with shareholders.
www.lancashiregroup.com
59
GOVERNANCE
COMMITTEE REPORTS CONTINUED
In accordance with UK company best practices the Committee
also reviewed the policy for Executive Directors’ remuneration
which has a three-year life, with a view to making a policy
recommendation to shareholders at the 2017 AGM. The
Committee considers the existing policy (last approved
in 2014) fit for purpose but has proposed certain minor
amendments to the policy to improve its clarity and operation.
The Committee also reviewed the terms of the ten-year RSS
rules governing the award of long-term incentives which are
due for renewal at the 2017 AGM. No material amendments
to the terms of the RSS rules are proposed, although certain
clarificatory changes are proposed including the introduction
of more formal provisions for the use of holding periods for
specified awards. The Committee also initiated a consultation
exercise prior to the year end including significant shareholders
and certain of the proxy advisory services to receive feedback
specifically in relation to the Group’s policy for Executive
Director remuneration, the renewal of the RSS rules and the
metrics to be used for the operation of Executive Director
remuneration during 2017. Further details regarding the
policy for Executive Director remuneration and the RSS rules
are given in the Directors’ Remuneration Report and the
Annual Report on Remuneration, for which the Committee
is responsible, and which can be found on pages 61 to 79.
During 2016, 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 76.
PRIORITIES FOR 2017
The Committee’s key priorities for 2017 are:
• To review the ongoing appropriateness and relevance of the
Group’s remuneration structures.
• To review arrangements for remuneration across the wider
Group with a view to further aligning the processes for
appraisal, objective setting and remuneration across the
Lloyd’s and non-Lloyd’s platforms.
60
Lancashire Holdings Limited | Annual Report & Accounts 2016
DIRECTORS’ REMUNERATION REPORT
ANNUAL STATEMENT
Dear Shareholder,
I am pleased to present the 2016 Directors’ Remuneration Report to
shareholders.
Lancashire’s Directors’ Remuneration Policy was first put to
shareholders and approved at the 2014 AGM. The Policy has served
us well and, in accordance with the practice for UK companies, we
will be submitting our Directors’ Remuneration Policy for reapproval
at the 2017 AGM. Proposed changes are few in number and largely
ensure greater clarity and address administrative details. No material
changes are proposed to the policy. A copy of the policy proposed
for approval at the 2017 AGM is set out on pages 63 to 68.
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 RoE and the delivery of
superior total shareholder returns on a risk-adjusted basis over the
course of the insurance cycle. Our Remuneration Policy and the
way it is implemented are closely aligned to this strategy.
Against this background the Board has debated at length during
this last year the issues raised by the global macro-economic
environment, the current trend towards lower investment returns
generally and the particular challenges to the insurance industry
as a whole. The Board and management believe that the insurance
industry is cyclical in its fundamental characteristics. Therefore,
at the current low point in the insurance cycle the Group must
prioritise achieving acceptable, but more modest, returns. This
means moderating overall risk levels through underwriting discipline
and prudent reinsurance planning, whilst ensuring that the business
continues to service the needs of its core clients and brokers. The
Board considers that such measures are important to ensure the
continuing relevance of the business to its clients, shareholders and
other stakeholders, and to position the business well for the time
when market conditions turn.
PROPOSAL TO RENEW THE RESTRICTED SHARE SCHEME AT
THE 2017 AGM
Lancashire’s long-term incentive scheme, the RSS, is due to expire
in 2018 and therefore shareholder approval will be sought for a
replacement scheme at the 2017 AGM. The replacement RSS rules
will have substantially the same terms as the existing scheme. There
are some minor changes to bring the new rules more in line with
current best practice including the extension of the clawback period
for awards to three years post vesting; and a change to determine
the value of shares subject to an award from the beginning of the
financial year to a period of five trading days immediately prior to
the date of such award.
Lancashire will continue the practice of paying dividend equivalents
on vested RSS awards (structured as nil cost options) up until the
date of exercise of awards. The Company is very active in its capital
management – often paying very significant dividends which can
lead to a reduction in the share price.
PERFORMANCE OUTCOME FOR 2016
The Group has delivered very solid results in a market which
remained challenging during 2016 (see the performance review
of this report on pages 72 to 75).
Against a continuing background of difficult market conditions
there was a decrease in total remuneration of 11.1 per cent for the
CEO and 13.5 per cent for the CFO between 2015 and 2016 (see
the comparison table for single figure remuneration on page 71).
This movement is consistent with an RoE of 13.5 per cent for 2016
compared to 10.9 per cent for 2015 (13.5 per cent on a warrant
adjusted basis) and a total shareholder return of 2.4 per cent for the
year compared to 25.9 per cent for 2015, which affected vesting levels
on the 2014 RSS awards (see below and page 74 for further details).
Executive Directors’ annual bonus performance targets set at
the beginning of 2016 for personal and financial performance
were stretching, and given the Company’s 2016 performance were
achieved at above target level (and at 63 per cent of maximum bonus
for the CEO and the CFO), subject to final 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.
In relation to long-term incentives, the 2014 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 2016. Our TSR performance
(in U.S. dollars) over this period ranked the Company below the
median of the designated peer group of 11 companies, resulting in
0 per cent vesting for the TSR component.
Our average RoE performance, adjusted for warrants, over this three-
year performance period was 13.9 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
89.8 per cent of the RoE component of the 2014 Performance RSS
awards vesting. Overall, the 2014 Performance RSS awards vested at
67.4 per cent. This compared to the overall 75 per cent vesting of the
2013 Performance RSS awards due to 100 per cent vesting of the RoE
portion of those awards and 0 per cent vesting of the TSR portion of
the awards, which we reported last year.
G
G
O
O
V
V
E
E
R
R
N
N
A
A
N
N
C
C
E
E
www.lancashiregroup.com
www.lancashiregroup.com
61
61
GOVERNANCE
DIRECTORS’ REMUNERATION REPORT CONTINUED
The total remuneration received by our current Executive Directors
in 2016 was lower than that received in 2015 (see page 71 for the
comparison data). In the current difficult underwriting environment
total remuneration for the Executive Directors is lower than in many
previous years, as demonstrated by the chart of Total Remuneration
History for the CEO on page 78. The Committee believes in setting
challenging performance criteria and having a significant proportion
of the overall package linked to Company performance. However,
the Committee also continues to recognise the need to ensure that
Executive Directors are appropriately remunerated and incentivised
even in the more challenging phases of the insurance cycle, as at
present.
It is also important that the Committee and the Board ensure that
Executive Director compensation is structured in such a way to
discourage excessive risk to the business.
The like-for-like employee costs for the Group were $72.1 million in
2016 compared with $80.1 million in 2015 (see page 78 for further
detail). A majority of our employment costs are in Sterling and this
reduction is driven principally by the fall in value of Sterling against
the U.S. dollar.
Overall, in light of the annual and three-year performance delivered,
the Committee is satisfied that there has been a robust link between
performance and reward for Executive Directors.
APPLICATION OF REMUNERATION POLICY FOR 2017
As mentioned above, the Remuneration Committee has reviewed
the policy approved by shareholders and believes it remains fit for
purpose, subject to certain minor changes. The policy changes
include the introduction of a two-year holding period on long-term
incentive awards and a strengthening of share ownership guidelines
whereby a 200 per cent of salary guideline will apply to all Executive
Directors and not just the CEO. Both these changes provide greater
long-term alignment with our shareholder base.
After careful deliberation and consultation with our major
shareholders and the major shareholder advisory groups, the Board
has decided to modify the way in which the Company implements
the Remuneration Policy for 2017. In setting annual bonus targets
the Board has decided to create a more formal linkage between
performance targets and the investment return environment. In
relation to longer-term RSS awards the Board has set targets by
reference to appropriate expectations for growth in fully converted
book value per share plus dividends, an important metric for our
shareholders and within the investment community for property and
casualty companies. Relative total shareholder return will continue
to account for 25 per cent of the award. Further details are set out
on pages 69 to 71 of this report.
The final section of this report is the Annual Report on
Remuneration which provides detailed disclosure on how the policy
will be implemented for 2017 and how Directors have been paid in
relation to 2016.
The disclosures provide our shareholders with the information
necessary to form a judgement as to the link between Company
performance and how the Executive Directors are paid. This Annual
Statement together with the Annual Report on Remuneration will be
subject to an advisory vote and I hope that you will be able to support
the resolution at the forthcoming AGM. Additionally, the proposed
new Remuneration Policy for 2017–2020 and the revised RSS rules
will both be put forward at the 2017 AGM for a binding vote. 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 POLICY SECTION
As a company incorporated in Bermuda, Lancashire is not bound
• there is a blend of short-term and long-term performance metrics
with an appropriate mix of performance conditions, meaning that
by UK law or regulation in the area of Directors’ remuneration
there is no undue focus on any one particular metric;
to the same extent that it applies to UK incorporated companies.
However, by virtue of the Company’s premium listing on the
LSE, and for the purposes of explaining its compliance against
the requirements of the UK Corporate Governance Code, the
Board is committed to providing full information on Directors’
remuneration to shareholders.
The Company’s first Remuneration Policy was approved by
shareholders at the 2014 AGM. That policy had a three-year life and
will expire at the 2017 AGM.
During the year, the Committee completed a review of executive
remuneration which sought to ensure continued alignment with
• 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 Group’s consolidated financial statements,
errors in the calculation of any performance condition, or the
Executive Director ceasing to be a Director and/or employee
due to gross misconduct.
the Company’s strategy and take account of good and developing
INTO ACCOUNT
practice. The revised Remuneration Policy for the Company’s
Directors is set out in this report and will be put forward for
The Committee Chairman and, where appropriate, the Company
Chairman, consult with major investors and representative bodies
shareholder approval at the AGM on 3 May 2017. If the policy is
on any significant remuneration proposal relating to Executive
approved, it will take effect immediately following the 2017 AGM
Directors. Views of shareholders at the AGM, and feedback
and it is intended to apply for a period of three years from the 2017
received at other times, will be considered by the Committee.
HOW THE VIEWS OF SHAREHOLDERS ARE TAKEN
AGM. The revised Remuneration Policy contains details of the
Company’s policy to govern future payments that will be made to
HOW THE VIEWS OF EMPLOYEES ARE TAKEN
Directors. If approved, all remuneration and loss of office payments
INTO ACCOUNT
made after 3 May 2017 will only be made if they are consistent with
The Remuneration Committee takes into account levels of
the approved Remuneration Policy. Full details of how the Company
pay elsewhere in the Group when determining the pay levels for
will implement the revised Remuneration Policy in 2017 is provided
Executive Directors. The proposed Remuneration Policy for all staff
in the Annual Report on Remuneration section starting on page 69.
is, in principle, broadly the same as that for Executive Directors in
The Annual Report on Remuneration also details the remuneration
paid to Directors in respect of the 2016 financial year in accordance
with the policy approved at the 2014 AGM.
that any of the Group’s employees may be offered similarly structured
packages, with participation in annual bonus and long-term incentive
plans, although award types (restricted cash, restricted stock or
performance shares) and size may vary between different categories
The revised Remuneration Policy has been developed taking
of staff. For Executive Directors, with higher remuneration levels,
into account the principles of the Code and the views of our
a higher proportion of the compensation package is subject to
major shareholders.
GOVERNANCE AND APPROACH
The Company’s proposed 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
performance pay, share-based remuneration and deferral. This
ensures that there is a strong link between remuneration, Company
performance and the interests of shareholders.
Reflecting good practice in this area, Executive Directors’ pension
provision is no more generous than the pension contributions made
to employees in the Group (in percentage of salary terms).
value creation, within appropriate risk parameters. The proposed
The Company does not consult with employees on Executive
Remuneration Policy also seeks to ensure that Executive Directors
Directors’ remuneration. However, as noted above, the Committee
are provided with appropriate incentives to drive individual
is made aware of pay structures across the wider Group when setting
performance and to reward them fairly for their contribution
the Remuneration Policy for Executive Directors.
to the successful performance of the Company.
The Remuneration Committee and the Board have considered
whether any element of the proposed 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 meet their day-to-day
living expenses;
CHANGES MADE TO THE POLICY
Following the review of the remuneration arrangements for
Executive Directors, some changes were introduced to the policy to
reflect changes in best practice and to provide a limited amount of
additional flexibility.
As mentioned above, the most material policy changes include the
introduction of a two-year holding period on long-term incentive
awards and a strengthening of share ownership guidelines.
62
62
Lancashire Holdings Limited | Annual Report & Accounts 2016
Lancashire Holdings Limited | Annual Report & Accounts 2016
www.lancashiregroup.com
63
DIRECTORS’ REMUNERATION REPORT CONTINUED
The total remuneration received by our current Executive Directors
APPLICATION OF REMUNERATION POLICY FOR 2017
in 2016 was lower than that received in 2015 (see page 71 for the
As mentioned above, the Remuneration Committee has reviewed
comparison data). In the current difficult underwriting environment
the policy approved by shareholders and believes it remains fit for
total remuneration for the Executive Directors is lower than in many
purpose, subject to certain minor changes. The policy changes
previous years, as demonstrated by the chart of Total Remuneration
include the introduction of a two-year holding period on long-term
History for the CEO on page 78. The Committee believes in setting
incentive awards and a strengthening of share ownership guidelines
challenging performance criteria and having a significant proportion
whereby a 200 per cent of salary guideline will apply to all Executive
of the overall package linked to Company performance. However,
Directors and not just the CEO. Both these changes provide greater
the Committee also continues to recognise the need to ensure that
long-term alignment with our shareholder base.
Executive Directors are appropriately remunerated and incentivised
even in the more challenging phases of the insurance cycle, as at
present.
After careful deliberation and consultation with our major
shareholders and the major shareholder advisory groups, the Board
has decided to modify the way in which the Company implements
It is also important that the Committee and the Board ensure that
the Remuneration Policy for 2017. In setting annual bonus targets
Executive Director compensation is structured in such a way to
the Board has decided to create a more formal linkage between
discourage excessive risk to the business.
The like-for-like employee costs for the Group were $72.1 million in
2016 compared with $80.1 million in 2015 (see page 78 for further
detail). A majority of our employment costs are in Sterling and this
reduction is driven principally by the fall in value of Sterling against
the U.S. dollar.
performance targets and the investment return environment. In
relation to longer-term RSS awards the Board has set targets by
reference to appropriate expectations for growth in fully converted
book value per share plus dividends, an important metric for our
shareholders and within the investment community for property and
casualty companies. Relative total shareholder return will continue
to account for 25 per cent of the award. Further details are set out
Overall, in light of the annual and three-year performance delivered,
on pages 69 to 71 of this report.
the Committee is satisfied that there has been a robust link between
performance and reward for Executive Directors.
The final section of this report is the Annual Report on
Remuneration which provides detailed disclosure on how the policy
will be implemented for 2017 and how Directors have been paid in
relation to 2016.
The disclosures provide our shareholders with the information
necessary to form a judgement as to the link between Company
performance and how the Executive Directors are paid. This Annual
Statement together with the Annual Report on Remuneration will be
subject to an advisory vote and I hope that you will be able to support
the resolution at the forthcoming AGM. Additionally, the proposed
new Remuneration Policy for 2017–2020 and the revised RSS rules
will both be put forward at the 2017 AGM for a binding vote. 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 POLICY SECTION
As a company incorporated in Bermuda, Lancashire is not bound
by UK law or regulation in the area of Directors’ remuneration
to the same extent that it applies to UK incorporated companies.
However, by virtue of the Company’s premium listing on the
LSE, and for the purposes of explaining its compliance against
the requirements of the UK Corporate Governance Code, the
Board is committed to providing full information on Directors’
remuneration to shareholders.
The Company’s first Remuneration Policy was approved by
shareholders at the 2014 AGM. That policy had a three-year life and
will expire at the 2017 AGM.
During the year, the Committee completed a review of executive
remuneration which sought to ensure continued alignment with
the Company’s strategy and take account of good and developing
practice. The revised Remuneration Policy for the Company’s
Directors is set out in this report and will be put forward for
shareholder approval at the AGM on 3 May 2017. If the policy is
approved, it will take effect immediately following the 2017 AGM
and it is intended to apply for a period of three years from the 2017
AGM. The revised Remuneration Policy contains details of the
Company’s policy to govern future payments that will be made to
Directors. If approved, all remuneration and loss of office payments
made after 3 May 2017 will only be made if they are consistent with
the approved Remuneration Policy. Full details of how the Company
will implement the revised Remuneration Policy in 2017 is provided
in the Annual Report on Remuneration section starting on page 69.
The Annual Report on Remuneration also details the remuneration
paid to Directors in respect of the 2016 financial year in accordance
with the policy approved at the 2014 AGM.
The revised Remuneration Policy has been developed taking
into account the principles of the Code and the views of our
major shareholders.
GOVERNANCE AND APPROACH
The Company’s proposed 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 proposed
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 proposed 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 meet their day-to-day
living expenses;
• there is a blend of short-term and long-term performance metrics
with an appropriate mix of performance conditions, meaning that
there is no undue focus on any one particular metric;
• there is a high level of share ownership amongst Executive
Directors, meaning that there is a strong focus on sustainable
long-term shareholder value; and
• 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 Group’s consolidated financial statements,
errors in the calculation of any performance condition, or the
Executive Director ceasing to be a Director and/or employee
due to gross misconduct.
HOW THE VIEWS OF SHAREHOLDERS ARE TAKEN
INTO ACCOUNT
The Committee Chairman and, where appropriate, the Company
Chairman, consult with major investors and representative bodies
on any significant remuneration proposal relating to Executive
Directors. Views of shareholders at the AGM, and feedback
received at other times, will be considered by the Committee.
HOW THE VIEWS OF EMPLOYEES ARE TAKEN
INTO ACCOUNT
The Remuneration Committee takes into account levels of
pay elsewhere in the Group when determining the pay levels for
Executive Directors. The proposed Remuneration Policy for all staff
is, in principle, broadly the same as that for Executive Directors in
that any of the Group’s employees may be offered similarly structured
packages, with participation in annual bonus and long-term incentive
plans, although award types (restricted cash, restricted stock or
performance shares) and size may vary between different categories
of staff. For Executive Directors, with higher remuneration levels,
a higher proportion of the compensation package is subject to
performance pay, share-based remuneration and deferral. This
ensures that there is a strong link between remuneration, Company
performance and the interests of shareholders.
Reflecting good practice in this area, Executive Directors’ pension
provision is no more generous than the pension contributions made
to employees in the Group (in percentage of salary terms).
The 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.
CHANGES MADE TO THE POLICY
Following the review of the remuneration arrangements for
Executive Directors, some changes were introduced to the policy to
reflect changes in best practice and to provide a limited amount of
additional flexibility.
As mentioned above, the most material policy changes include the
introduction of a two-year holding period on long-term incentive
awards and a strengthening of share ownership guidelines.
62
Lancashire Holdings Limited | Annual Report & Accounts 2016
www.lancashiregroup.com
www.lancashiregroup.com
63
63
GOVERNANCE
DIRECTORS’ REMUNERATION REPORT CONTINUED
REMUNERATION POLICY TABLE
Base Salary
Purpose and Link to Strategy Helps recruit, motivate and retain high-calibre Executive Directors by offering salaries at market
Operation
competitive levels.
Reflects individual experience and role.
Normally reviewed annually and fixed for 12 months, typically effective from 1 January. Positioning and
annual increases influenced by:
• role, experience and performance;
• change in broader workforce salary;
• changes to the size and complexity of the business; and
• changes in responsibility or position.
Salaries are benchmarked periodically against insurance company peers in the UK, U.S. and in Bermuda.
Opportunity
No maximum.
Benefits
Purpose and Link to Strategy Market competitive structure to support recruitment and retention.
Medical cover aims to ensure minimal business interruption as a result of illness.
Operation
Executive Directors’ benefits may include healthcare, dental, vision, gym membership and life insurance.
Other additional benefits may be offered from time to time that the Committee considers appropriate based
on the Executive Director’s circumstances.
Executive Directors who are expatriates or are required to relocate may be eligible for a housing allowance or
other relocation-related expenses.
Any reasonable business-related expense can be reimbursed, including any personal tax thereon if such
expense is determined to be a taxable benefit.
Opportunity
No maximum.
Pension
Purpose and Link to Strategy Contribution towards funding post-retirement lifestyle.
Operation
The Company operates a defined contribution pension scheme (via outsourced pension providers)
or cash-in-lieu of pension.
There is a salary sacrifice structure in the UK.
There is the opportunity for additional voluntary contributions to be made by individuals, if elected.
Opportunity
Company contribution is currently ten per cent of base salary.
Annual Bonus1,2
Purpose and Link to Strategy Rewards the achievement of financial and personal targets.
Operation
The annual bonus is based on financial and personal performance.
The precise weightings may differ each year, although there will be a greater focus on financial as opposed to
personal performance.
The Committee will have the ability to override the bonus outcome by either increasing or decreasing the
amount payable (subject to the cap) to ensure a robust link between reward and performance.
At least 25 per cent of each Executive Director’s bonus is automatically deferred into shares as nil
cost options or conditional awards over three years, with one third vesting each subsequent year.
A dividend equivalent provision operates enabling dividends to be accrued (in cash or shares) on
unvested deferred bonus shares in the form of nil cost options up to the point of exercise.
The bonus is subject to 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.
64
64
Lancashire Holdings Limited | Annual Report & Accounts 2016
Lancashire Holdings Limited | Annual Report & Accounts 2016
Opportunity
The maximum bonus for Executive Directors for achieving target level of performance as a percentage of salary
is 200 per cent of salary. Maximum opportunity is two times target.
Note: The Committee may set bonus opportunities less than the amounts set out above – see Implementation of
Policy section of the Annual Report on Remuneration.
Performance Metrics
The weightings that apply to the bonus measures and the degree of stretch in objectives may vary each year
depending on the business aims and the broader economic or industry environment at the start of the relevant
year. For Executive Directors, the financial component will be at least 75 per cent of the overall opportunity,
and no more than 25 per cent will be based on personal or strategic objectives.
Purpose and Link
Rewards Executive Directors for achieving superior returns for shareholders over a longer-term time frame.
Long Term Incentives (LTI)
to Strategy
Operation2,3
Financial Performance
other financial KPI3.
The financial component is based on the Company’s key financial measures of performance. For any year, these
may include RoE, growth in BVS, profit, comprehensive income, combined ratio, investment return or any
Typically, a sliding scale of targets applies for financial performance targets. Bonus is earned on an incremental
basis once a predetermined threshold level is achieved. Up to 25 per cent of the total bonus opportunity is
payable for achieving threshold/median rising to maximum bonus for stretch/upper quartile performance.
The degree of stretch in targets may vary each year depending on the business aims and the broader economic
or industry environment at the start of the relevant year.
Personal Performance
Personal performance is based upon achievement of clearly articulated objectives. A performance rating is
attributed to participating Executive Directors, which determines the pay-out for this part of the bonus.
Enables Executive Directors to build a meaningful shareholding over time and align goals with shareholders.
RSS awards are normally made annually in the form of nil cost options (or conditional awards) with vesting
dependent on the achievement of performance conditions over at least three financial years, commencing with
the year of grant. This three-year period is longer than the typical pattern of loss reserve development on the
Group’s insurance business, which is approximately two years.
The number of awards will normally be determined by reference to the share price around the time of grant
unless the Committee, at its discretion, determines otherwise.
The Committee considers carefully the quantum of awards each year to ensure that they are competitive in light
of peer practice and the targets set.
Awards are subject to 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
The Committee has the discretion, in exceptional circumstances, to settle an award made to Executive Directors
Opportunity
Award levels are determined primarily by seniority. A maximum individual grant limit of 350 per cent
A two-year post-vesting holding period applies to awards made to Executive Directors since 2016.
Note: The Committee may set the normal level of award at less than the percentage set out above – see
Implementation of Remuneration Policy section of the Annual Report on Remuneration.
Performance Metrics
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
to the point of exercise.
in cash.
of salary applies.
financial measures.
remains appropriate.
threshold performance.
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
A sliding scale of targets applies for financial metrics with no more than 25 per cent vesting for
For TSR, none of this part of the award will vest below median ranking or achievement of an index. No more
than 25 per cent of this part of the award will vest for achieving median or index.
www.lancashiregroup.com
65
DIRECTORS’ REMUNERATION REPORT CONTINUED
REMUNERATION POLICY TABLE
Base Salary
Purpose and Link to Strategy Helps recruit, motivate and retain high-calibre Executive Directors by offering salaries at market
Operation
Normally reviewed annually and fixed for 12 months, typically effective from 1 January. Positioning and
competitive levels.
Reflects individual experience and role.
annual increases influenced by:
• role, experience and performance;
• change in broader workforce salary;
• changes to the size and complexity of the business; and
• changes in responsibility or position.
Salaries are benchmarked periodically against insurance company peers in the UK, U.S. and in Bermuda.
Opportunity
No maximum.
Benefits
Purpose and Link to Strategy Market competitive structure to support recruitment and retention.
Medical cover aims to ensure minimal business interruption as a result of illness.
Operation
Executive Directors’ benefits may include healthcare, dental, vision, gym membership and life insurance.
Other additional benefits may be offered from time to time that the Committee considers appropriate based
on the Executive Director’s circumstances.
other relocation-related expenses.
Executive Directors who are expatriates or are required to relocate may be eligible for a housing allowance or
Any reasonable business-related expense can be reimbursed, including any personal tax thereon if such
expense is determined to be a taxable benefit.
Opportunity
No maximum.
Pension
Purpose and Link to Strategy Contribution towards funding post-retirement lifestyle.
Operation
The Company operates a defined contribution pension scheme (via outsourced pension providers)
or cash-in-lieu of pension.
There is a salary sacrifice structure in the UK.
Opportunity
Company contribution is currently ten per cent of base salary.
There is the opportunity for additional voluntary contributions to be made by individuals, if elected.
Annual Bonus1,2
Purpose and Link to Strategy Rewards the achievement of financial and personal targets.
Operation
The annual bonus is based on financial and personal performance.
The precise weightings may differ each year, although there will be a greater focus on financial as opposed to
personal performance.
The Committee will have the ability to override the bonus outcome by either increasing or decreasing the
amount payable (subject to the cap) to ensure a robust link between reward and performance.
At least 25 per cent of each Executive Director’s bonus is automatically deferred into shares as nil
cost options or conditional awards over three years, with one third vesting each subsequent year.
A dividend equivalent provision operates enabling dividends to be accrued (in cash or shares) on
unvested deferred bonus shares in the form of nil cost options up to the point of exercise.
The bonus is subject to 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.
64
Lancashire Holdings Limited | Annual Report & Accounts 2016
Opportunity
Performance Metrics
The maximum bonus for Executive Directors for achieving target level of performance as a percentage of salary
is 200 per cent of salary. Maximum opportunity is two times target.
Note: The Committee may set bonus opportunities less than the amounts set out above – see Implementation of
Policy section of the Annual Report on Remuneration.
The weightings that apply to the bonus measures and the degree of stretch in objectives may vary each year
depending on the business aims and the broader economic or industry environment at the start of the relevant
year. For Executive Directors, the financial component will be at least 75 per cent of the overall opportunity,
and no more than 25 per cent will be based on personal or strategic objectives.
Financial Performance
The financial component is based on the Company’s key financial measures of performance. For any year, these
may include RoE, growth in BVS, profit, comprehensive income, combined ratio, investment return or any
other financial KPI3.
Typically, a sliding scale of targets applies for financial performance targets. Bonus is earned on an incremental
basis once a predetermined threshold level is achieved. Up to 25 per cent of the total bonus opportunity is
payable for achieving threshold/median rising to maximum bonus for stretch/upper quartile performance.
The degree of stretch in targets may vary each year depending on the business aims and the broader economic
or industry environment at the start of the relevant year.
Personal Performance
Personal performance is based upon achievement of clearly articulated objectives. A performance rating is
attributed to participating Executive Directors, which determines the pay-out for this part of the bonus.
Long Term Incentives (LTI)
Purpose and Link
to Strategy
Operation2,3
Opportunity
Performance Metrics
Rewards Executive Directors for achieving superior returns for shareholders over a longer-term time frame.
Enables Executive Directors to build a meaningful shareholding over time and align goals with shareholders.
RSS awards are normally made annually in the form of nil cost options (or conditional awards) with vesting
dependent on the achievement of performance conditions over at least three financial years, commencing with
the year of grant. This three-year period is longer than the typical pattern of loss reserve development on the
Group’s insurance business, which is approximately two years.
The number of awards will normally be determined by reference to the share price around the time of grant
unless the Committee, at its discretion, determines otherwise.
The Committee considers carefully the quantum of awards each year to ensure that they are competitive in light
of peer practice and the targets set.
Awards are subject to 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.
The Committee has the discretion, in exceptional circumstances, to settle an award made to Executive Directors
in cash.
A two-year post-vesting holding period applies to awards made to Executive Directors since 2016.
Award levels are determined primarily by seniority. A maximum individual grant limit of 350 per cent
of salary applies.
Note: The Committee may set the normal level of award at less than the percentage set out above – see
Implementation of Remuneration Policy section of the Annual Report on Remuneration.
Awards vest at the end of a three-year performance period based on performance measures reflecting the
long-term strategy of the business at the time of grant.
These may include measures such as TSR, RoE/BVS, Company profitability, or any other relevant
financial measures.
If more than one measure is used, the Committee will review the weightings between the measures chosen
and the target ranges prior to each LTI grant to ensure that the overall balance and level of stretch
remains appropriate.
A sliding scale of targets applies for financial metrics with no more than 25 per cent vesting for
threshold performance.
For TSR, none of this part of the award will vest below median ranking or achievement of an index. No more
than 25 per cent of this part of the award will vest for achieving median or index.
www.lancashiregroup.com
www.lancashiregroup.com
65
65
GOVERNANCE
DIRECTORS’ REMUNERATION REPORT CONTINUED
REMUNERATION POLICY TABLE CONTINUED
Share Ownership Guidelines4
Under the guidelines, Executive Directors are expected to maintain an interest equivalent in value to no less than two times salary over time.
Until such time as the guideline threshold is achieved Executive Directors are required to retain no less than 50 per cent of the net of tax
value of awards that vest under the RSS.
Chairman and Non-Executive Directors’ (‘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 single fee for his responsibilities as Chairman. The level of these fees is reviewed
periodically by the Committee and the CEO by reference to broadly comparable businesses in terms of size
and operations.
In general, the Non-Executive Directors are paid a single fee for all responsibilities, although supplemental
fees may be payable where additional responsibilities are undertaken, including a Non-Executive Director role
on a subsidiary board.
Any reasonable business-related expenses (including any personal tax payable) can be reimbursed.
Opportunity
No maximum.
(1) The Committee operates the annual bonus plan and RSS according to their respective rules and in accordance with the Listing Rules. The Committee, consistent with normal market practice, retains discretion over a
number of areas relating to the operation and administration of these plans and this discretion forms part of this policy.
(2) All historic awards that were granted under any current or previous share scheme operated by the Company that remain outstanding remain eligible to vest based on their original award terms and this provision forms
part of the policy.
(3) Performance measures: these may include the performance indicators shown on pages 20 to 21 or others described within the Annual Report and Accounts Glossary commencing on page 156 or any other measure that
supports the achievement of the Company’s short to long-term objectives.
(4) Share Ownership interest equivalent is defined as wholly owned shares or the net of taxes value of RSS awards which have vested but are unexercised and the net of tax value of deferred bonus RSS awards. Shares include
those owned by persons closely associated with the relevant Executive Director.
ILLUSTRATIONS OF ANNUAL APPLICATION OF REMUNERATION POLICY
The charts below show the potential total remuneration opportunities for the Executive Directors in 2017 at different levels of performance
under the proposed policy, if it is approved by shareholders at the 2017 AGM.
)
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
5.84
42%
42%
16%
3.38
36%
36%
28%
0.92
100%
3.97
39%
43%
18%
2.35
33%
36%
31%
0.73
100%
Fixed pay
On-target
Maximum
Fixed pay
On-target
Maximum
CEO
CFO
Fixed pay
Annual bonus
LTI Awards (RSS)
Fixed pay = 2017 Salary + Actual Value of 2016 Benefits + 2017 Pension Contribution.
On-target = Fixed Pay + Target Bonus (being half the Maximum Bonus Opportunity) + Target Value of 2017 RSS grant
(assuming 50 per cent vesting with face values of grant).
Maximum = Fixed Pay + Maximum Bonus Opportunity + Maximum Value of 2017 RSS grant (assuming 100 per cent vesting
with the face values of grant).
No account has been taken of any share price growth or dividend equivalent accruals.
APPROACH TO RECRUITMENT REMUNERATION
The remuneration package for a new Executive Director would be set in accordance with the terms of the Company’s prevailing approved
Remuneration Policy at the time of appointment and take into account the skills and experience of the individual, the market rate for a
candidate of that experience and the importance of securing the relevant individual.
Salary would be provided at such a level as is required to attract the most appropriate candidate. The Committee retains the flexibility to set
base salary for a newly appointed Executive Director below the mid-market level and allow them to progress quickly to or around mid-market
level once expertise and performance have been proven. This decision would take into account all relevant factors noted above.
The annual bonus and LTI potential would be in line with the Policy. Depending on the timing of the appointment, the Committee may
deem it appropriate to set different bonus performance measures for the performance year during which he or she became an Executive
Director. The Committee may grant an LTI award shortly after joining, up to the plan limits set out in the Remuneration Policy table
(assuming the Company is not in a closed period).
In addition, the Committee may offer additional cash and/or share-based elements to replace deferred or incentive pay forfeited by an
executive leaving a previous employer. It would seek to ensure, where possible, that these awards would be consistent with awards forfeited in
terms of vesting periods (which may be less than three years), expected value and performance conditions.
For an internal Executive Director appointment, any variable pay element awarded in respect of the prior role may be allowed to pay out
according to its terms, adjusted as relevant to take into account the appointment. In addition, any other ongoing remuneration obligations
existing prior to appointment may continue.
The Committee may agree that the Company will meet certain relocation expenses as appropriate and is able to provide expatriate benefits
including housing, a relocation allowance, assignment-related costs or tax equalisation.
SERVICE CONTRACTS AND LOSS OF OFFICE PAYMENT POLICY FOR EXECUTIVE DIRECTORS
Executive Directors have service contracts with six-month notice periods. In the event of termination, the Executive Directors’ contracts
provide for compensation up to a maximum of base salary plus the value of benefits to which the Executive Directors are contractually
entitled for the unexpired portion of the notice period. The Company may pay statutory claims. No Executive Director has a contractual right
to a bonus for any period of notice not worked.
of no more than 12 months from either party.
The service contract for a new appointment will be on similar terms as existing Executive Directors, with the facility to include a notice period
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
If an Executive Director resigns or is summarily dismissed, salary, pension and benefits will cease on the last day of employment and there will
of employment.
be no further payments.
66
66
Lancashire Holdings Limited | Annual Report & Accounts 2016
Lancashire Holdings Limited | Annual Report & Accounts 2016
www.lancashiregroup.com
67
DIRECTORS’ REMUNERATION REPORT CONTINUED
REMUNERATION POLICY TABLE CONTINUED
Share Ownership Guidelines4
Under the guidelines, Executive Directors are expected to maintain an interest equivalent in value to no less than two times salary over time.
Until such time as the guideline threshold is achieved Executive Directors are required to retain no less than 50 per cent of the net of tax
value of awards that vest under the RSS.
a market competitive fee level.
and operations.
on a subsidiary board.
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
The Chairman is paid a single fee for his responsibilities as Chairman. The level of these fees is reviewed
periodically by the Committee and the CEO by reference to broadly comparable businesses in terms of size
In general, the Non-Executive Directors are paid a single fee for all responsibilities, although supplemental
fees may be payable where additional responsibilities are undertaken, including a Non-Executive Director role
Opportunity
No maximum.
Any reasonable business-related expenses (including any personal tax payable) can be reimbursed.
(1) The Committee operates the annual bonus plan and RSS according to their respective rules and in accordance with the Listing Rules. The Committee, consistent with normal market practice, retains discretion over a
number of areas relating to the operation and administration of these plans and this discretion forms part of this policy.
(2) All historic awards that were granted under any current or previous share scheme operated by the Company that remain outstanding remain eligible to vest based on their original award terms and this provision forms
(3) Performance measures: these may include the performance indicators shown on pages 20 to 21 or others described within the Annual Report and Accounts Glossary commencing on page 156 or any other measure that
(4) Share Ownership interest equivalent is defined as wholly owned shares or the net of taxes value of RSS awards which have vested but are unexercised and the net of tax value of deferred bonus RSS awards. Shares include
part of the policy.
supports the achievement of the Company’s short to long-term objectives.
those owned by persons closely associated with the relevant Executive Director.
ILLUSTRATIONS OF ANNUAL APPLICATION OF REMUNERATION POLICY
The charts below show the potential total remuneration opportunities for the Executive Directors in 2017 at different levels of performance
under the proposed policy, if it is approved by shareholders at the 2017 AGM.
APPROACH TO RECRUITMENT REMUNERATION
The remuneration package for a new Executive Director would be set in accordance with the terms of the Company’s prevailing approved
Remuneration Policy at the time of appointment and take into account the skills and experience of the individual, the market rate for a
candidate of that experience and the importance of securing the relevant individual.
Salary would be provided at such a level as is required to attract the most appropriate candidate. The Committee retains the flexibility to set
base salary for a newly appointed Executive Director below the mid-market level and allow them to progress quickly to or around mid-market
level once expertise and performance have been proven. This decision would take into account all relevant factors noted above.
The annual bonus and LTI potential would be in line with the Policy. Depending on the timing of the appointment, the Committee may
deem it appropriate to set different bonus performance measures for the performance year during which he or she became an Executive
Director. The Committee may grant an LTI award shortly after joining, up to the plan limits set out in the Remuneration Policy table
(assuming the Company is not in a closed period).
In addition, the Committee may offer additional cash and/or share-based elements to replace deferred or incentive pay forfeited by an
executive leaving a previous employer. It would seek to ensure, where possible, that these awards would be consistent with awards forfeited in
terms of vesting periods (which may be less than three years), expected value and performance conditions.
For an internal Executive Director appointment, any variable pay element awarded in respect of the prior role may be allowed to pay out
according to its terms, adjusted as relevant to take into account the appointment. In addition, any other ongoing remuneration obligations
existing prior to appointment may continue.
The Committee may agree that the Company will meet certain relocation expenses as appropriate and is able to provide expatriate benefits
including housing, a relocation allowance, assignment-related costs or tax equalisation.
SERVICE CONTRACTS AND LOSS OF OFFICE PAYMENT POLICY FOR EXECUTIVE DIRECTORS
Executive Directors have service contracts with six-month notice periods. In the event of termination, the Executive Directors’ contracts
provide for compensation up to a maximum of base salary plus the value of benefits to which the Executive Directors are contractually
entitled for the unexpired portion of the notice period. The Company may pay statutory claims. No Executive Director has a contractual right
to a bonus for any period of notice not worked.
The service contract for a new appointment will be on similar terms as existing Executive Directors, with the facility to include a notice period
of no more than 12 months from either party.
The Company seeks to apply the principle of mitigation in the payment of compensation on the termination of the service contract of any
Executive Director. There are no special provisions in the service contracts for payments to Executive Directors on a change of control of
the Company.
In the event of an exit of an Executive Director, the overriding principle will be to honour contractual remuneration entitlements and
determine, on an equitable basis, the appropriate treatment of deferred and performance linked elements of the package, taking account of
the circumstances. Failure will not be rewarded.
Depending on the leaver classification, an Executive Director may be eligible for certain payments or benefits continuation after cessation
of employment.
If an Executive Director resigns or is summarily dismissed, salary, pension and benefits will cease on the last day of employment and there will
be no further payments.
Fixed pay = 2017 Salary + Actual Value of 2016 Benefits + 2017 Pension Contribution.
On-target = Fixed Pay + Target Bonus (being half the Maximum Bonus Opportunity) + Target Value of 2017 RSS grant
(assuming 50 per cent vesting with face values of grant).
Maximum = Fixed Pay + Maximum Bonus Opportunity + Maximum Value of 2017 RSS grant (assuming 100 per cent vesting
with the face values of grant).
No account has been taken of any share price growth or dividend equivalent accruals.
66
Lancashire Holdings Limited | Annual Report & Accounts 2016
www.lancashiregroup.com
www.lancashiregroup.com
67
67
GOVERNANCE
DIRECTORS’ REMUNERATION REPORT CONTINUED
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.
ANNUAL REPORT ON REMUNERATION
This Annual Report on Remuneration together with the Chairman’s Statement, as detailed on pages 61 and 62, will be subject to an advisory
vote at the 2017 AGM. The information on page 71 with respect to Directors’ emoluments and onwards through page 79 has been audited
Vested but unexercised deferred bonus RSS awards will remain exercisable. Unvested deferred bonus RSS awards will ordinarily vest in full,
relative to the normal vesting period. All such vested awards must be exercised within 12 months of the vesting date.
IMPLEMENTATION OF REMUNERATION POLICY FOR 2017
In relation to the Policy described in the previous section, the following section sets out additional disclosure on the expected application of
Vested but unexercised RSS awards may remain exercisable for 12 months. Unvested awards may vest on the normal vesting date unless
the Committee determines that such awards shall instead vest at the time of cessation. Unvested awards will only vest to the extent that the
performance conditions have been satisfied (over the full or curtailed period as relevant). A pro-rata reduction in the size of awards may
apply, based upon the period of time after the grant date and ending on the date of cessation of employment relative to the three-year or
other relevant vesting period.
The Committee has discretion to permit unvested RSS awards to vest early rather than continue on the normal vesting timetable and also
retains discretion as to whether or not to apply (or to apply to a lesser extent) the pro-rata reduction to the RSS awards where it feels the
reduction would be inappropriate.
Depending upon circumstances, the Committee may consider other payments in respect of any claims in connection with a termination of
employment where deemed appropriate, including an unfair dismissal award, outplacement support and assistance with legal fees.
TERMS OF APPOINTMENT FOR NON-EXECUTIVE DIRECTORS
The Non-Executive Directors serve subject to the Company’s Bye-laws and under letters of appointment. They are appointed subject to
re-election at the AGM and are also terminable by either party on six months’ notice except in the event of earlier termination in accordance
with the Bye-laws. The Non-Executive Directors are typically expected to serve for up to six years, although the Board may invite a Non-
Executive Director to serve for an additional period. Their letters of appointment are available for inspection at the Company’s registered
office and at each AGM.
In accordance with best practice under the Code, the Board ordinarily submits the Directors individually for re-election by the shareholders
at each AGM.
LEGACY ARRANGEMENTS
In approving the Policy; authority is given to the Company for the duration of the Policy to honour commitments paid, promised to be paid
or awarded to: (i) current or former Directors prior to the date of this Policy being approved (provided that such payments or promises were
consistent with any Remuneration Policy of the Company which was approved by shareholders and was in effect at the time they were made);
or (ii) to an individual (who subsequently is appointed as a Director of the Company) at a time when the relevant individual was not a
Director of the Company and, in the opinion of the Committee, was not paid, promised to be paid or awarded as financial consideration of
that individual becoming a Director of the Company, even where such commitments are inconsistent with the provisions of the revised Policy.
For the avoidance of doubt, this includes all awards granted under the 2008 RSS rules in accordance with the Policy approved at the 2014
AGM and to employees of the Company who are not Directors at the date of grant. Outstanding RSS awards that remain unvested or
unexercised at the date of this report (including for current Executive Directors as detailed on page 75 of the Annual Report on
Remuneration), remain eligible for vesting or exercise based on their original award terms.
The Policy approved by shareholders at the 2014 AGM (‘current policy’) will continue to apply until this proposed Policy is approved at the
2017 AGM. If this proposed Policy is not approved at the 2017 AGM, the current policy will continue to apply in accordance with its terms.
by EY.
the Policy for 2017.
BASE SALARY AND FEES
Executive Directors
Increases and resulting salaries effective from 1 January 2017 are set out below:
• CEO – salary increased by 3 per cent to $819,545.
• CFO – salary increased by 3 per cent to $562,755.
• For 2017, increases of 3 per cent are in line with the salary increases across the general workforce population.
Non-Executive Directors
The Chairman’s and Non-Executive Directors’ fees are as follows for 2017:
• The fee for the Chairman (Peter Clarke) is $350,000 per annum.
• The Non-Executive Director fee will remain at $175,000 per annum.
• Samantha Hoe-Richardson is a Non-Executive Director of LUK in which capacity she will receive a fee of £50,000 per annum.
• Simon Fraser is a Non-Executive Director of CUL in which capacity he will receive a fee of $80,000 per annum.
For 2017, the CEO will have a target bonus of 150 per cent of salary and, therefore, a maximum opportunity of 300 per cent of salary. This is
within the approved policy limit and it is in line with last year’s opportunity and represents a maximum bonus opportunity which is 100 per
cent of salary less than the set policy limit. The CFO’s target bonus opportunity will be in line with the policy at 150 per cent of salary
The financial and personal portions of the annual bonus will remain unchanged with 75 per cent on financial performance and 25 per cent
Other Fees
ANNUAL BONUS
(maximum 300 per cent).
on personal performance.
Financial Performance (75 per cent)
The Company’s most important financial KPI is RoE, which is the core indicator of the delivery of our strategic priorities of ensuring
underwriting comes first, effectively balancing risk and return and managing capital nimbly through the insurance cycle (see the strategic
overview on pages 16 and 17 of this report). Further to consultation with the Company’s major shareholders, the Company has decided both
to simplify the measure for the financial performance element of the annual bonus targets and to create a more formal linkage between
performance targets and the investment return environment. Accordingly, for 2017, the financial component is to be based on the
performance of the Group’s RoE, measured as the internal rate of return of the change in FCBVS plus accrued dividends.
A sliding scale range of RoE targets has been set by reference to the Risk Free Rate of Return as follows:
• 25 per cent of target bonus shall be payable at a threshold level of RoE equal to RFRoR + 6 per cent (0 per cent vesting will occur below this
threshold).
• 50 per cent of target bonus shall be payable at a level of RoE equal to RFRoR + 7 per cent.
• 100 per cent of target bonus shall be payable at a level of RoE equal to RFRoR + 8 per cent.
• 200 per cent of target bonus shall be payable at a level of RoE equal to RFRoR + 14 per cent.
68
68
Lancashire Holdings Limited | Annual Report & Accounts 2016
Lancashire Holdings Limited | Annual Report & Accounts 2016
www.lancashiregroup.com
69
DIRECTORS’ REMUNERATION REPORT CONTINUED
LEAVER ON ARRANGED TERMS OR GOOD LEAVER
If an Executive Director leaves on agreed terms, including compassionate circumstances, there may be payments after cessation of
employment. Salary, pension and benefits will be paid up to the length of the agreed notice period or agreed period of gardening leave.
Subject to performance, a bonus may be payable at the discretion of the Committee pro-rata for the portion of the financial year worked.
Vested but unexercised deferred bonus RSS awards will remain exercisable. Unvested deferred bonus RSS awards will ordinarily vest in full,
relative to the normal vesting period. All such vested awards must be exercised within 12 months of the vesting date.
Vested but unexercised RSS awards may remain exercisable for 12 months. Unvested awards may vest on the normal vesting date unless
the Committee determines that such awards shall instead vest at the time of cessation. Unvested awards will only vest to the extent that the
performance conditions have been satisfied (over the full or curtailed period as relevant). A pro-rata reduction in the size of awards may
apply, based upon the period of time after the grant date and ending on the date of cessation of employment relative to the three-year or
other relevant vesting period.
reduction would be inappropriate.
The Committee has discretion to permit unvested RSS awards to vest early rather than continue on the normal vesting timetable and also
retains discretion as to whether or not to apply (or to apply to a lesser extent) the pro-rata reduction to the RSS awards where it feels the
Depending upon circumstances, the Committee may consider other payments in respect of any claims in connection with a termination of
employment where deemed appropriate, including an unfair dismissal award, outplacement support and assistance with legal fees.
TERMS OF APPOINTMENT FOR NON-EXECUTIVE DIRECTORS
The Non-Executive Directors serve subject to the Company’s Bye-laws and under letters of appointment. They are appointed subject to
re-election at the AGM and are also terminable by either party on six months’ notice except in the event of earlier termination in accordance
with the Bye-laws. The Non-Executive Directors are typically expected to serve for up to six years, although the Board may invite a Non-
Executive Director to serve for an additional period. Their letters of appointment are available for inspection at the Company’s registered
In accordance with best practice under the Code, the Board ordinarily submits the Directors individually for re-election by the shareholders
office and at each AGM.
at each AGM.
LEGACY ARRANGEMENTS
In approving the Policy; authority is given to the Company for the duration of the Policy to honour commitments paid, promised to be paid
or awarded to: (i) current or former Directors prior to the date of this Policy being approved (provided that such payments or promises were
consistent with any Remuneration Policy of the Company which was approved by shareholders and was in effect at the time they were made);
or (ii) to an individual (who subsequently is appointed as a Director of the Company) at a time when the relevant individual was not a
Director of the Company and, in the opinion of the Committee, was not paid, promised to be paid or awarded as financial consideration of
that individual becoming a Director of the Company, even where such commitments are inconsistent with the provisions of the revised Policy.
For the avoidance of doubt, this includes all awards granted under the 2008 RSS rules in accordance with the Policy approved at the 2014
AGM and to employees of the Company who are not Directors at the date of grant. Outstanding RSS awards that remain unvested or
unexercised at the date of this report (including for current Executive Directors as detailed on page 75 of the Annual Report on
Remuneration), remain eligible for vesting or exercise based on their original award terms.
The Policy approved by shareholders at the 2014 AGM (‘current policy’) will continue to apply until this proposed Policy is approved at the
2017 AGM. If this proposed Policy is not approved at the 2017 AGM, the current policy will continue to apply in accordance with its terms.
ANNUAL REPORT ON REMUNERATION
This Annual Report on Remuneration together with the Chairman’s Statement, as detailed on pages 61 and 62, will be subject to an advisory
vote at the 2017 AGM. The information on page 71 with respect to Directors’ emoluments and onwards through page 79 has been audited
by EY.
IMPLEMENTATION OF REMUNERATION POLICY FOR 2017
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 2017.
BASE SALARY AND FEES
Executive Directors
Increases and resulting salaries effective from 1 January 2017 are set out below:
• CEO – salary increased by 3 per cent to $819,545.
• CFO – salary increased by 3 per cent to $562,755.
• For 2017, increases of 3 per cent are in line with the salary increases across the general workforce population.
Non-Executive Directors
The Chairman’s and Non-Executive Directors’ fees are as follows for 2017:
• The fee for the Chairman (Peter Clarke) is $350,000 per annum.
• The Non-Executive Director fee will remain at $175,000 per annum.
Other Fees
• Samantha Hoe-Richardson is a Non-Executive Director of LUK in which capacity she will receive a fee of £50,000 per annum.
• Simon Fraser is a Non-Executive Director of CUL in which capacity he will receive a fee of $80,000 per annum.
ANNUAL BONUS
For 2017, the CEO will have a target bonus of 150 per cent of salary and, therefore, a maximum opportunity of 300 per cent of salary. This is
within the approved policy limit and it is in line with last year’s opportunity and represents a maximum bonus opportunity which is 100 per
cent of salary less than the set policy limit. The 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
underwriting comes first, effectively balancing risk and return and managing capital nimbly through the insurance cycle (see the strategic
overview on pages 16 and 17 of this report). Further to consultation with the Company’s major shareholders, the Company has decided both
to simplify the measure for the financial performance element of the annual bonus targets and to create a more formal linkage between
performance targets and the investment return environment. Accordingly, for 2017, the financial component is to be based on the
performance of the Group’s RoE, measured as the internal rate of return of the change in FCBVS plus accrued dividends.
A sliding scale range of RoE targets has been set by reference to the Risk Free Rate of Return as follows:
• 25 per cent of target bonus shall be payable at a threshold level of RoE equal to RFRoR + 6 per cent (0 per cent vesting will occur below this
threshold).
• 50 per cent of target bonus shall be payable at a level of RoE equal to RFRoR + 7 per cent.
• 100 per cent of target bonus shall be payable at a level of RoE equal to RFRoR + 8 per cent.
• 200 per cent of target bonus shall be payable at a level of RoE equal to RFRoR + 14 per cent.
68
Lancashire Holdings Limited | Annual Report & Accounts 2016
www.lancashiregroup.com
www.lancashiregroup.com
69
69
GOVERNANCE
DIRECTORS’ REMUNERATION REPORT CONTINUED
There shall be linear interpolation between these points. The Board considers that these target ranges are appropriately challenging, given
the current difficult insurance market conditions, and will help to ensure a strong and more formulaic link between remuneration for the
Executive Directors and the Company’s financial performance, the strategy and risk profile of the business and the investment return
environment, without encouraging excessive risk taking. In future years, the Committee would not normally expect to set vesting points
below the levels outlined above and, when appropriate, will set higher targets.
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 2017 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 Group Values.
Effective leadership and management of the finance function and the Bermuda office.
Development of the general business strategy.
Contribution aligned to the Lancashire Group Values.
The personal targets are broadly common among the Executive Directors, with variances being attributable to the specifics of their respective
roles. Specific granular areas for personal development within the set broad personal objectives are discussed between the Chairman and the
Executive Directors and agreed by the Committee. As part of the 2017 annual performance reviews each Executive Director will receive 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, 2017 RSS awards are subject to a range based on (i) average annual growth in FCBVS plus accrued dividends and (ii)
relative TSR performance conditions, both measured by reference to a period ending on 31 December 2019. These metrics aim to provide an
appropriate focus on the Company’s underlying financial performance and cycle management, and in the case of relative TSR to provide an
objective reward for stock market performance measured against the Company’s peers.
Weighting
For 2017, the TSR/RoE weighting is 25 per cent on TSR and 75 per cent on average annual growth in FCBVS plus accrued dividends.
Target ranges
The average annual growth in FCBVS plus accrued dividends target range for 2017 awards is:
• threshold – 6 per cent; and
• maximum – 13 per cent.
None of the award will vest if average annual growth in FCBVS plus accrued dividends 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 the stretch target represents exceptional performance, given current challenging market
conditions. The target range closely aligns the longer-term remuneration of our Executive Directors with strong performance, the
implementation of the business strategy and the interests of our shareholders, but is not so stretching as to encourage excessive risk taking.
The TSR target for 2017 awards is as follows:
The Group’s TSR is compared against a comparator group comprising 11 peer companies as disclosed on page 76.
• 0 per cent will vest for a below median ranking;
• 25 per cent of the award will vest if Lancashire’s performance is at the median; and
• 100 per cent of the award will vest for upper quartile and above performance.
Vesting will be on a proportionate basis for performance between median and upper quartiles.
Award levels
2017 RSS award levels are as follows:
• CEO – shares to the value of $2,458,636 (being 300 per cent of salary)
• CFO – shares to the value of $1,547,577 (being 275 per cent of salary)
The number of shares awarded shall be determined based on the closing average share price for a period of five trading days immediately
For RSS awards made in 2016 or subsequent years, Executive Directors are expected to hold vested RSS awards (or the resultant net of tax
shares) which had a performance period of at least three years, for a further period of not less than two years following vesting.
SINGLE FIGURE ON REMUNERATION
The following table presents the Executive Directors’ emoluments in U.S. dollars in respect of the years ended 31 December 2016 and
Salary
$
810,266
770,955
547,423
530,224
Pension
$
81,027
77,096
54,636
55,880
2016
2015
2016
2015
Taxable
Benefits1
$
20,127
19,785
Annual Bonus5,6
$
Long-Term
Incentives
(RSS)2,3
$
Total4
$
1,510,554
1,003,429
3,425,403
1,668,165
1,316,789
3,852,790
114,445
1,037,248
831,184
2,584,936
98,273
1,145,474
1,158,324
2,988,175
(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. Taxable benefits for Elaine Whelan for 2015 have been adjusted to reflect final actual benefits.
(2) For 2016, the long-term incentive values are based on the 2014 RSS awards which vest at 67.4 per cent on 16 February 2017 and are based on a three-year performance period that ended on 31 December 2016. The
values are based on the share price at 31 December 2016 and include the value of dividends accrued on vested shares.
(3) For 2015, the long-term incentive values were based on the 2013 RSS awards which vested at 75 per cent on 18 February 2016 and were based on a three-year performance period that ended on 31 December 2015. The
values are re-presented from the 2015 Annual Report and Accounts based on the share price at the vesting date, 18 February 2016, and include the value of dividends accrued on vested shares.
(4) Some amounts were paid in Sterling and converted at the average exchange rate of 1.3777 for the year as they are set in U.S. dollars.
(5) For 2016, the Lancashire Group delivered solid results in a challenging market. Bonus targets were set at the beginning of 2016 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 RoE was 13.5 per cent against a target level of 11 per cent and the relative component is provisionally cited at 58.33 per cent (with 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 72 and 73. 25 per cent of Executive Directors’ annual bonus is
deferred into the long-term incentive scheme without performance conditions, vesting at 33.33 per cent over a three-year period.
(6) Annual bonus figures for Alex Maloney and Elaine Whelan for 2015 have been re-presented to reflect final relative performance data which was used to calculate the bonus figures and were finalised after all peer data
was released in 2016, after the 2015 Directors’ Remuneration Report was published for circulation. For 2015, the relative component had been provisionally stated to pay out at 50 per cent of the maximum, however
after final results of all peers were released, this element paid out at 158 per cent of target (being 72 per cent of the maximum).
prior to the date of the award.
Post vesting holding period
31 December 2015.
Executive Directors
Alex Maloney4,, CEO
Elaine Whelan4, CFO
70
70
Lancashire Holdings Limited | Annual Report & Accounts 2016
Lancashire Holdings Limited | Annual Report & Accounts 2016
www.lancashiregroup.com
71
DIRECTORS’ REMUNERATION REPORT CONTINUED
There shall be linear interpolation between these points. The Board considers that these target ranges are appropriately challenging, given
The TSR target for 2017 awards is as follows:
the current difficult insurance market conditions, and will help to ensure a strong and more formulaic link between remuneration for the
Executive Directors and the Company’s financial performance, the strategy and risk profile of the business and the investment return
environment, without encouraging excessive risk taking. In future years, the Committee would not normally expect to set vesting points
below the levels outlined above and, when appropriate, will set higher targets.
Personal Performance (25 per cent)
The Group’s TSR is compared against a comparator group comprising 11 peer companies as disclosed on page 76.
• 0 per cent will vest for a below median ranking;
• 25 per cent of the award will vest if Lancashire’s performance is at the median; and
• 100 per cent of the award will vest for upper quartile and above performance.
This element of the bonus plan is based upon the individual achievement of clearly articulated objectives created at the beginning of each
Vesting will be on a proportionate basis for performance between median and upper quartiles.
year. The table below sets out a broad summary of the 2017 personal objectives for each Executive Director.
Executive Director
Personal Performance
Alex Maloney
Effective leadership and management of the senior executive team and Group.
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.
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 2017 annual performance reviews each Executive Director will receive 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
Weighting
Target ranges
line basis.
• threshold – 6 per cent; and
• maximum – 13 per cent.
For 2017, the TSR/RoE weighting is 25 per cent on TSR and 75 per cent on average annual growth in FCBVS plus accrued dividends.
The average annual growth in FCBVS plus accrued dividends target range for 2017 awards is:
None of the award will vest if average annual growth in FCBVS plus accrued dividends 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-
The Board and Committee consider that the stretch target represents exceptional performance, given current challenging market
conditions. The target range closely aligns the longer-term remuneration of our Executive Directors with strong performance, the
implementation of the business strategy and the interests of our shareholders, but is not so stretching as to encourage excessive risk taking.
Award levels
2017 RSS award levels are as follows:
• CEO – shares to the value of $2,458,636 (being 300 per cent of salary)
• CFO – shares to the value of $1,547,577 (being 275 per cent of salary)
The number of shares awarded shall be determined based on the closing average share price for a period of five trading days immediately
prior to the date of the award.
Post vesting holding period
For RSS awards made in 2016 or subsequent years, Executive Directors are expected to hold vested RSS awards (or the resultant net of tax
shares) which had a performance period of at least three years, for a further period of not less than two years following vesting.
SINGLE FIGURE ON REMUNERATION
The following table presents the Executive Directors’ emoluments in U.S. dollars in respect of the years ended 31 December 2016 and
31 December 2015.
For Executive Directors, 2017 RSS awards are subject to a range based on (i) average annual growth in FCBVS plus accrued dividends and (ii)
relative TSR performance conditions, both measured by reference to a period ending on 31 December 2019. These metrics aim to provide an
appropriate focus on the Company’s underlying financial performance and cycle management, and in the case of relative TSR to provide an
objective reward for stock market performance measured against the Company’s peers.
Executive Directors
Alex Maloney4,, CEO
Elaine Whelan4, CFO
Salary
$
810,266
770,955
547,423
530,224
Pension
$
81,027
77,096
54,636
55,880
2016
2015
2016
2015
Taxable
Benefits1
$
20,127
19,785
Annual Bonus5,6
$
Long-Term
Incentives
(RSS)2,3
$
Total4
$
1,510,554
1,003,429
3,425,403
1,668,165
1,316,789
3,852,790
114,445
1,037,248
831,184
2,584,936
98,273
1,145,474
1,158,324
2,988,175
(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. Taxable benefits for Elaine Whelan for 2015 have been adjusted to reflect final actual benefits.
(2) For 2016, the long-term incentive values are based on the 2014 RSS awards which vest at 67.4 per cent on 16 February 2017 and are based on a three-year performance period that ended on 31 December 2016. The
values are based on the share price at 31 December 2016 and include the value of dividends accrued on vested shares.
(3) For 2015, the long-term incentive values were based on the 2013 RSS awards which vested at 75 per cent on 18 February 2016 and were based on a three-year performance period that ended on 31 December 2015. The
values are re-presented from the 2015 Annual Report and Accounts based on the share price at the vesting date, 18 February 2016, and include the value of dividends accrued on vested shares.
(4) Some amounts were paid in Sterling and converted at the average exchange rate of 1.3777 for the year as they are set in U.S. dollars.
(5) For 2016, the Lancashire Group delivered solid results in a challenging market. Bonus targets were set at the beginning of 2016 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 RoE was 13.5 per cent against a target level of 11 per cent and the relative component is provisionally cited at 58.33 per cent (with 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 72 and 73. 25 per cent of Executive Directors’ annual bonus is
deferred into the long-term incentive scheme without performance conditions, vesting at 33.33 per cent over a three-year period.
(6) Annual bonus figures for Alex Maloney and Elaine Whelan for 2015 have been re-presented to reflect final relative performance data which was used to calculate the bonus figures and were finalised after all peer data
was released in 2016, after the 2015 Directors’ Remuneration Report was published for circulation. For 2015, the relative component had been provisionally stated to pay out at 50 per cent of the maximum, however
after final results of all peers were released, this element paid out at 158 per cent of target (being 72 per cent of the maximum).
70
Lancashire Holdings Limited | Annual Report & Accounts 2016
www.lancashiregroup.com
www.lancashiregroup.com
71
71
GOVERNANCE
DIRECTORS’ REMUNERATION REPORT CONTINUED
NON-EXECUTIVE DIRECTORS’ FEES
FINANCIAL PERFORMANCE
Current Non-Executive Directors
Peter Clarke1
Michael Dawson2
Simon Fraser3
Samantha Hoe-Richardson4
Robert Lusardi5
Tom Milligan6
Former Non-Executive Directors
Emma Duncan7
Martin Thomas8
Fee
$
Other
$
Total
$
75 per cent of the 2016 bonus was based on Company performance conditions and the extent to which they were achieved is as follows:
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
290,769
175,000
28,269
–
175,000
175,000
175,000
175,000
84,808
–
175,000
158,958
91,538
175,000
111,250
325,000
–
–
–
–
66,974
–
13,350
–
–
–
–
–
–
–
34,375
100,000
290,769
175,000
28,269
–
241,974
175,000
188,350
175,000
84,808
–
175,000
158,958
91,538
175,000
145,625
425,000
(1) Peter Clarke was appointed as a Non-Executive Director with effect from 9 June 2014 and as LHL Chairman with effect from 4 May 2016 and his 2016 fees are proportionally pro-rated for the year.
(2) Michael Dawson was appointed as a Non-Executive Director with effect from 3 November 2016 and his 2016 fees are proportionally pro-rated for the year.
(3) Simon Fraser was additionally appointed as a Non-Executive Director of CUL with effect from 29 February 2016 and his 2016 fees are proportionally pro-rated for the year.
(4) Samantha Hoe-Richardson was additionally appointed as a Non-Executive Director of LUK with effect from 18 October 2016 and her 2016 fees are proportionally pro-rated for the year.
(5) Robert Lusardi was appointed as a Non-Executive Director with effect from 8 July 2016 and his 2016 fees are proportionally pro-rated for the year.
(6) Tom Milligan was appointed as a Non-Executive Director with effect from 3 February 2015 and his 2015 fees were proportionally pro-rated for the year.
(7) Emma Duncan retired from the Board on 8 July 2016 and her 2016 fees are proportionally pro-rated for the year.
(8) Martin Thomas retired from the Board on 4 May 2016 and his 2016 fees are proportionally pro-rated for the year.
2017 ANNUAL BONUS PAYMENTS IN RESPECT OF 2016 PERFORMANCE
As detailed in the Policy Report, each Executive Director participates in the annual bonus plan, under which performance is measured over
a single financial year.
The target value of bonus was 150 per cent of salary for the CEO and CFO respectively, and the maximum payable was two times the target
value. The RoE is 13.5 per cent.
Performance Measures
Absolute RoE
Relative RoE
Total
Weighting
(of total Company
element of 75%)
%
60
40
100
(75 per cent of Total Bonus)
Threshold
%
7
50
Target
%
11
N/A
Max
%
19
75
Actual
performance
%
13.5
58.3
% payout
131.3 of target
100.0 of target
118.8 of target payable in respect
of Company performance
For 2016, the Lancashire Group delivered solid results in a difficult market. The absolute component paid out at 131.3 per cent of target
as the RoE was 13.5 per cent against a target of 11 per cent. 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 re-presented in the 2017
Directors’ Remuneration Report as final numbers.
PERSONAL PERFORMANCE
25 per cent of the 2016 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 2016 personal objectives for each Executive Director.
Executive Director
Personal Performance
Alex Maloney
Effective leadership and management of the senior executive team and Group.
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.
Development of the general business strategy.
Contribution aligned to the Lancashire Group Values.
The personal targets were broadly common among the Executive Directors, with variances being attributable to the specifics of their
respective roles and performance targets relating to areas of personal development.
During the 2016 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 2016 performance against personal objectives the following ratings were determined following a process for the
evaluation of performance of the Executive Directors against the agreed personal targets and discussion and agreement of the outcomes with
the Chairman and members of the Board. The outcomes are expressed as a percentage of the maximum award for personal performance:
CEO – 75 per cent, and CFO – 75 per cent.
A table of performance measures and total 2016 bonus achievement is set out below:
Executive Director
Alex Maloney
Elaine Whelan
Financial
performance
(max % of
total bonus)
Personal
performance
(max % of
total bonus)
%
75
75
%
25
25
Bonus
% of maximum
paid in cash
Total1
(75 per cent of
awarded
bonus value
total bonus)
$
$
Value of bonus
deferred into RSS
Value of bonus
awards (25 per
cent of total
bonus)1
$
%
63
63
1,510,554
1,132,915
1,037,248
777,936
377,639
259,312
(1) 25 per cent of total bonus award will be deferred into RSS awards with one third vesting annually, each year, over a three-year period with the first third becoming exercisable in February 2018, subject to the Company
not being in a closed period. These awards vest on the relevant dates subject to continued employment only.
72
72
Lancashire Holdings Limited | Annual Report & Accounts 2016
Lancashire Holdings Limited | Annual Report & Accounts 2016
www.lancashiregroup.com
73
DIRECTORS’ REMUNERATION REPORT CONTINUED
NON-EXECUTIVE DIRECTORS’ FEES
Current Non-Executive Directors
Peter Clarke1
Michael Dawson2
Simon Fraser3
Samantha Hoe-Richardson4
Robert Lusardi5
Tom Milligan6
Former Non-Executive Directors
Emma Duncan7
Martin Thomas8
Fee
$
Other
Total
$
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
290,769
175,000
28,269
–
175,000
175,000
175,000
175,000
84,808
–
175,000
158,958
91,538
175,000
111,250
325,000
66,974
13,350
$
–
–
–
–
–
–
–
–
–
–
–
–
34,375
100,000
290,769
175,000
28,269
241,974
175,000
188,350
175,000
84,808
–
–
175,000
158,958
91,538
175,000
145,625
425,000
(1) Peter Clarke was appointed as a Non-Executive Director with effect from 9 June 2014 and as LHL Chairman with effect from 4 May 2016 and his 2016 fees are proportionally pro-rated for the year.
(2) Michael Dawson was appointed as a Non-Executive Director with effect from 3 November 2016 and his 2016 fees are proportionally pro-rated for the year.
(3) Simon Fraser was additionally appointed as a Non-Executive Director of CUL with effect from 29 February 2016 and his 2016 fees are proportionally pro-rated for the year.
(4) Samantha Hoe-Richardson was additionally appointed as a Non-Executive Director of LUK with effect from 18 October 2016 and her 2016 fees are proportionally pro-rated for the year.
(5) Robert Lusardi was appointed as a Non-Executive Director with effect from 8 July 2016 and his 2016 fees are proportionally pro-rated for the year.
(6) Tom Milligan was appointed as a Non-Executive Director with effect from 3 February 2015 and his 2015 fees were proportionally pro-rated for the year.
(7) Emma Duncan retired from the Board on 8 July 2016 and her 2016 fees are proportionally pro-rated for the year.
(8) Martin Thomas retired from the Board on 4 May 2016 and his 2016 fees are proportionally pro-rated for the year.
2017 ANNUAL BONUS PAYMENTS IN RESPECT OF 2016 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.
value. The RoE is 13.5 per cent.
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
FINANCIAL PERFORMANCE
75 per cent of the 2016 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
%
7
50
Target
%
11
N/A
Max
%
19
75
Actual
performance
%
13.5
58.3
% payout
131.3 of target
100.0 of target
100
(75 per cent of Total Bonus)
118.8 of target payable in respect
of Company performance
For 2016, the Lancashire Group delivered solid results in a difficult market. The absolute component paid out at 131.3 per cent of target
as the RoE was 13.5 per cent against a target of 11 per cent. 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 re-presented in the 2017
Directors’ Remuneration Report as final numbers.
PERSONAL PERFORMANCE
25 per cent of the 2016 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 2016 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 Group Values.
Effective leadership and management of the finance function and the Bermuda office.
Development of the general business strategy.
Contribution aligned to the Lancashire Group Values.
The personal targets were broadly common among the Executive Directors, with variances being attributable to the specifics of their
respective roles and performance targets relating to areas of personal development.
During the 2016 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 2016 performance against personal objectives the following ratings were determined following a process for the
evaluation of performance of the Executive Directors against the agreed personal targets and discussion and agreement of the outcomes with
the Chairman and members of the Board. The outcomes are expressed as a percentage of the maximum award for personal performance:
CEO – 75 per cent, and CFO – 75 per cent.
A table of performance measures and total 2016 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
awards (25 per
cent of total
bonus)1
$
75
75
25
25
63
63
1,510,554
1,132,915
1,037,248
777,936
377,639
259,312
(1) 25 per cent of total bonus award will be deferred into RSS awards with one third vesting annually, each year, over a three-year period with the first third becoming exercisable in February 2018, subject to the Company
not being in a closed period. These awards vest on the relevant dates subject to continued employment only.
72
Lancashire Holdings Limited | Annual Report & Accounts 2016
www.lancashiregroup.com
www.lancashiregroup.com
73
73
GOVERNANCE
DIRECTORS’ REMUNERATION REPORT CONTINUED
LONG-TERM SHARE AWARDS WITH PERFORMANCE PERIODS ENDING IN THE YEAR – 2014 RSS AWARD
The 2014 RSS awards were based on a three-year performance period ending on 31 December 2016 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 67.4 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 2014 RSS awards)
(relevant to 75% of the 2014 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
13.9
0
25
100
89.8
Details of the vesting for each Executive Director, based on the above, are shown in the table below:
13,976
13,976
27,953
Executive Director
Alex Maloney
Elaine Whelan
Number of
shares at grant
Number of
shares to lapse
Number of
shares to vest
Dividend accrual
on vested shares
value2
$
Value of shares
including
dividend
accrual1
$
124,333
102,989
40,532
33,573
83,801
69,416
287,256
237,947
1,003,429
831,184
(1) The value of the vested shares is based on the 2014 RSS awards which vest at 67.4 per cent on 16 February 2017 and are based on a three-year performance period that ended on 31 December 2016. The values are
provisionally based on the average share price of the last quarter of 2016 (being $8.55 based on the exchange rate of 1.2422). The vested awards are subject to the claw-back provision set out on page 65.
(2) Dividends accrue on awards at the record date of a dividend payment and upon exercise the cash value of the accrued dividends is paid to the employee on the number of vested awards net of tax required.
SCHEME INTERESTS AWARDED DURING THE YEAR
The table below sets out the performance RSS awards that were granted as nil-cost options on 18 February 2016.
Executive Director
Alex Maloney
Elaine Whelan
Number of awards
granted during
the year
Grant date2
Face value
of awards
granted during
the year1,3
$
18-Feb-2016
219,254
1,940,398
18-Feb-2016
157,104
1,390,370
% vesting
at threshold
performance
25
25
(1) The share price on the date of performance awards grant was $8.85 when the RSS share awards were granted as nil-cost options. The awards were based on the share price as at 31 December 2015 (being $9.31, based on
(2) The vesting of the RSS performance awards is subject to two performance conditions as follows:
the exchange rate of 1.4826).
(2) These awards are due to vest subject to performance conditions being met at the end of the performance period ending 31 December 2018 and becoming exercisable in the first open period following the release of the
Company’s 2018 year-end results after the meeting of the Board in February 2019.
(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.
• 25 per cent of each award is subject to a performance condition measuring the TSR performance of the
Company against the TSR performance of a select group of comparator companies (see page 76 for a list
of comparator companies for each grant year), over a three-year performance period. 25 per cent of this
part of the award vests for median performance by the Company, rising to 100 per cent vesting of this
LOSS OF OFFICE PAYMENTS
There were no loss of office payments during the 2016 year.
DETAILS OF ALL OUTSTANDING SHARE AWARDS
Executive Directors.
In addition to awards made during the 2016 financial year, the table below sets out details of all outstanding RSS awards held by
PERFORMANCE AND DEFERRED BONUS AWARDS UNDER THE NIL-COST OPTION RESTRICTED SHARE SCHEME (RSS)
Grant date1
Exercise
price
Awards
held at
1-Jan-16
Awards
granted
Awards
vested
Awards
lapsed
during the
during the
during the
Awards
exercised
during the
Awards
held at
End of
performance
year
year
year
year
31-Dec-16
period
Alex Maloney,
Performance RSS2,3
28-Feb-13
131,969
98,976
32,993
98,976
– 31-Dec-15
Group CEO
Deferred Bonus RSS4
5-Mar-13
Elaine Whelan,
Performance RSS2,3
28-Feb-13
116,087
87,065
29,022
87,065
– 31-Dec-15
567,907
275,478
128,610
32,993
128,610
681,782
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
18-Feb-16
Deferred Bonus RSS4
11-Mar-16
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
18-Feb-16
Deferred Bonus RSS4
11-Mar-16
5,848
124,333
19,620
244,208
41,929
5,040
102,989
15,971
168,149
29,540
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
219,254
56,224
–
–
157,104
38,607
–
–
–
–
–
–
–
–
–
–
–
–
5,848
–
9,810
–
–
–
–
–
–
–
5,040
7,985
9,847
–
–
–
–
–
–
–
–
–
–
–
–
–
–
5,848
–
– 124,333 31-Dec-16
9,810
9,810
–
244,208 31-Dec-17
219,254 31-Dec-18
56,224
5,040
–
–
102,989 31-Dec-16
7,985
7,986
–
168,149 31-Dec-17
9,847
19,693
157,104 31-Dec-18
38,607
–
–
–
–
Total
Group CFO &
LICL CEO
Total
437,776
195,711
109,937
29,022
109,937
494,528
(1) The market values of the common shares on the dates of grant were:
• 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
• 18 February 2016 £6.17
• 11 March 2016 £5.37
as follows:
• 2014 – 16 February 2017;
(3) The vesting dates of the RSS performance awards are subject to being out of a closed period and are
• 2015 – first open period following the release of the Company’s 2017 year-end results; and
• 2016 – first open period following the release of the Company’s 2018 year-end results.
(4) The vesting dates of the RSS Deferred Bonus awards are subject to being out of a closed period and, for
the 2013 to 2016 Deferred Bonus awards, are as follows:
• 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;
part of the award for upper quartile performance by the Company or better (with proportionate vesting
• 2014 – vest 33.33 per cent over a three-year period at the first open period following the release of
between these two points).
the Company’s year-end results for 2014, 2015 and 2016;
• The other 75 per cent of each award is subject to a performance condition based on average annual RoE
• 2015 – vest 33.33 per cent over a three-year period at the first open period following the release of
over a three-year performance period. 25 per cent of this part of the award will vest if average annual
the Company’s year-end results for 2015, 2016 and 2017; and
RoE over the performance period exceeds the criteria set out in the table on page 76, 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 76. Between these two points vesting will take place on a straight-line basis from
25 per cent to 100 per cent for RoE performance.
• 2016 – vest 33.33 per cent over a three-year period at the first open period following the release of
the Company’s year-end results for 2016, 2017 and 2018.
74
74
Lancashire Holdings Limited | Annual Report & Accounts 2016
Lancashire Holdings Limited | Annual Report & Accounts 2016
www.lancashiregroup.com
75
DIRECTORS’ REMUNERATION REPORT CONTINUED
Performance level
Below threshold
Threshold
Stretch or above
Actual achieved
Executive Director
Alex Maloney
Elaine Whelan
Executive Director
Alex Maloney
Elaine Whelan
the exchange rate of 1.4826).
(relative to a comparator group of 11 companies)
(over three years in excess of 13-week Treasury Bill Rate)
TSR
Average annual RoE
(relevant to 25% of the 2014 RSS awards)
(relevant to 75% of the 2014 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
13.9
0
25
100
89.8
Details of the vesting for each Executive Director, based on the above, are shown in the table below:
(1) The value of the vested shares is based on the 2014 RSS awards which vest at 67.4 per cent on 16 February 2017 and are based on a three-year performance period that ended on 31 December 2016. The values are
provisionally based on the average share price of the last quarter of 2016 (being $8.55 based on the exchange rate of 1.2422). The vested awards are subject to the claw-back provision set out on page 65.
(2) Dividends accrue on awards at the record date of a dividend payment and upon exercise the cash value of the accrued dividends is paid to the employee on the number of vested awards net of tax required.
SCHEME INTERESTS AWARDED DURING THE YEAR
The table below sets out the performance RSS awards that were granted as nil-cost options on 18 February 2016.
Face value
of awards
Number of awards
granted during
granted during
the year1,3
Grant date2
the year
$
% vesting
at threshold
performance
18-Feb-2016
219,254
1,940,398
18-Feb-2016
157,104
1,390,370
25
25
(2) These awards are due to vest subject to performance conditions being met at the end of the performance period ending 31 December 2018 and becoming exercisable in the first open period following the release of the
Company’s 2018 year-end results after the meeting of the Board in February 2019.
(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 2016 year.
LONG-TERM SHARE AWARDS WITH PERFORMANCE PERIODS ENDING IN THE YEAR – 2014 RSS AWARD
The 2014 RSS awards were based on a three-year performance period ending on 31 December 2016 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 67.4 per cent, and the actual number of awards vesting (with their estimated value).
DETAILS OF ALL OUTSTANDING SHARE AWARDS
In addition to awards made during the 2016 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
Alex Maloney,
Group CEO
Performance RSS2,3
28-Feb-13
Deferred Bonus RSS4
5-Mar-13
Number of
Number of
shares at grant
shares to lapse
Number of
shares to vest
Dividend accrual
on vested shares
value2
$
Value of shares
including
dividend
accrual1
$
124,333
102,989
40,532
33,573
83,801
69,416
287,256
237,947
1,003,429
831,184
Total
Elaine Whelan,
Group CFO &
LICL CEO
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
18-Feb-16
Deferred Bonus RSS4
11-Mar-16
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
18-Feb-16
Deferred Bonus RSS4
11-Mar-16
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Awards
held at
1-Jan-16
131,969
5,848
124,333
19,620
244,208
41,929
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-16
End of
performance
period
–
–
–
–
–
–
98,976
32,993
98,976
– 31-Dec-15
5,848
–
9,810
–
13,976
–
–
–
–
–
–
–
–
–
5,848
–
– 124,333 31-Dec-16
9,810
9,810
–
244,208 31-Dec-17
13,976
27,953
–
–
219,254 31-Dec-18
56,224
–
–
219,254
56,224
567,907
275,478
128,610
32,993
128,610
681,782
116,087
5,040
102,989
15,971
168,149
29,540
–
–
–
–
–
–
–
–
157,104
38,607
87,065
29,022
87,065
– 31-Dec-15
5,040
–
7,985
–
9,847
–
–
–
–
–
–
–
–
–
5,040
–
–
102,989 31-Dec-16
7,985
7,986
–
168,149 31-Dec-17
9,847
19,693
–
–
157,104 31-Dec-18
38,607
(1) The share price on the date of performance awards grant was $8.85 when the RSS share awards were granted as nil-cost options. The awards were based on the share price as at 31 December 2015 (being $9.31, based on
(2) The vesting of the RSS performance awards is subject to two performance conditions as follows:
(1) The market values of the common shares on the dates of grant were:
• 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
• 18 February 2016 £6.17
• 11 March 2016 £5.37
• 25 per cent of each award is subject to a performance condition measuring the TSR performance of the
Company against the TSR performance of a select group of comparator companies (see page 76 for a list
of comparator companies for each grant year), over a three-year performance period. 25 per cent of this
part of the award vests for median performance by the Company, rising to 100 per cent vesting of this
part of the award for upper quartile performance by the Company or better (with proportionate vesting
between these two points).
• The other 75 per cent of each award is subject to a performance condition based on average annual RoE
over a three-year performance period. 25 per cent of this part of the award will vest if average annual
RoE over the performance period exceeds the criteria set out in the table on page 76, 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 76. 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 closed period and are
as follows:
• 2014 – 16 February 2017;
• 2015 – first open period following the release of the Company’s 2017 year-end results; and
• 2016 – first open period following the release of the Company’s 2018 year-end results.
(4) The vesting dates of the RSS Deferred Bonus awards are subject to being out of a closed period and, for
the 2013 to 2016 Deferred Bonus awards, are as follows:
• 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;
• 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; and
• 2016 – vest 33.33 per cent over a three-year period at the first open period following the release of
the Company’s year-end results for 2016, 2017 and 2018.
Total
437,776
195,711
109,937
29,022
109,937
494,528
74
Lancashire Holdings Limited | Annual Report & Accounts 2016
www.lancashiregroup.com
www.lancashiregroup.com
75
75
GOVERNANCE
DIRECTORS’ REMUNERATION REPORT CONTINUED
TSR TARGETS FOR RSS (25 PER CENT WEIGHTING)
DIRECTORS’ SHAREHOLDINGS AND SHARE INTERESTS
2013
2014
2015
2016
2017
Formal shareholding guidelines were first introduced in 2012 and have subsequently been modified. The guidelines require the CEO and
100%
25%
Nil
75th percentile
75th percentile
75th percentile
75th percentile
75th percentile
= median
< median
= median
< median
= median
< median
= median
< median
= median
< median
ROE TARGETS FOR RSS (75 PER CENT WEIGHTING)
100%
25%
Nil
* Average annual growth in FCBVS plus accrued dividends.
Peer Companies
Amlin plc1
Arch Capital Group Limited2, 4
Argo Group International Holdings, Ltd.
Aspen Insurance Holdings Limited
Axis Capital Holdings Limited
Beazley plc
Catlin Group Ltd.3
Endurance Specialty Holdings Ltd.4,7
Everest Re Group, Ltd.5
The Hanover Insurance Group6
Hiscox Ltd.
Montpelier Re Holdings Ltd.7
Novae Group plc8
Renaissance Re Holdings Ltd.
Validus Holdings Ltd.
2013
2014
2015
2016
RFRoR + 15%
RFRoR +15%
RFRoR +15%
RFRoR +15%
RFRoR + 6%
RFRoR + 6%
RFRoR + 6%
RFRoR + 6%
< RFRoR + 6%
< RFRoR + 6%
< RFRoR + 6%
< RFRoR + 6%
2017*
13%
6%
< 6%
2013 awards
2014 awards
2015 awards
2016 awards
2017 awards
X
–
X
X
X
X
X
X
–
–
X
X
–
X
X
X
–
X
X
X
X
X
X
–
–
X
X
–
X
X
X
–
X
X
X
X
–
X
X
X
X
–
X
X
X
–
X
X
X
X
X
–
X
X
X
X
–
X
X
X
–
X
X
X
X
X
–
–
X
X
X
–
X
X
X
(1) Mitsui Sumitomo Insurance Company acquired Amlin plc. on 1 February 2016. Accordingly, the Committee decided to use Amlin plc as a comparator company up to 30 June 2015 and it was replaced with Everest Re
Group, Ltd with effect from 1 July 2015.
(2) Arch Capital Group Limited was added to the peer group of companies with effect from 1 October 2016 as a replacement for Endurance Specialty Holdings Ltd.
(3) Catlin Group Ltd. was acquired by the XL Group with effect from 1 May 2015 and so was used as a comparator company up to 31 December 2014 and was replaced by Novae Group plc.
(4) Sompo Holdings Inc. announced on 5 October 2016 that it intended to acquire Endurance Specialty Holdings Ltd (‘Endurance’). The transaction subsequently achieved shareholder approval. Accordingly, the Committee
decided to use Arch Capital Group Limited as a comparator company with effect from 1 October 2016 as a replacement for Endurance.
(5) Everest Re Group, Ltd. was added to the peer group of companies with effect from 1 July 2015 as a replacement for Amlin plc.
(6) The Hanover Insurance Group was added to the peer group of companies with effect from 1 January 2015 as a replacement for Montpelier Re Holdings Ltd.
(7) Montpelier Re Holdings Ltd. was acquired by Endurance with effect from 31 July 2015 and so was used as a comparator company up to 31 December 2014 and was replaced by The Hanover Insurance Group.
(8) Novae Group plc was added to the peer group of companies with effect from 1 January 2015 as a replacement for Catlin Group Ltd.
CFO to build and maintain a shareholding in the Company worth two times annual salary as set out in the Policy Report.
Details of the Directors’ interests in shares are shown in the table below.
As at 1 January 2016
As at 31 December 2016
Legally owned
Legally owned
under the RSS
under the RSS
Vested but
unexercised
awards under
other share-
based plans
Shareholding
guideline
achieved?
Number of Ordinary Shares
Subject to
deferral
Subject to
performance
conditions
93,987
66,286
587,795
428,242
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
382,008
287,169
–
N/A
1,000
3,947
N/A
1,000
513,512
428,976
14,000
–
1,000
3,947
3,000
1,000
–
6,950
N/A
N/A
Total
1,195,294
923,504
14,000
–
1,000
3,947
3,000
1,000
–
–
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Yes
Yes
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Directors
Alex Maloney
Elaine Whelan
Peter Clarke
Michael Dawson
Simon Fraser
Robert Lusardi
Tom Milligan
Samantha Hoe-Richardson
Former Non-Executive Directors
Emma Duncan
Martin Thomas
PERFORMANCE GRAPH
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.
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.
76
76
Lancashire Holdings Limited | Annual Report & Accounts 2016
Lancashire Holdings Limited | Annual Report & Accounts 2016
www.lancashiregroup.com
77
This graph shows the value, by 31 December 2016, 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.
DIRECTORS’ REMUNERATION REPORT CONTINUED
TSR TARGETS FOR RSS (25 PER CENT WEIGHTING)
ROE TARGETS FOR RSS (75 PER CENT WEIGHTING)
100%
25%
Nil
100%
25%
Nil
* Average annual growth in FCBVS plus accrued dividends.
Peer Companies
Amlin plc1
Arch Capital Group Limited2, 4
Argo Group International Holdings, Ltd.
Aspen Insurance Holdings Limited
Axis Capital Holdings Limited
Beazley plc
Catlin Group Ltd.3
Endurance Specialty Holdings Ltd.4,7
Everest Re Group, Ltd.5
The Hanover Insurance Group6
Hiscox Ltd.
Montpelier Re Holdings Ltd.7
Novae Group plc8
Renaissance Re Holdings Ltd.
Validus Holdings Ltd.
Group, Ltd with effect from 1 July 2015.
2013
2014
2015
2016
2017
75th percentile
75th percentile
75th percentile
75th percentile
75th percentile
= median
< median
= median
< median
= median
< median
= median
< median
= median
< median
2013
2014
2015
2016
RFRoR + 15%
RFRoR +15%
RFRoR +15%
RFRoR +15%
RFRoR + 6%
RFRoR + 6%
RFRoR + 6%
RFRoR + 6%
< RFRoR + 6%
< RFRoR + 6%
< RFRoR + 6%
< RFRoR + 6%
2017*
13%
6%
< 6%
2013 awards
2014 awards
2015 awards
2016 awards
2017 awards
X
–
X
X
X
X
X
X
–
–
X
X
–
X
X
X
–
X
X
X
X
X
X
–
–
X
X
–
X
X
X
–
X
X
X
X
–
X
X
X
X
–
X
X
X
–
X
X
X
X
X
–
X
X
X
X
–
X
X
X
–
X
X
X
X
X
–
–
X
X
X
–
X
X
X
(1) Mitsui Sumitomo Insurance Company acquired Amlin plc. on 1 February 2016. Accordingly, the Committee decided to use Amlin plc as a comparator company up to 30 June 2015 and it was replaced with Everest Re
(2) Arch Capital Group Limited was added to the peer group of companies with effect from 1 October 2016 as a replacement for Endurance Specialty Holdings Ltd.
(3) Catlin Group Ltd. was acquired by the XL Group with effect from 1 May 2015 and so was used as a comparator company up to 31 December 2014 and was replaced by Novae Group plc.
(4) Sompo Holdings Inc. announced on 5 October 2016 that it intended to acquire Endurance Specialty Holdings Ltd (‘Endurance’). The transaction subsequently achieved shareholder approval. Accordingly, the Committee
decided to use Arch Capital Group Limited as a comparator company with effect from 1 October 2016 as a replacement for Endurance.
(5) Everest Re Group, Ltd. was added to the peer group of companies with effect from 1 July 2015 as a replacement for Amlin plc.
(6) The Hanover Insurance Group was added to the peer group of companies with effect from 1 January 2015 as a replacement for Montpelier Re Holdings Ltd.
(7) Montpelier Re Holdings Ltd. was acquired by Endurance with effect from 31 July 2015 and so was used as a comparator company up to 31 December 2014 and was replaced by The Hanover Insurance Group.
(8) Novae Group plc was added to the peer group of companies with effect from 1 January 2015 as a replacement for Catlin Group Ltd.
DIRECTORS’ SHAREHOLDINGS AND SHARE INTERESTS
Formal shareholding guidelines were first introduced in 2012 and have subsequently been modified. The guidelines require the CEO and
CFO to build and maintain a shareholding in the Company worth two times annual salary as set out in the Policy Report.
Details of the Directors’ interests in shares are shown in the table below.
Directors
Alex Maloney
Elaine Whelan
Peter Clarke
Michael Dawson
Simon Fraser
Samantha Hoe-Richardson
Robert Lusardi
Tom Milligan
Former Non-Executive Directors
Emma Duncan
Martin Thomas
As at 1 January 2016
As at 31 December 2016
Number of Ordinary Shares
Legally owned
Legally owned
382,008
287,169
–
N/A
1,000
3,947
N/A
1,000
513,512
428,976
14,000
–
1,000
3,947
3,000
1,000
–
6,950
N/A
N/A
Subject to
deferral
under the RSS
Subject to
performance
conditions
under the RSS
93,987
66,286
587,795
428,242
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
Vested but
unexercised
awards under
other share-
based plans
–
–
N/A
N/A
N/A
N/A
N/A
N/A
Total
1,195,294
923,504
14,000
–
1,000
3,947
3,000
1,000
N/A
N/A
N/A
N/A
Shareholding
guideline
achieved?
Yes
Yes
N/A
N/A
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
£
500
450
400
350
300
250
200
150
100
50
0
2008
2009
2010
2011
2012
2013
2014
2015
2016
Lancashire Holdings
FTSE 250 Index
Source: Datastream (Thomson Reuters)
This graph shows the value, by 31 December 2016, 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.
76
Lancashire Holdings Limited | Annual Report & Accounts 2016
www.lancashiregroup.com
www.lancashiregroup.com
77
77
GOVERNANCE
DIRECTORS’ REMUNERATION REPORT CONTINUED
TOTAL REMUNERATION HISTORY FOR CEO
The table below sets out the total single figure remuneration for the CEOs over the last eight years with the annual bonus paid as
a percentage of the maximum and the percentage of long-term share awards vesting in each year.
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, with the exception of Peter Clarke who is the Chairman of the Board):
2009
2010
2011
2012
2013
Richard Brindle
20141
Alex Maloney
20142
2015
2016
Remuneration Committee Members
Position
Comments
Total remuneration ($000s)
7,244
9,945
9,623
10,460
10,175
10,072
2,405
3,8534
3,425
Annual bonus (%)
LTI vesting (%)
68
N/A
94
99.6
73
100
73
99
80
100
80
613
73
50
724
75
63
67
(1) Richard Brindle was the CEO from 2005 until he retired from the Group and as a Director on 30 April 2014.
(2) Alex Maloney was appointed CEO effective 1 May 2014, after the retirement of Mr Brindle. For the purposes of this table his numbers have been pro-rated to account for only his time in office as CEO for 2014.
(3) Mr Brindle was afforded good leaver status and all RSS award interests were vested upon his departure, using estimated TSR and RoE values at the time of his retirement. The amounts in the table above reflect all awards
which vested in 2014. Further particulars of the vesting were reported in the Group’s 2014 Annual Report and Accounts.
(4) Alex Maloney’s 2015 total remuneration and annual bonus percentage have been re-presented in the above table to reflect changes made after the publication of the 2015 Annual Report and Accounts. These changes
are primarily due to the disclosed relative RoE performance which impacted his annual bonus figure for 2015 and the re-presentation of his LTI award vesting and dividend accrual value at the vesting date, as disclosed
on page 71.
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 CEO from the preceding year
and the average percentage change in respect of the employees of the Group taken as a whole.
Base salary
Benefits
Bonus
Year on
year change
CEO2
%
Average year
on year change
employees1,3
%
5
4
-9
10
9
12
(1) Employee numbers were calculated on a per permanent employee headcount basis for the years ending 31 December 2016 and 31 December 2015, adjusted for any joiners and leavers during this period.
(2) The underlying salary increase from 2015 to 2016 for the CEO was 3 per cent. However some amounts were paid in Sterling and converted at the average exchange rate of 1.3777 for the year, which has resulted in the
overall 5 per cent base salary year on year change above.
(3) The underlying salary increase from 2015 to 2016 for the general workforce population was 3 per cent. The 10 per cent increase reflects staff promotions and other adjustments made during the year.
RELATIVE IMPORTANCE OF THE SPEND ON PAY
The following table sets out the percentage change in dividends and overall spend on pay in the year ended 31 December 2016 compared to
the year ended 31 December 2015.
Employee remuneration costs
Dividends
2016
$m
72.1
178.9
2015
$m
Percentage change
%
80.1
317.5
-10
-44
Simon Fraser
Peter Clarke
Robert Lusardi
Emma Duncan
LHL Remuneration Committee Chairman Attended 4 of a potential maximum meetings of 4 in 2016
Member from 4 November 2014
Attended 4 of a potential maximum meetings of 4 in 2016
Michael Dawson
Member from 3 November 2016
Attended 0 of a potential maximum meetings of 0 in 2016
Member from 8 July 2016
Attended 2 of a potential maximum meetings of 2 in 2016
Member from 5 November 2010
Attended 2 of a potential maximum meetings of 2 in 2016
Samantha Hoe-Richardson Member on an interim basis from 4 May
Attended 2 of a potential maximum meetings of 2 in 2016
Retired on 8 July 2016
2016 to 3 November 2016
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
The total fees paid to NBS in respect of its services to the Committee for the year ended 31 December 2016 were $159,473 (2015 – $132,330).
RCG Code.
Fees are predominantly charged on a ‘time spent’ basis.
ENGAGEMENT WITH SHAREHOLDERS
Details of votes cast for and against the resolution to approve last year’s Remuneration Report are shown below along with the votes to
approve the outgoing policy which have been restated below; any matters discussed with shareholders during the year are provided in
the Implementation of Remuneration Policy for 2017 section of the report starting on page 69.
Vote to approve 2015 Annual Report
2014 AGM Vote to approve outgoing
on Remuneration
Remuneration Policy
Total number
of votes
% of
votes cast
Total number
of votes
% of
votes cast
139,168,062
5,670,010
96.1
132,963,855
3.9
14,530,236
144,838,072
100.0
147,494,091
4,450,849
554,388
90.1
9.9
100.0
Approved by the Board of Directors and signed on behalf of the Board
For
Against
Total
Abstentions
Simon Fraser
LHL Remuneration Committee Chairman
15 February 2017
78
78
Lancashire Holdings Limited | Annual Report & Accounts 2016
Lancashire Holdings Limited | Annual Report & Accounts 2016
www.lancashiregroup.com
79
DIRECTORS’ REMUNERATION REPORT CONTINUED
2009
2010
2011
2012
2013
20141
20142
2015
Total remuneration ($000s)
7,244
9,945
9,623
10,460
10,175
10,072
2,405
3,8534
Annual bonus (%)
LTI vesting (%)
68
N/A
94
99.6
73
100
73
99
80
100
80
613
73
50
724
75
2016
3,425
63
67
(1) Richard Brindle was the CEO from 2005 until he retired from the Group and as a Director on 30 April 2014.
(2) Alex Maloney was appointed CEO effective 1 May 2014, after the retirement of Mr Brindle. For the purposes of this table his numbers have been pro-rated to account for only his time in office as CEO for 2014.
(3) Mr Brindle was afforded good leaver status and all RSS award interests were vested upon his departure, using estimated TSR and RoE values at the time of his retirement. The amounts in the table above reflect all awards
which vested in 2014. Further particulars of the vesting were reported in the Group’s 2014 Annual Report and Accounts.
(4) Alex Maloney’s 2015 total remuneration and annual bonus percentage have been re-presented in the above table to reflect changes made after the publication of the 2015 Annual Report and Accounts. These changes
are primarily due to the disclosed relative RoE performance which impacted his annual bonus figure for 2015 and the re-presentation of his LTI award vesting and dividend accrual value at the vesting date, as disclosed
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
PERCENTAGE CHANGE IN CEO REMUNERATION
The following table sets out the percentage change in the aggregate value of salary, benefits and bonus for the CEO from the preceding year
and the average percentage change in respect of the employees of the Group taken as a whole.
(1) Employee numbers were calculated on a per permanent employee headcount basis for the years ending 31 December 2016 and 31 December 2015, adjusted for any joiners and leavers during this period.
(2) The underlying salary increase from 2015 to 2016 for the CEO was 3 per cent. However some amounts were paid in Sterling and converted at the average exchange rate of 1.3777 for the year, which has resulted in the
overall 5 per cent base salary year on year change above.
(3) The underlying salary increase from 2015 to 2016 for the general workforce population was 3 per cent. The 10 per cent increase reflects staff promotions and other adjustments made during the year.
The following table sets out the percentage change in dividends and overall spend on pay in the year ended 31 December 2016 compared to
RELATIVE IMPORTANCE OF THE SPEND ON PAY
the year ended 31 December 2015.
Year on
year change
CEO2
%
Average year
on year change
employees1,3
5
4
-9
%
10
9
12
%
-10
-44
Percentage change
2016
$m
72.1
178.9
2015
$m
80.1
317.5
on page 71.
of the maximum.
Base salary
Benefits
Bonus
Employee remuneration costs
Dividends
TOTAL REMUNERATION HISTORY FOR CEO
The table below sets out the total single figure remuneration for the CEOs over the last eight years with the annual bonus paid as
a percentage of the maximum and the percentage of long-term share awards vesting in each year.
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, with the exception of Peter Clarke who is the Chairman of the Board):
Richard Brindle
Alex Maloney
Remuneration Committee Members
Position
Comments
Simon Fraser
Peter Clarke
LHL Remuneration Committee Chairman Attended 4 of a potential maximum meetings of 4 in 2016
Member from 4 November 2014
Attended 4 of a potential maximum meetings of 4 in 2016
Michael Dawson
Member from 3 November 2016
Attended 0 of a potential maximum meetings of 0 in 2016
Robert Lusardi
Emma Duncan
Member from 8 July 2016
Attended 2 of a potential maximum meetings of 2 in 2016
Member from 5 November 2010
Retired on 8 July 2016
Attended 2 of a potential maximum meetings of 2 in 2016
Samantha Hoe-Richardson Member on an interim basis from 4 May
Attended 2 of a potential maximum meetings of 2 in 2016
2016 to 3 November 2016
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 2016 were $159,473 (2015 – $132,330).
Fees are predominantly charged on a ‘time spent’ basis.
ENGAGEMENT WITH SHAREHOLDERS
Details of votes cast for and against the resolution to approve last year’s Remuneration Report are shown below along with the votes to
approve the outgoing policy which have been restated below; any matters discussed with shareholders during the year are provided in
the Implementation of Remuneration Policy for 2017 section of the report starting on page 69.
Vote to approve 2015 Annual Report
on Remuneration
2014 AGM Vote to approve outgoing
Remuneration Policy
Total number
of votes
% of
votes cast
Total number
of votes
% of
votes cast
139,168,062
5,670,010
96.1
132,963,855
3.9
14,530,236
144,838,072
100.0
147,494,091
4,450,849
554,388
90.1
9.9
100.0
For
Against
Total
Abstentions
Approved by the Board of Directors and signed on behalf of the Board
Simon Fraser
LHL Remuneration Committee Chairman
15 February 2017
78
Lancashire Holdings Limited | Annual Report & Accounts 2016
www.lancashiregroup.com
www.lancashiregroup.com
79
79
GOVERNANCE
DIRECTORS’ REPORT
OVERVIEW OF THE GROUP
Lancashire Holdings Limited is a Bermuda incorporated company (Registered Company No. 37415) with operating subsidiaries in Bermuda
and London, and two Syndicates at Lloyd’s.
The Company’s common shares were admitted to trading on AIM in December 2005 and were subsequently moved up to the Official List
and to trading on the main market of the LSE on 16 March 2009. The shares have been included in the FTSE 250 Index since 22 June 2009.
PRINCIPAL ACTIVITIES
The Company’s principal activity, through its wholly owned subsidiaries, is the provision of global specialty insurance and reinsurance
products. On 7 November 2013, the Company completed the acquisition of CCL, an established Lloyd’s insurance group, and in June 2013
established Kinesis, a third-party capital and underwriting management facility, to complement the Group’s longstanding specialty insurance
activities. An analysis of the Group’s business performance can be found in the Business review on pages 24 to 30.
DIVIDENDS
For the year ended 31 December 2016, the following dividends were declared:
• an interim dividend of $0.05 per common share was declared on 26 July 2016 and paid on 31 August 2016 in pounds sterling at the
pound/U.S. dollar exchange rate of 1.3159 or £0.0380 per common share;
• a special dividend of $0.75 per common share was declared on 2 November 2016 and paid on 14 December 2016 in pounds sterling at the
pound/U.S. dollar exchange rate of 1.2417 or £0.6040 per common share; and
• a final dividend of $0.10 per common share was declared on 15 February 2017 to be paid on 22 March 2017 in pounds sterling at the
pound/U.S. dollar exchange rate on the record date of 24 February 2017 or approximately £0.08 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.
CURRENT DIRECTORS
• Peter Clarke (Non-Executive Chairman) (appointed Chairman effective 4 May 2016)
• Michael Dawson (Non-Executive Director) (appointed effective 3 November 2016)
• Simon Fraser (Senior Independent Non-Executive Director)
• Samantha Hoe-Richardson (Non-Executive Director)
• Robert Lusardi (Non-Executive Director) (appointed effective 8 July 2016)
• Alex Maloney (Chief Executive Officer)
• Tom Milligan (Non-Executive Director)
• Elaine Whelan (Chief Financial Officer)
DIRECTORS WHO RETIRED DURING THE YEAR
• Martin Thomas (Non-Executive Chairman) (retired effective 4 May 2016)
• Emma Duncan (Non-Executive Director) (retired effective 8 July 2016)
82
80
Lancashire Holdings Limited | Annual Report & Accounts 2016
Lancashire Holdings Limited | Annual Report & Accounts 2016
DIRECTORS’ REPORT
The Company’s common shares were admitted to trading on AIM in December 2005 and were subsequently moved up to the Official List
and to trading on the main market of the LSE on 16 March 2009. The shares have been included in the FTSE 250 Index since 22 June 2009.
PRINCIPAL ACTIVITIES
The Company’s principal activity, through its wholly owned subsidiaries, is the provision of global specialty insurance and reinsurance
products. On 7 November 2013, the Company completed the acquisition of CCL, an established Lloyd’s insurance group, and in June 2013
established Kinesis, a third-party capital and underwriting management facility, to complement the Group’s longstanding specialty insurance
activities. An analysis of the Group’s business performance can be found in the Business review on pages 24 to 30.
DIVIDENDS
For the year ended 31 December 2016, the following dividends were declared:
• an interim dividend of $0.05 per common share was declared on 26 July 2016 and paid on 31 August 2016 in pounds sterling at the
pound/U.S. dollar exchange rate of 1.3159 or £0.0380 per common share;
• a special dividend of $0.75 per common share was declared on 2 November 2016 and paid on 14 December 2016 in pounds sterling at the
pound/U.S. dollar exchange rate of 1.2417 or £0.6040 per common share; and
• a final dividend of $0.10 per common share was declared on 15 February 2017 to be paid on 22 March 2017 in pounds sterling at the
pound/U.S. dollar exchange rate on the record date of 24 February 2017 or approximately £0.08 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.
CURRENT DIRECTORS
• Peter Clarke (Non-Executive Chairman) (appointed Chairman effective 4 May 2016)
• Michael Dawson (Non-Executive Director) (appointed effective 3 November 2016)
• Simon Fraser (Senior Independent Non-Executive Director)
• Samantha Hoe-Richardson (Non-Executive Director)
• Robert Lusardi (Non-Executive Director) (appointed effective 8 July 2016)
• Alex Maloney (Chief Executive Officer)
• Tom Milligan (Non-Executive Director)
• Elaine Whelan (Chief Financial Officer)
DIRECTORS WHO RETIRED DURING THE YEAR
• Martin Thomas (Non-Executive Chairman) (retired effective 4 May 2016)
• Emma Duncan (Non-Executive Director) (retired effective 8 July 2016)
82
Lancashire Holdings Limited | Annual Report & Accounts 2016
OVERVIEW OF THE GROUP
and London, and two Syndicates at Lloyd’s.
Lancashire Holdings Limited is a Bermuda incorporated company (Registered Company No. 37415) with operating subsidiaries in Bermuda
DIRECTORS’ INTERESTS
The Directors’ beneficial interests in the Company’s common shares as at 31 December 2016 and 2015 including interests held by family
members were as follows:
Directors
Peter Clarke1
Michael Dawson
Simon Fraser
Samantha Hoe-Richardson
Robert Lusardi2
Alex Maloney3
Tom Milligan
Elaine Whelan4
Former Non-Executive Directors
Emma Duncan
Martin Thomas
Common shares
held as at
31 December 2016
Common shares
held as at
31 December 2015
14,000
–
1,000
3,947
3,000
513,512
1,000
428,976
–
–
1,000
3,947
–
382,008
1,000
287,169
N/A
N/A
–
6,950
There have been no changes in Directors’ shareholdings between the end of the financial year and the date of this Report.
(1) Peter Clarke conducted the following transactions in the Company’s shares during 2016:
• 1 March – purchase of 14,000 shares at a price of £5.52 costing £77,241.
(2) Robert Lusardi conducted the following transactions in the Company’s shares during 2016:
• 30 December – purchase of 3,000 shares at a price of $8.60 costing $25,800.
(3) Includes 100,000 shares owned by his spouse, Amanda Maloney. Alex Maloney conducted the following transactions in the Company’s shares during 2016:
• 1 March – purchase of 44,553 shares at a price of £5.60 costing £249,497.
• 5 May – purchase of 18,955 shares at a price of £5.27 costing £99,798.
• 13 September – exercise of 98,976 RSS awards and 29,634 deferred bonus RSS awards and related sale of 60,614 shares to cover tax liabilities, at a price of £6.50 realising £394,032.
(4) Includes 11,590 shares owned by her spouse, Kilian Whelan. Elaine Whelan conducted the following transactions in the Company’s shares during 2016:
• 1 March – purchase of 29,500 shares at a price of £5.61 costing £165,569.
• 3 March – purchase of 8,990 shares at a price of £5.55 costing £49,912 by Kilian Whelan.
• 9 May – exercise of 87,065 RSS awards and 22,872 deferred bonus RSS awards and related sale of 6,620 shares on 9 and 10 May to cover tax liabilities, at a price of £5.55 realising £36,745.
TRANSACTIONS IN OWN SHARES
The Company did not repurchase any of its own common shares during 2016 or 2015.
The Group’s current repurchase programme has 20,134,191 common shares remaining to be purchased as at 31 December 2016
(approximately $172.7 million at the 31 December 2016 share price). The purpose of the Company’s repurchase programme is to acquire
shares to use in the future towards satisfying its obligations under its RSS awards. Further details of the share repurchase authority and
programme are set out in note 18 to the consolidated financial statements on page 150. The repurchase programme is subject to renewal
at the 2017 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 61 to 79.
SUBSTANTIAL SHAREHOLDERS
As at 15 February 2017, 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 Ltd
Setanta Asset Management Limited
Vidacos Nominees Ltd
BlackRock, Inc.
Dimensional Fund Advisors LP
Franklin Mutual Advisers, LLC
Troy Asset Management Limited
Number of shares as
at 15 February 2017
% of shares
in issue
39,964,120
31,558,488
15,223,868
10,342,300
8,976,004
8,097.268
7,856,956
6,842,393
20.0
15.8
7.6
5.2
4.5
4.1
3.9
3.4
www.lancashiregroup.com
www.lancashiregroup.com
83
81
GOVERNANCE
DIRECTORS’ REPORT CONTINUED
CORPORATE GOVERNANCE – COMPLIANCE STATEMENT
The Company’s compliance with the Code is summarised in the Corporate Governance section of this Report on pages 47 to 49.
The Company confirms, in accordance with the principle of ‘comply or explain’, that there are no areas of material non-compliance with
the Code.
DONATIONS
In June 2016 the Company made a cash donation of $300,110 to the Lancashire Foundation.
The Foundation owns 330,713 common shares in the Company and during the 2016 calendar year received dividends of £236,010 declared
on those shares.
Lancashire established the Lancashire Foundation as a Bermuda charitable trust in 2007, with the aim of creating a trust for the benefit
of charitable causes in Bermuda, the UK and worldwide. During 2012, the assets of the Lancashire Foundation were transferred to the
Lancashire Foundation charitable trust established in England and Wales and registered with the Charity Commission. The Lancashire
Foundation’s trustees are two senior employees and a subsidiary Non-Executive Director. The Trustees make donations following
recommendations made by the Company’s Donations Committee consisting of some of the Group’s employees.
A summary of the work of the Lancashire Foundation during 2016 can be found in the Corporate Responsibility section on pages 36 to 41.
The Group did not make any political donations or expenditure during 2016 or 2015.
HEALTH AND SAFETY
The Group considers the health and safety of its employees to be a management responsibility equal to that of any other function.
The Group operates in compliance with health and safety legislative requirements in Bermuda and the UK.
GREENHOUSE GAS EMISSIONS
The Group’s greenhouse gas emissions are detailed in the Corporate Responsibility section on page 39.
EMPLOYEES
The Group is an equal opportunity employer, and does not tolerate unfair discrimination 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 ERM report on pages 31 to 33 and in the risk disclosures section
on pages 101 to 128 of the consolidated financial statements. The Group’s use of derivative financial instruments can be found on
pages 116 to 118.
ACCOUNTING STANDARDS
The Group’s consolidated financial statements are prepared in accordance with accounting principles generally accepted under IFRS as
adopted by the European Union. Where IFRS is silent, as it is in respect of certain aspects relating to the measurement of insurance products,
the IFRS framework allows reference to another comprehensive body of accounting principles. In such instances, the Group’s management
determines appropriate measurement bases, to provide the most useful information to users of the consolidated financial statements, using
their judgement and considering U.S. GAAP.
84
82
Lancashire Holdings Limited | Annual Report & Accounts 2016
Lancashire Holdings Limited | Annual Report & Accounts 2016
DIRECTORS’ REPORT CONTINUED
CORPORATE GOVERNANCE – COMPLIANCE STATEMENT
The Company’s compliance with the Code is summarised in the Corporate Governance section of this Report on pages 47 to 49.
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
on those shares.
In June 2016 the Company made a cash donation of $300,110 to the Lancashire Foundation.
The Foundation owns 330,713 common shares in the Company and during the 2016 calendar year received dividends of £236,010 declared
Lancashire established the Lancashire Foundation as a Bermuda charitable trust in 2007, with the aim of creating a trust for the benefit
of charitable causes in Bermuda, the UK and worldwide. During 2012, the assets of the Lancashire Foundation were transferred to the
Lancashire Foundation charitable trust established in England and Wales and registered with the Charity Commission. The Lancashire
Foundation’s trustees are two senior employees and a subsidiary Non-Executive Director. The Trustees make donations following
recommendations made by the Company’s Donations Committee consisting of some of the Group’s employees.
A summary of the work of the Lancashire Foundation during 2016 can be found in the Corporate Responsibility section on pages 36 to 41.
The Group did not make any political donations or expenditure during 2016 or 2015.
HEALTH AND SAFETY
The Group considers the health and safety of its employees to be a management responsibility equal to that of any other function.
The Group operates in compliance with health and safety legislative requirements in Bermuda and the UK.
GREENHOUSE GAS EMISSIONS
The Group’s greenhouse gas emissions are detailed in the Corporate Responsibility section on page 39.
EMPLOYEES
The Group is an equal opportunity employer, and does not tolerate unfair discrimination 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 ERM report on pages 31 to 33 and in the risk disclosures section
on pages 101 to 128 of the consolidated financial statements. The Group’s use of derivative financial instruments can be found on
pages 116 to 118.
ACCOUNTING STANDARDS
The Group’s consolidated financial statements are prepared in accordance with accounting principles generally accepted under IFRS as
adopted by the European Union. Where IFRS is silent, as it is in respect of certain aspects relating to the measurement of insurance products,
the IFRS framework allows reference to another comprehensive body of accounting principles. In such instances, the Group’s management
determines appropriate measurement bases, to provide the most useful information to users of the consolidated financial statements, using
their judgement and considering U.S. GAAP.
ANNUAL GENERAL MEETING
The notice of the 2017 AGM, to be held on 3 May 2017 at the Company’s head office, 29th Floor, 20 Fenchurch Street, London EC3M 3BY,
UK, is contained in a separate circular to shareholders which is made available to shareholders at the same time as this Annual Report and
Accounts. The notice of the AGM is also available on the Company’s website.
ELECTRONIC AND WEB COMMUNICATIONS
Provisions of the Bermuda Companies Act 1981 enable companies to communicate with shareholders by electronic and/or website
communications. The Company will notify shareholders (either in writing or by other permitted means) when a relevant document or other
information is placed on the website and a shareholder may request a hard copy version of the document or information.
GOING CONCERN AND VIABILITY STATEMENT
The Business review section on pages 24 to 30 sets out details of the Group’s financial performance, capital management, business
environment and outlook. In addition, further discussion of the principal risks and material uncertainties affecting the Group can be found
on pages 34 and 35. Starting on page 101, 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 report. The three-year strategic plan was last approved by
the Board on 26 July 2016. The Board receives quarterly reports from the CRO and sets and approves risk tolerances for the business. The
Board approved the Group’s 2016 ORSA report on 8 December 2016.
During 2016, and in particular in the preparation of the 2016 ORSA report, 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 2018,
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 2018. 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 2017 AGM to appoint KPMG as the Company’s auditors and to authorise the Directors to set
the auditors’ remuneration.
During 2016 the Company completed an audit tender process and, as a result, the Board decided to recommend to shareholders that KPMG
be appointed as the Company’s auditors at the 2017 AGM. EY have served as the Company’s auditors since 2005. See page 54 for further
details of the audit tender process.
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
15 February 2017
84
Lancashire Holdings Limited | Annual Report & Accounts 2016
www.lancashiregroup.com
www.lancashiregroup.com
85
83
GOVERNANCE
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and Accounts and the Group’s consolidated financial statements in
accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year that give a true and fair view of the state of
affairs of the Group and of the profit or loss of the Group for that year. The consolidated financial statements have been prepared in
accordance with IFRS. Where IFRS is silent, as it is in respect of certain aspects relating to the measurement of insurance products, U.S.
GAAP is considered. Further detail on the basis of preparation is described in the consolidated financial statements. In preparing the
consolidated financial statements, the Directors are required to:
• select suitable accounting policies and apply them consistently;
• make judgements and accounting estimates that are reasonable and prudent;
• state whether they have been prepared in accordance with IFRS;
• state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the
Group’s consolidated financial statements;
• provide additional disclosures where compliance with the specific requirements of IFRS are considered to be insufficient to enable users to
understand the impact of particular transactions, events and conditions on the financial position and performance; and
• prepare the consolidated financial statements on the going concern basis unless it is inappropriate to presume that the Group will
continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s transactions and
disclose with reasonable accuracy at any time the financial position of the Group, and enable them to ensure that the consolidated financial
statements comply with applicable laws and regulations. They are also responsible for safeguarding the assets of the Group and hence for
taking reasonable steps for the prevention and detection of fraud and other irregularities.
DIRECTORS’ RESPONSIBILITY STATEMENT
The Directors confirm that to the best of their knowledge:
1.
2.
3.
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;
the Board considers the Annual Report and Accounts, taken as a whole, are fair, balanced and understandable and provide the
information necessary for shareholders to assess the Group’s position and performance, business model and strategy; and
the Strategy and the Business review sections of this Annual Report and Accounts include a fair review of the development and
performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that
the Group faces.
Legislation in Bermuda governing the preparation and dissemination of the consolidated financial statements may differ from legislation in
other jurisdictions. In addition, the rights of shareholders under Bermuda law may differ from those for shareholders of companies
incorporated in other jurisdictions.
By order of the Board
15 February 2017
84
Lancashire Holdings Limited | Annual Report & Accounts 2016
www.lancashiregroup.com
86
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF LANCASHIRE HOLDINGS LIMITED
The Directors are responsible for preparing the Annual Report and Accounts and the Group’s consolidated financial statements in
accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year that give a true and fair view of the state of
affairs of the Group and of the profit or loss of the Group for that year. The consolidated financial statements have been prepared in
accordance with IFRS. Where IFRS is silent, as it is in respect of certain aspects relating to the measurement of insurance products, U.S.
GAAP is considered. Further detail on the basis of preparation is described in the consolidated financial statements. In preparing the
consolidated financial statements, the Directors are required to:
• select suitable accounting policies and apply them consistently;
• make judgements and accounting estimates that are reasonable and prudent;
• state whether they have been prepared in accordance with IFRS;
• state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the
Group’s consolidated financial statements;
• provide additional disclosures where compliance with the specific requirements of IFRS are considered to be insufficient to enable users to
understand the impact of particular transactions, events and conditions on the financial position and performance; and
• prepare the consolidated financial statements on the going concern basis unless it is inappropriate to presume that the Group will
continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s transactions and
disclose with reasonable accuracy at any time the financial position of the Group, and enable them to ensure that the consolidated financial
statements comply with applicable laws and regulations. They are also responsible for safeguarding the assets of the Group and hence for
taking reasonable steps for the prevention and detection of fraud and other irregularities.
DIRECTORS’ RESPONSIBILITY STATEMENT
The Directors confirm that to the best of their knowledge:
1.
the consolidated financial statements, prepared in accordance with IFRS, give a true and fair view of the assets, liabilities, financial
position and profit of the Group;
2.
the Board considers the Annual Report and Accounts, taken as a whole, are fair, balanced and understandable and provide the
information necessary for shareholders to assess the Group’s position and performance, business model and strategy; and
3.
the Strategy and the Business review sections of this Annual Report and Accounts include a fair review of the development and
performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that
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
the Group faces.
incorporated in other jurisdictions.
By order of the Board
15 February 2017
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 2016 and of its profit for the year then ended; and
• have been properly prepared in accordance with IFRSs as adopted by the European Union.
WHAT WE HAVE AUDITED
We have audited the consolidated financial statements of LHL for the year ended 31 December 2016 which comprise:
• the consolidated balance sheet as at 31 December 2016;
• 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 24.
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.
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 $7.5 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 2015 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.
www.lancashiregroup.com
86
www.lancashiregroup.com
85
FINANCIAL STATEMENTS
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF LANCASHIRE HOLDINGS LIMITED CONTINUED
VALUATION OF LOSS RESERVES ($679.8 MILLION GROSS, $543.1 MILLION NET; 2015: $671.0 MILLION GROSS, $587.1 MILLION NET)
Refer to page 50 (Audit Committee report), page 98 (accounting policies), page 109 (risk disclosures), and page 143 (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 appropriate sources.
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 103 and note 12 related
to losses and loss adjustment expenses.
What we concluded to
the Audit Committee
Taken as a whole,
we consider that
managements
judgements in the
areas highlighted
are 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.
86
Lancashire Holdings Limited | Annual Report & Accounts 2016
GOODWILL AND INTANGIBLE ASSETS ($153.8 MILLION; 2015: $153.8 MILLION)
Refer to page 50 (Audit Committee report), page 97 (accounting policy) and page 146 (disclosures)
Risk
Response
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
Management’s impairment assessment of the recorded value of goodwill
and the syndicate participation rights was performed as at 30 September
2016. We evaluated and challenged this assessment, including:
– validating that the base cash flows used were consistent with the three
year forecast approved by the Board;
– reading the three year plan, assessing back testing performed by
management to support the robustness of the forecast process and
having regard to market conditions;
– the pre-tax discount rate applied
– considering whether the pre-tax discount rate applied was appropriate
to those cash flows.
by assessing the cost of capital for the Group and comparable
businesses, and the sensitivity of the impairment assessment to changes
in the pre-tax discount rate; and
– assessing whether long term growth assumptions were consistent with
economic and industry forecasts; and
– assessing the sensitivity analysis performed by management, and
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.
We considered management’s assessment as to whether there were
any impairment indicators during the final quarter of the year, which
included a comparison of expected 1 January 2017 business to be written
as per the three year plan against the actual business subsequently written.
REVENUE RECOGNITION – PREMIUM ESTIMATES
Refer to page 50 (Audit Committee report) and page 97 (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 2016 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.
What we concluded to
the Audit Committee
We agreed with
the conclusions
of management’s
assessment at 30
September 2016,
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 applicable
accounting standards.
www.lancashiregroup.com
87
FINANCIAL STATEMENTS
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF LANCASHIRE HOLDINGS LIMITED CONTINUED
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 performed an audit of the complete financial information (‘full scope audit’)
of all components of the group being LUK, LICL, Cathedral and Group except for the investment in associate for which we performed
specified procedures.
Full scope audit procedures were performed over 100 per cent (2015: 100 per cent) of gross written premiums and insurance contract
liabilities, and 97 per cent (2015: 98 per cent) of profit before tax. Specified audit procedures were performed over the remaining 3 per cent
(2015: 2 per cent) of profit before tax.
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 team, or by component auditors from other EY global network firms operating under our instruction.
The primary audit team, comprising both London and Bermuda members, 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 audit 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.
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 $7.5 million (2015: $8.6 million), which is approximately 5 per cent (2015: approximately 5 per
cent) of profit before tax. The decrease in materiality from the prior period is due to the reduced profit before tax for 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 (2015: 50 per cent) of our planning materiality, namely $3.8 million (2015: $4.3 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 $3.8 million to $1.9 million (2015: $4.3 million to $2.4 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
(2015: $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.
88
Lancashire Holdings Limited | Annual Report & Accounts 2016
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 84, 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.
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.
OPINION ON OTHER MATTERS
In our opinion the part of the Directors’ Remuneration Report that is described as having been audited has been properly prepared in
accordance with the basis of preparation as described therein.
MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION
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:
We have no exceptions
to report.
– 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.
Listing Rules review requirements
We are required to review:
– the Directors’ statement in relation to going concern and longer-term
viability, set out on page 83; and
– the part of the Corporate Governance Statement relating to the
Company’s compliance with the provisions of the UK Corporate
Governance Code specified for review.
We have no exceptions
to report.
www.lancashiregroup.com
89
FINANCIAL STATEMENTS
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF LANCASHIRE HOLDINGS LIMITED CONTINUED
STATEMENT ON THE DIRECTORS’ ASSESSMENT OF THE PRINCIPAL RISKS THAT WOULD THREATEN THE SOLVENCY OR LIQUIDITY
OF THE ENTITY
We have nothing
material to add or
draw attention to.
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.
Ernst & Young LLP
London
15 February 2017
(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.
90
Lancashire Holdings Limited | Annual Report & Accounts 2016
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2016
Gross premiums written
Outwards reinsurance premiums
Net premiums written
Change in unearned premiums
Change in unearned premiums on premiums ceded
Net premiums earned
Net investment income
Net other investment income (losses)
Net realised (losses) gains and impairments
Share of profit of associate
Other income
Net foreign exchange gains (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 income (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 income (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
Notes
2
2
2
2
3
3
3
15
22
2, 12
2, 12
2, 4
2, 4
5, 6, 20
6
7
8
3, 10
10
21
21
2016
$m
633.9
(175.2)
458.7
25.7
3.7
488.1
29.8
6.9
(2.4)
5.1
20.5
4.4
552.4
212.2
(69.7)
142.5
135.1
(3.0)
98.5
10.7
383.8
168.6
18.2
150.4
3.9
154.3
153.8
0.5
154.3
4.1
–
4.1
158.4
157.9
0.5
158.4
$0.77
$0.76
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
$0.93
$0.91
www.lancashiregroup.com
91
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
As at 31 December 2016
Assets
Cash and cash equivalents
Accrued interest receivable
Investments
Inwards premiums receivable from insureds and cedants
Reinsurance assets
– Unearned premiums on premiums ceded
– Reinsurance recoveries
– Other receivables
Other receivables
Corporation tax receivable
Investment in associate
Property, plant and equipment
Deferred acquisition costs
Intangible assets
Total assets
Liabilities
Insurance contracts
– Losses and loss adjustment expenses
– Unearned premiums
– Other payables
Amounts payable to reinsurers
Deferred acquisition costs ceded
Other payables
Corporation tax payable
Deferred tax liability
Interest rate swap
Long-term debt
Total liabilities
Shareholders’ equity
Share capital
Own shares
Other reserves
Accumulated other comprehensive loss
Retained earnings
Total shareholders’ equity attributable to equity shareholders of LHL
Non-controlling interests
Total shareholders’ equity
Total liabilities and shareholders’ equity
Notes
9, 17
10, 11, 17
13
12
13
13
11, 15
16
12
14
17
17
18
18
19
10
22
2016
$m
2015
$m
308.8
6.6
1,648.4
270.0
33.9
136.7
16.5
43.6
1.1
49.7
5.3
81.5
153.8
2,755.9
679.8
373.5
37.4
52.7
0.4
61.0
–
18.7
3.7
320.9
1,548.1
100.7
(23.2)
881.6
(6.4)
254.6
1,207.3
0.5
1,207.8
2,755.9
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
322.3
1,554.8
100.7
(30.4)
880.8
(10.5)
279.7
1,220.3
0.5
1,220.8
2,775.6
The consolidated financial statements were approved by the Board of Directors on 15 February 2017 and signed on its behalf by:
Alex Maloney
Director/CEO
Elaine Whelan
Director/CFO
92
Lancashire Holdings Limited | Annual Report & Accounts 2016
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
For the year ended 31 December 2016
Balance as at 31 December 2014
Total comprehensive income for the year
Shares purchased by trust
Distributed by trust
Dividends on common shares
Dividend equivalents on warrants
Dividends paid to minority interest holders
Warrant exercises
Equity based compensation – tax
Equity based compensation – expense
Balance as at 31 December 2015
Total comprehensive income for the year
Shares donated to trust
Distributed by trust
Dividends on common shares
Dividends paid to minority interest holders
Equity based compensation – expense
Balance as at 31 December 2016
Notes
18, 19, 22, 23
18, 19
18
18, 19
22
18, 19, 23
8, 19
6, 19
18, 19, 22
18, 19
18
22
19
Accumulated
other
comprehensive
loss
$m
0.8
(11.3)
–
–
–
–
–
–
–
–
(10.5)
4.1
–
–
–
–
–
(6.4)
Other
reserves
$m
887.1
–
8.8
(17.2)
–
–
–
(13.8)
0.1
15.8
880.8
–
(0.6)
(9.5)
–
–
10.9
881.6
Own
shares
$m
(43.3)
–
(9.3)
12.5
–
–
–
9.7
–
–
(30.4)
–
0.6
6.6
–
–
–
(23.2)
Share
capital
$m
96.1
–
0.5
–
–
–
–
4.1
–
–
100.7
–
–
–
–
–
–
100.7
Shareholders’
equity
attributable
to equity
shareholders
of LHL
$m
1,356.8
169.8
–
(4.7)
(316.0)
(1.5)
–
–
0.1
15.8
1,220.3
157.9
–
(2.9)
(178.9)
–
10.9
1,207.3
Retained
earnings
$m
416.1
181.1
–
–
(316.0)
(1.5)
–
–
–
–
279.7
153.8
–
–
(178.9)
–
–
254.6
Non-
controlling
interests
$m
0.5
0.6
–
–
–
–
(0.6)
–
–
–
0.5
0.5
–
–
–
(0.5)
–
0.5
Total
shareholders’
equity
$m
1,357.3
170.4
–
(4.7)
(316.0)
(1.5)
(0.6)
–
0.1
15.8
1,220.8
158.4
–
(2.9)
(178.9)
(0.5)
10.9
1,207.8
www.lancashiregroup.com
93
FINANCIAL STATEMENTS
Notes
5
7
6
15
3
3
22
18
9
2016
$m
150.4
(1.3)
2.3
15.6
(38.5)
5.0
10.7
(2.3)
(5.1)
(6.9)
2.4
(1.1)
(71.7)
(10.6)
48.9
38.4
(0.4)
2.9
(1,214.0)
1,341.8
168.7
(15.4)
(178.9)
(0.5)
(2.9)
(197.7)
19.9
291.8
(2.9)
308.8
2015
$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
(990.8)
1,173.5
234.1
(15.2)
(317.5)
(0.6)
(4.7)
(338.0)
(5.8)
303.5
(5.9)
291.8
STATEMENT OF CONSOLIDATED CASH FLOWS
For the year ended 31 December 2016
Cash flows from operating activities
Profit before tax
Tax (paid) refunded
Depreciation
Interest expense on long-term debt
Interest and dividend income
Net amortisation of fixed maturity securities
Equity based compensation
Foreign exchange (gains) losses
Share of profit of associate
Net other investment (income) losses
Net realised losses (gains) and impairments
Net unrealised gains on interest rate swaps
Changes in operational assets and liabilities
– Insurance and reinsurance contracts
– Other assets and liabilities
Net cash flows from operating activities
Cash flows from investing activities
Interest and dividends received
Purchase of property, plant and equipment
Investment in associate
Purchase of investments
Proceeds on sale of investments
Net cash flows from investing activities
Cash flows used in financing activities
Interest paid
Dividends paid
Dividends paid to minority interest holders
Distributions by trust
Net cash flows used in financing activities
Net increase (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
94
Lancashire Holdings Limited | Annual Report & Accounts 2016
ACCOUNTING POLICIES
For the year ended 31 December 2016
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The basis of preparation, consolidation principles and significant accounting policies adopted in the preparation of these consolidated
financial statements are set out below.
BASIS OF PREPARATION
The Group’s consolidated financial statements are prepared in accordance with accounting principles generally accepted under IFRS as
adopted by the European Union.
Where IFRS is silent, as it is in respect of certain aspects relating to the measurement of insurance products, the IFRS framework allows
reference to another comprehensive body of accounting principles. In such instances, the Group’s management determines appropriate
measurement bases, to provide the most useful information to users of the consolidated financial statements, using their judgement and
considering U.S. GAAP.
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 in 2016 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. These will be addressed in IFRS 17, previously referred to as IFRS 4 Phase II, which will include a number of significant changes
regarding the measurement and disclosure of insurance contracts both in terms of liability measurement and profit recognition. IFRS 17 is
expected to be issued in the first half of 2017 with an effective date of 1 January 2021. The Group will continue to assess the potential impact
the new standard will have on its results and the presentation and disclosure thereof.
IFRS 9, Financial Instruments: Classification and Measurement, has been issued but is not yet effective, and therefore has not yet been
adopted by the Group. The Group continues to apply IAS 39, Financial Instruments: Recognition and Measurement and classifies its fixed
maturity securities, equity securities and hedge funds as AFS or FVTPL. The new standard is effective for annual periods beginning on or after
1 January 2018, although it has been deferred for insurers to 1 January 2021 to align with the implementation date of IFRS 17. IFRS 9 is not
expected to have a material impact on the results and disclosures reported in the consolidated financial statements.
The consolidated balance sheet of the Group is presented in order of decreasing liquidity.
USE OF ESTIMATES
The preparation of financial statements in conformity with IFRS requires the Group to make estimates and assumptions that affect the
reported and disclosed amounts at the balance sheet date and the reported and disclosed amounts of revenues and expenses during the
reporting period. Actual results may differ materially from the estimates made.
The most significant estimate made by management is in relation to losses and loss adjustment expenses. This is discussed on page 98 and also
in the risk disclosures section from page 109. Estimates in relation to losses and loss adjustment expenses recoverable are discussed on page 98.
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 98 and 99 and in note 10. Management judgement is applied in
determining impairment charges. The estimation of the fair value of equity based compensation awards granted is discussed in note 6.
Intangible assets are recognised on the acquisition of a subsidiary. The fair value of intangible assets arising from the acquisition of a subsidiary
is largely based on the estimated expected cash flows of the business acquired and the contractual rights of that business. The Group
determines whether indefinite life intangible assets are impaired at least on an annual basis. This requires an estimation of the recoverable
amount of the CGU to which the intangible assets are allocated. The assumptions made by management in performing impairment tests of
intangible assets are subject to estimation uncertainty. Details of the key assumptions used in the estimation of the recoverable amounts of the
CGU are contained in note 16.
www.lancashiregroup.com
95
FINANCIAL STATEMENTS
ACCOUNTING POLICIES CONTINUED
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 2016. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and
continue to be consolidated until the date when such control ceases. Intercompany balances, profits and transactions are eliminated. Control
is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect
those returns through its power over the investee.
The Group participates on two Syndicates at Lloyd’s, which are managed by the Group’s managing agent subsidiary. In view of the several
liability of underwriting members at Lloyd’s, the Group recognises its proportion of all the transactions undertaken by the Syndicates in which
it participates within its consolidated statement of comprehensive income. Similarly, the Group’s proportion of the Syndicates’ assets and
liabilities has been reflected in its consolidated balance sheet. This proportion is calculated by reference to the Group’s participation as a
percentage of each Syndicate’s total capacity for each year of account.
Subsidiaries’ accounting policies are generally consistent with the Group’s accounting policies. Where they differ, adjustments are made on
consolidation to bring accounting policies in line.
ASSOCIATE
Investments, in which the Group has significant influence over the operational and financial policies of the investee, are recognised at cost
and thereafter accounted for using the equity method. Under this method, the Group records its proportionate share of income and loss from
such investments in its consolidated statement of comprehensive income for the period. Adjustments are made to investment in associate
accounting policies, where necessary, in order to be consistent with the Group’s accounting policies.
FOREIGN CURRENCY TRANSLATION
The functional currency, which is the currency of the primary economic environment in which operations are conducted, for all Group
entities is U.S. dollars. Items included in the financial statements of each of the Group’s entities are measured using the functional currency.
The consolidated financial statements are also presented in U.S. dollars.
Foreign currency transactions are recorded in the functional currency for each entity using the exchange rates prevailing at the dates of
the transactions, or at the average rate for the period when this is a reasonable approximation. Monetary assets and liabilities denominated
in foreign currencies are translated at period end exchange rates. The resulting exchange differences on translation are recorded in the
consolidated statement of comprehensive 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 (loss) in shareholders’ equity.
96
Lancashire Holdings Limited | Annual Report & Accounts 2016
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.
INSURANCE CONTRACTS
CLASSIFICATION
Insurance contracts are those contracts that transfer significant insurance risk at the inception of the contract. Contracts that do not transfer
significant insurance risk are accounted for as investment contracts. Insurance risk is transferred when an insurer agrees to compensate a
policyholder if a specified uncertain future event adversely affects the policyholder.
PREMIUMS AND ACQUISITION COSTS
Premiums are first recognised as written at the later of a contract’s binding or inception date. The Group writes both excess of loss
and pro-rata (proportional) contracts. For the majority of excess of loss contracts, premiums written are recorded based on the minimum
and deposit or flat premium, as defined in the contract. Subsequent adjustments to the minimum and deposit premium are recognised in
the period in which they are determined. For pro-rata contracts and excess of loss contracts where no deposit is specified in the contract,
premiums written are recognised based on estimates of ultimate premiums provided by the insureds or ceding companies. Initial estimates of
premiums written are recognised in the period in which the contract incepts, or the period in which the contract is bound if later. Subsequent
adjustments, based on reports of actual premium by the insureds or ceding companies, or revisions in estimates, are recorded in the period in
which they are determined.
Premiums written are earned rateably over the term of the underlying risk period of the insurance contract, except where the period of risk
differs significantly from the contract period. In these circumstances, premiums are recognised over the period of risk in proportion to the
amount of insurance protection provided. The portion of the premium related to the unexpired portion of the risk period is reflected in
unearned premiums.
Where contract terms require the reinstatement of coverage after an insured’s or ceding company’s loss, the estimated mandatory
reinstatement premiums are recorded as premiums written when a specific loss event occurs. Reinstatement premiums are not recorded for
losses included within the provision for IBNR that do not relate to a specific loss event.
Inwards premiums receivable from insureds and cedants are recorded net of commissions, brokerage, premium taxes and other levies on
premiums, unless the contract specifies otherwise. These balances are reviewed for impairment, with any impairment loss recognised as an
expense in the period in which it is determined.
Acquisition costs represent commissions, brokerage, profit commissions and other variable costs that relate directly to the successful securing
of new contracts and the renewing of existing contracts. They are generally deferred over the period in which the related premiums are
earned to the extent they are recoverable out of expected future revenue margins. All other acquisition costs are recognised as an expense
when incurred.
www.lancashiregroup.com
97
FINANCIAL STATEMENTS
ACCOUNTING POLICIES CONTINUED
OUTWARDS REINSURANCE
Outwards reinsurance premiums comprise the cost of reinsurance contracts entered into. Outwards reinsurance premiums are accounted for
in the period in which the contract incepts, or the period in which the contract is bound if later. The provision for the reinsurers’ share of
unearned premiums represents that part of reinsurance premiums ceded which are estimated to be earned in future financial periods.
Unearned reinsurance commissions are recognised as a liability using the same principles.
Any amounts recoverable from reinsurers are estimated using the same methodology as for the underlying losses. The Group monitors the
creditworthiness of its reinsurers on an ongoing basis and assesses any reinsurance assets for impairment, with any impairment loss recognised
as an expense in the period in which it is determined.
LOSSES
Losses comprise losses and loss adjustment expenses paid in the period and changes in the provision for outstanding losses and ACR,
including the provision for IBNR and related expenses. Losses and loss adjustment expenses are charged to income as they are incurred.
A portion of the Group’s business is in classes with high attachment points of coverage, including property catastrophe excess of loss.
Reserving for losses in such programmes is inherently complicated in that losses in excess of the attachment level of the Group’s policies are
characterised by high severity and low frequency and other factors which could vary significantly as losses are settled. This limits the volume
of industry loss experience available from which to reliably predict ultimate losses following a loss event.
Losses and loss adjustment expenses represent the estimated ultimate cost of settling all losses and loss adjustment expenses arising from
events which have occurred up to the balance sheet date, including a provision for IBNR. The Group does not discount its liabilities for
unpaid losses. Outstanding losses are initially set on the basis of reports of losses received from third parties. ACRs are determined where the
Group’s best estimate of the reported loss is greater than that reported. Estimated IBNR reserves may also consist of a provision for additional
development in excess of losses reported by insureds or ceding companies, as well as a provision for losses which have occurred but which have
not yet been reported by insureds or ceding companies. IBNR reserves are set on a best estimate basis and are estimated by management using
various actuarial methods as well as a combination of the Group’s own loss experience, historical insurance industry loss experience,
underwriters’ experience, estimates of pricing adequacy trends and management’s professional judgement.
The estimation of the ultimate liability arising is a complex process which incorporates a significant amount of judgement. It is reasonably
possible that uncertainties inherent in the reserving process, delays in insureds or ceding companies reporting losses to the Group, together
with the potential for unforeseen adverse developments, could lead to a material change in losses and loss adjustment expenses.
LIABILITY ADEQUACY TESTS
At each balance sheet date, the Group performs a liability adequacy test using current best estimates of future cash outflows generated by its
insurance contracts, plus any investment income thereon. If, as a result of these tests, the carrying amount of the Group’s insurance liabilities is
found to be inadequate, the deficiency is charged to income for the period, initially by writing off deferred acquisition costs and subsequently
by establishing a provision.
FINANCIAL INSTRUMENTS
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are carried in the consolidated balance sheet at amortised cost and include cash in hand, deposits held on call
with banks and other short-term highly liquid investments with a maturity of three months or less at the date of purchase. Carrying amounts
approximate fair value due to the short-term nature and high liquidity of the instruments.
Interest income earned on cash and cash equivalents is recognised on the effective interest rate method. The carrying value of accrued interest
income approximates estimated fair value due to its short-term nature and high liquidity.
INVESTMENTS
The Group’s fixed maturity and equity securities are quoted or unquoted investments that are classified as AFS or at FVTPL and are carried at
estimated fair value. The classification of the Group’s financial assets is determined at the time of initial purchase and depends on the nature
of the investment. A financial asset is classified at FVTPL if it is managed and evaluated on a fair value basis and if acquired principally for the
purpose of selling in the short term, or if it forms part of a portfolio of financial assets in which there is evidence of short-term profit taking.
Equity securities classified as AFS are those that are neither classified as held for trading nor designated at FVTPL. Fixed maturity securities
classified as AFS are those that are intended to be held for an indefinite period of time and that may be sold in response to needs for liquidity
or in response to changes in market conditions.
98
Lancashire Holdings Limited | Annual Report & Accounts 2016
The Group’s hedge funds are unquoted investments classified at FVTPL and are carried at estimated fair value. Estimated fair values are
determined using a combination of the most recent NAVs provided by each fund’s independent administrator and the estimated performance
provided by each hedge fund manager.
Regular way purchases and sales of investments are recognised at estimated fair value including, in the case of investments not carried
at FVTPL, transaction costs attributable to the acquisition of that investment on the trade date and are subsequently carried at estimated
fair value. The estimated fair values of quoted and unquoted investments are determined based on bid prices from recognised exchanges,
broker-dealers, recognised indices or pricing vendors. Unrealised gains and losses from changes in the estimated fair value of AFS investments
are included in accumulated other comprehensive income (loss) in shareholders’ equity. Changes in estimated fair value of investments
classified at FVTPL are recognised in current period net other investment income (loss).
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 (loss) 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 maturity securities are calculated using the effective interest rate method
and are recognised in current period net investment income. Interest income is recognised on the effective interest rate method. The carrying
value of accrued interest income approximates estimated fair value due to its short-term nature and high liquidity. Dividends on equity
securities are recorded as income on the date the dividends become payable to the holders of record.
The Group regularly reviews the carrying value of its AFS investments for evidence of impairment. An investment is impaired if its carrying
value exceeds the estimated fair value and there is objective evidence of impairment to the asset. Such evidence would include a prolonged
decline in estimated fair value below cost or amortised cost, where other factors, such as expected cash flows, do not support a recovery in
value. If an impairment is deemed appropriate, the difference between cost or amortised cost and estimated fair value is removed from
accumulated other comprehensive income (loss) in shareholders’ equity and charged to current period income. Impairment losses on fixed
maturity 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
Fees and profit commissions are recognised in line with services provided. Contingent profit commissions due on open years of account are
recognised when it is virtually certain that they will be realised.
LONG-TERM DEBT
Long-term debt is recognised initially at fair value, net of transaction costs incurred. Thereafter it is held at amortised cost, with the
amortisation calculated using the effective interest rate method. Derecognition occurs when the obligation has been extinguished.
www.lancashiregroup.com
99
FINANCIAL STATEMENTS
ACCOUNTING POLICIES CONTINUED
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 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 when the services
are rendered.
TAX
Income tax represents the sum of the tax currently payable and any deferred tax. The tax payable is calculated based on taxable profit for
the period using tax rates and tax laws enacted or substantively enacted at the year end reporting date and any adjustments to tax payable in
respect of prior periods. Taxable profit for the period can differ from that reported in the consolidated statement of comprehensive income
due to non-taxable income and certain items which are not tax deductible or which are deferred to subsequent periods. Tax provisions on the
net change in unrealised gains/losses on investments classified as AFS are recognised in other comprehensive income or (loss).
Deferred tax is recognised on all temporary differences between the assets and liabilities in the consolidated balance sheet and their tax base,
except when the deferred tax liability arises from the initial recognition of goodwill. Deferred tax assets or liabilities are accounted for using
the balance sheet liability method. Deferred tax assets are recognised to the extent that realising the related tax benefit through future taxable
profits is likely and are reassessed each year for recognition.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and
when the deferred income taxes relate to the same fiscal authority.
Where the current estimated fair value of equity based compensation awards differs from the estimated fair value at the time of grant, adjusted
where applicable for dividends, the related corporation tax and deferred tax charge or credit is recognised directly in other reserves.
OWN SHARES
Own shares include shares repurchased under share repurchase authorisations and held in treasury, plus shares repurchased and held in trust,
for the purposes of employee equity based compensation schemes. Own shares are deducted from shareholders’ equity. No gain or loss is
recognised on the purchase, sale, cancellation or issue of own shares and any consideration paid or received is recognised directly in equity.
100
Lancashire Holdings Limited | Annual Report & Accounts 2016
RISK DISCLOSURES
For the year ended 31 December 2016
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 SHARP 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 BLAST, including considering its effectiveness. It ensures
that all key areas of risk are discussed according to a schedule that covers fortnightly, monthly, quarterly, semi-annual and annual reviews. The
RRC meets fortnightly and is responsible for 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. 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.
The Group subscribes to a ‘three lines of defence’ model, the front line being risk ownership by business managers. Responsibility for the
management of individual risks has been assigned to, and may form part of the performance objectives of, the risk owners within the business.
Risk owners ensure that these risks and controls are consistent with their day-to-day processes and the entries made in the Group risk registers,
which are a direct input into BLAST. The second line comprises the Risk Management team which is responsible for risk oversight. Within this,
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 and is a member of 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. Cathedral’s CRO provides formal reports to the CUL Board and Risk Committee. The third line of defence
is Internal Audit who work very closely with the business and the Risk Management team in providing risk assurance.
www.lancashiregroup.com
101
FINANCIAL STATEMENTS
RISK DISCLOSURES CONTINUED
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 Chairman of 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’ risk-based capital approach to decision making is their economic capital model, BLAST, which
is based on the widely accepted economic capital modeling tool, ReMetrica. Management uses BLAST primarily for monitoring its insurance
risks. However, BLAST is also used to monitor other risks including market, credit and operational risks.
BLAST produces data in the form of a stochastic distribution for all classes, including non-elemental classes. The distribution includes the
mean outcome and the result at various return periods, including very remote events. BLAST calculates projected financial outcomes for each
insurance class, as well as the overall portfolio including diversification credit. Diversification credit arises as individual risks are generally not
strongly correlated and are unlikely to all produce profits or losses at the same time. BLAST also measures the Group’s aggregate insurance
exposures. It therefore helps senior management and the Board of Directors to determine the level of capital required to meet the combined
risk from a wide range of categories. Assisted by BLAST, the Group seeks to achieve an improved risk-adjusted return over time.
BLAST is used in strategic underwriting decisions, as part of the Group’s annual business planning process, reforecasting and to assist in
portfolio optimisation, taking account of inwards business and all major reinsurance purchases. Management also utilises BLAST in assessing
the impact of strategic decisions on individual classes of business that the Group writes, or is considering writing, as well as the overall resulting
financial impact to the Group. BLAST output, covering all of the risk groups to which the Group is exposed, is reviewed, including the
anticipated loss curves, combined ratios and risk-adjusted profitability, to determine profitability and risk tolerance headroom by class.
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.
The six primary risk categories, insurance risk, market risk, liquidity risk, credit risk, operational risk and strategic risk, are discussed in detail
on pages 103 to 128.
102
Lancashire Holdings Limited | Annual Report & Accounts 2016
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 individual entity level.
A number of controls are deployed to manage the amount of insurance exposure assumed:
• the Group has a rolling three-year strategic plan that helps establish the over-riding business goals that the Board of Directors aims
to achieve;
• a detailed business plan is produced annually, which includes expected premiums and combined ratios by class and considers risk-adjusted
profitability, capital usage and requirements. The plan is approved by the Board of Directors and is monitored, reviewed and updated on an
ongoing basis;
• for Cathedral, the Syndicate business forecast and business plan are subject to review and approval by Lloyd’s;
• BLAST, SHARP and Cathedral’s internal models are used to measure occurrence risks, aggregate risks and correlations between classes and
other non-insurance risks, and the outputs and assumptions from BLAST and SHARP are reviewed periodically by the RRC;
• each authorised class has a predetermined normal maximum line structure;
• each underwriter has a clearly defined limit of underwriting authority;
• the Group and individual operating entities have predetermined tolerances on probabilistic and deterministic losses of capital for certain
single events;
• risk levels versus tolerances are monitored on a regular basis;
• a daily underwriting call is held for LICL and LUK to peer review insurance proposals, opportunities and emerging risks;
• a daily post-binding review process with exception reporting to management based on underwriting authority operates at Cathedral;
• sophisticated pricing and aggregation models are utilised in certain areas of the underwriting process, and are updated frequently;
• BLAST and other modeling tools are deployed to model catastrophes and resultant losses to the portfolio and the Group; and
• reinsurance may be purchased to mitigate both frequency and severity of losses on a treaty or facultative basis and to improve risk-adjusted
RoE as modeled in BLAST.
Some of the Group’s business provides coverage for natural catastrophes (e.g. hurricanes, earthquakes 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.
www.lancashiregroup.com
103
FINANCIAL STATEMENTS
RISK DISCLOSURES CONTINUED
The Group’s exposures to certain peak zone elemental losses, as a percentage of tangible capital, including long-term debt, are shown below.
Net loss estimates are before income tax and net of reinstatement premiums and outwards reinsurance. The exposure to catastrophe losses
that would result in an impairment to the investment in associate is included in the figures below.
As at 31 December 2016
Zones
Gulf of Mexico1
Non-Gulf of Mexico – U.S.
California
Pan-European
Japan
Japan
Pacific North West
(1) Landing hurricane from Florida to Texas.
As at 31 December 2015
Zones
Gulf of Mexico1
Non-Gulf of Mexico – U.S.
California
Pan-European
Japan
Japan
Pacific North West
(1) Landing hurricane from Florida to Texas.
100 year return period
estimated net loss
250 year return period
estimated net loss
$m
% of tangible
capital
$m
% of tangible
capital
176.7
156.1
87.0
69.0
48.7
48.6
27.6
12.9
11.4
6.3
5.0
3.5
3.5
2.0
259.0
326.1
145.8
115.7
67.3
114.3
65.7
18.8
23.7
10.6
8.4
4.9
8.3
4.8
100 year return period
estimated net loss
250 year return period
estimated net loss
$m
% of tangible
capital
$m
% of tangible
capital
231.6
236.2
157.7
92.2
47.7
72.1
37.1
16.7
17.0
11.4
6.6
3.4
5.2
2.7
347.2
457.4
250.8
145.6
69.3
121.2
98.5
25.0
32.9
18.1
10.5
5.0
8.7
7.1
Perils
Hurricane
Hurricane
Earthquake
Windstorm
Typhoon
Earthquake
Earthquake
Perils
Hurricane
Hurricane
Earthquake
Windstorm
Typhoon
Earthquake
Earthquake
There can be no guarantee that the modeled assumptions and techniques deployed in calculating these figures are accurate. There could also
be an unmodeled loss which exceeds these figures. In addition, any modeled loss scenario could cause a larger loss to capital than the
modeled expectation.
Details of annual gross premiums written by geographic area of risks insured are provided below:
U.S. and Canada
Worldwide offshore
Worldwide, including the U.S. and Canada1
Europe
Far East
Worldwide, excluding the U.S. and Canada2
Middle East
Rest of world
Total
2016
2015
$m
179.7
161.1
115.6
46.9
29.2
15.4
13.5
72.5
633.9
%
28.4
25.5
18.2
7.4
4.6
2.4
2.1
11.4
100.0
$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
(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.
104
Lancashire Holdings Limited | Annual Report & Accounts 2016
Details of annual gross premiums written by business segment are provided below:
Property
Lloyd’s
Energy
Marine
Aviation
Total
2016
2015
$m
219.5
215.0
126.0
37.2
36.2
633.9
%
34.6
33.9
19.9
5.9
5.7
100.0
$m
197.2
247.7
112.0
47.6
36.6
641.1
%
30.8
38.6
17.5
7.4
5.7
100.0
Further details of the gross premiums written and the risks associated with each of these five principal business segments are described on the
following pages.
I. PROPERTY
Gross premiums written, for the year:
Property catastrophe excess of loss
Property political risk
Terrorism
Property retrocession
Property risk excess of loss
Other property
Total
2016
$m
99.8
44.1
41.1
12.8
11.3
10.4
219.5
2015
$m
90.6
33.3
43.8
13.6
10.0
5.9
197.2
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.
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.
Terrorism business can be written either ground-up or for primary or excess layers, with cover provided for U.S. and worldwide property risks,
but typically excluding nuclear, chemical, biological and cyber coverage in most territories. Cover is generally provided to medium to large
commercial and industrial enterprises. Policies are typically written for scheduled locations and exposure is controlled by setting limits on
aggregate exposure within a ‘blast zone’ radius. The term of these contracts is often multi-year reflecting the term of the underlying exposures.
Some national pools are also written, which may include nuclear, chemical and biological coverage and may have an element of life coverage.
Property 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.
Property risk excess of loss is written on an excess of loss basis through UNL treaty arrangements, predominantly covering fire and allied perils
in addition to natural catastrophe exposure. The portfolio is written on a worldwide basis, with particular focus on the U.S. market.
www.lancashiregroup.com
105
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 103 and 104.
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.
II. LLOYD’S
Gross premiums written, for the year:
Property reinsurance
Property direct and facultative
Aviation and satellite
Marine cargo
Energy
Terrorism
Contingency
Total
2016
$m
88.6
56.1
24.3
21.2
14.9
6.3
3.6
215.0
2015
$m
92.9
66.2
28.5
29.6
20.1
6.0
4.4
247.7
Property reinsurance predominantly includes property catastrophe excess of loss, property per risk excess of loss and property retrocession
lines of business. Property catastrophe excess of loss and property per risk excess of loss provide protection for elemental and non-elemental
risks and are written on an excess of loss treaty basis within the U.S. and internationally. The U.S. property catastrophe excess of loss book is
particularly focused on regional clients. Property retrocession is written on an excess of loss basis through treaty arrangements. It provides
coverage for elemental risks when sold on a catastrophe basis and both elemental and non-elemental risks when sold on a per risk retrocession
basis. Protection is generally given on a regional basis and may cover specific property risks or all catastrophe perils. It is also generally written
on an UNL basis, meaning loss payments are linked to the ceding company’s own loss.
Property direct and facultative is a worldwide book of largely commercial property business, written both in the open market and under
delegated authorities. The account spans small individual locations to Fortune 500 accounts but with a bias towards small to medium-sized
risks. Policies are generally provided both for non-elemental and elemental perils, although not all risks include both elemental and non-
elemental coverage. Coverage is generally written on a full value, primary or excess of loss basis, although the very largest accounts are
currently seldom written at the primary level.
Aviation and satellite includes aviation reinsurance, aviation war, general aviation and aviation satellite lines of business. Aviation reinsurance
provides excess of loss catastrophe cover to the insurers of the world’s major airlines and aircraft and aircraft manufacturers. This includes
cover for the aircraft themselves as well as losses arising from passenger and third-party liability claims against airlines and/or manufacturers.
Aviation war covers loss or damage to aviation assets from war, terrorism and similar causes. General aviation covers fixed wing and rotor wing
aircraft, typically with 50 passenger seats or less, and covers both commercial and private clients. A significant part of the aviation satellite
account is written through Satec, a specialist underwriting agency, to which underwriting authority is delegated. Satellite insurance is
purchased by launch operators, satellite manufacturers and satellite operators to protect against launch or deployment failure or subsequent
failure in orbit. Policies are typically written for launch plus one year in orbit. Thereafter orbit cover is normally provided on an annual basis.
Marine cargo is an international account and is written either on a direct basis or by way of reinsurance. It covers the (re)insurance of
commodities or goods in transit. Typically, transit cover is provided on an all-risks basis for marine perils for the full value of the goods
concerned, although higher value or capacity business may be written on a layered basis. Static cover is also provided for losses to cargo, from
both elemental and non-elemental causes, whilst static at points along its route. In addition, the cargo account can include specie and fine art,
vault risks, artwork on exhibition and marine war business relating to cargo in transit.
106
Lancashire Holdings Limited | Annual Report & Accounts 2016
Energy risks are written mostly on a direct basis and may be ground-up or for primary or excess layers on either a first loss or full value basis.
Worldwide offshore energy policies are typically package policies which may include physical damage, well control, business interruption and
third-party liability sections. Coverage can include fire and explosion and elemental risks. Individual assets covered can be high-value and are
therefore mostly written on a subscription basis, meaning that coverage is placed with multiple risk carriers. Construction energy contracts
generally cover all risks of platforms, FPSO and drilling units under construction at yard and offshore, during towing and installation. Onshore
construction contracts are generally not written.
Terrorism business can be written either ground-up or for primary or excess layers, with cover provided for U.S. and worldwide property risks,
but typically excluding nuclear, chemical, biological and cyber coverage in most territories. Cover is generally provided to medium to large
commercial and industrial enterprises. Policies are typically written for scheduled locations and exposure is controlled by setting limits on
aggregate exposure within a ‘blast zone’ radius. The term of these contracts may be multi-year, reflecting the term of the underlying
exposures. Reinsurance may be purchased on a facultative or treaty basis.
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.
Reinsurance may be purchased to reduce the exposure to large risk losses including large natural catastrophe losses in the U.S., Canada and
worldwide with certain exclusions. Reinsurance may also be purchased to mitigate an accumulation of smaller, attritional losses. Reinsurance
may be purchased on a facultative, excess of loss treaty or proportional treaty basis.
III. ENERGY
Gross premiums written, for the year:
Worldwide offshore energy
Gulf of Mexico offshore energy
Construction energy
Energy liabilities
Other energy
Total
2016
$m
88.7
20.1
4.8
3.5
8.9
126.0
2015
$m
92.8
6.1
2.8
3.3
7.0
112.0
Energy risks are written mostly on a direct basis and may be ground-up or for primary or excess layers on either a first loss or full value basis.
Worldwide offshore energy policies are typically package policies which may include physical damage, business interruption and third-party
liability sections. Coverage can include fire and explosion and elemental risks. Individual assets covered can be high-value and are therefore
mostly written on a subscription basis, meaning that coverage is placed with multiple risk carriers.
Gulf of Mexico offshore energy programmes cover elemental and non-elemental risks. Most policies have sub-limits on coverage for
elemental losses. These programmes are exposed to Gulf of Mexico windstorms. Exposure to such events is controlled and measured through
loss modeling. The accuracy of this exposure analysis is limited by the quality of data and the effectiveness of the modeling. It is possible that a
catastrophic event significantly exceeds the expected modeled event loss. The Group’s appetite and exposure guidelines to large losses are set
out on pages 103 and 104.
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.
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.
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.
www.lancashiregroup.com
107
FINANCIAL STATEMENTS
RISK DISCLOSURES CONTINUED
IV. MARINE
Gross premiums written, for the year:
Marine hull and total loss
Marine builders’ risk
Marine P&I clubs
Marine hull war
Other marine
Total
2016
$m
13.1
8.7
8.4
4.1
2.9
37.2
2015
$m
19.9
6.5
13.0
6.0
2.2
47.6
With the exception of the marine P&I clubs, where excess layers are written, most policies are written on a ground-up basis. Marine hull and
total loss is generally written on a direct basis and covers marine risks on a worldwide basis, primarily for physical damage. Marine builders’ risk
covers the building of ocean going vessels in specialised yards worldwide and their testing and commissioning. Marine P&I clubs is mostly the
reinsurance of the International Group of Protection and Indemnity Clubs and covers marine liabilities. Marine hull war is mostly direct
insurance of loss of vessels from war, piracy or terrorist attack, with a very limited amount of facultative reinsurance.
The largest expected exposure in the marine class is from physical loss rather than from elemental loss events, although there is exposure to
elemental perils and to the costs for removal of wreck.
Reinsurance may be purchased to reduce the Group’s exposure to both large risk losses and an accumulation of smaller, attritional losses.
Reinsurance is typically purchased on a treaty excess of loss basis.
V. AVIATION
Gross premiums written, for the year:
AV52
Aviation satellite
Other aviation
Total
2016
$m
24.0
9.8
2.4
36.2
2015
$m
23.5
12.2
0.9
36.6
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.
108
Lancashire Holdings Limited | Annual Report & Accounts 2016
REINSURANCE
The Group, in the normal course of business and in accordance with its risk management practices, seeks to reduce certain types of loss
that may arise from events that could cause unfavourable underwriting results, and to improve the modeled risk-adjusted RoE by entering into
reinsurance arrangements. Reinsurance does not relieve the Group of its obligations to policyholders. Under the Group’s reinsurance security
policy, reinsurers are assessed and approved as appropriate security based on their financial strength ratings, amongst other factors. The RSC
considers reinsurers that are not rated or do not fall within the predefined rating categories on a case-by-case basis, and would usually require
collateral to be posted to support such obligations. There are specific guidelines for these collateralised contracts. The RSC monitors its
reinsurers on an ongoing basis and formally reviews the Group’s reinsurance arrangements at least quarterly.
Reinsurance protection is typically purchased on an excess of loss basis, however it may also include ILW covers or quota share arrangements.
The mix of reinsurance cover is dependent on the specific loss mitigation requirements, market conditions and available capacity. Reinsurance
may also be purchased to optimise the risk-adjusted return of the underwriting portfolio. The structure varies between types of peril and
sub-class. The Group regularly reviews its catastrophe and other exposures and may purchase reinsurance in order to reduce the Group’s net
exposure to a large natural catastrophe loss and/or to reduce net exposures to other large losses. The Group can purchase both facultative
and treaty reinsurance with varying cover and attachment points. The reinsurance coverage is not intended to be available to meet all potential
loss circumstances. The Group will retain some losses, as the cover purchased is unlikely to transfer the totality of the Group’s exposure.
Any loss amount which exceeds the programme would be retained by the Group. Some parts of the reinsurance programme have limited
reinstatements, therefore the number of claims which may be recovered from second or subsequent losses in those particular circumstances
is limited.
INSURANCE LIABILITIES
For most insurance and reinsurance companies, the most significant judgement made by management is the estimation of losses and loss
adjustment expenses. The estimation of the ultimate liability arising from claims made under insurance and reinsurance contracts is a critical
estimate for the Group, particularly given the nature of the business written.
Under GAAP, loss reserves are not permitted until the occurrence of an event which may give rise to a claim. As a result, only loss reserves
applicable to losses incurred up to the reporting date are established, with no allowance for the provision of a contingency reserve to account
for expected future losses or for the emergence of new types of latent claims. Claims arising from future events can be expected to require the
establishment of substantial reserves from time to time. All reserves are reported on an undiscounted basis.
Losses and loss adjustment expenses are maintained to cover the Group’s estimated liability for both reported and unreported claims.
Reserving methodologies that calculate a point estimate for the ultimate losses are utilised, and then a range is developed around these
point estimates. The point estimate represents management’s best estimate of ultimate loss and loss adjustment expenses. The Group’s
internal actuaries review the reserving assumptions and methodologies on a quarterly basis with loss estimates being subject to a semi-annual
corroborative review by independent actuaries. 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.
www.lancashiregroup.com
109
FINANCIAL STATEMENTS
RISK DISCLOSURES CONTINUED
SHORT-TAIL VERSUS LONG-TAIL
In general, claims relating to short-tail risks, such as the majority of risks underwritten by the Group, are reported more promptly than those
relating to long-tail risks, including the majority of casualty risks. However, the timeliness of reporting can be affected by such factors as the
nature of the event causing the loss, the location of the loss, and whether the losses are from policies in force with insureds, primary insurers,
reinsurers or vendor binding authorities.
EXCESS OF LOSS VERSUS PROPORTIONAL
For excess of loss contracts, which make up the majority of the Group’s business, management are aided by the fact that each policy has
a defined limit of liability arising from one event. Once that limit has been reached, there is no further exposure to additional losses from
that policy for the same event. For proportional business, an initial estimated loss and loss expense ratio is generally used. This is based upon
information provided by the insured or ceding company and/or their broker and management’s historical experience of that treaty, if any,
and the estimate is adjusted as actual experience becomes known.
TIME LAGS
There is a time lag inherent in reporting from the original claimant to the primary insurer or binding authority holder to the broker and
then to the reinsurer. Also, the combination of low claims frequency and high severity makes the available data more volatile and less useful for
predicting ultimate losses. In the case of proportional contracts, reliance is placed on an analysis of a contract’s historical experience, industry
information, and the professional judgement of underwriters in estimating reserves for these contracts. In addition, if available, reliance is
placed partially on ultimate loss ratio forecasts as reported by insureds or cedants, which are normally subject to a quarterly or six-month lag.
UNCERTAINTY
As a result of the time lag described above, an estimation must be made of IBNR reserves, which consist of a provision for additional
development in excess of the case reserves reported by insureds or ceding companies, as well as a provision for claims which have occurred
but which have not yet been reported by insureds or ceding companies. Due to the degree of reliance that is necessarily placed on insureds
or ceding companies for claims reporting, the associated time lag, the low frequency/high severity nature of much of the business that the
Group underwrites, and the varying reserving practices among ceding companies, reserve estimates are highly dependent on management
judgement and are therefore uncertain. During the loss settlement period, which may be years in duration, additional facts regarding
individual claims and trends often will become known, and current laws and case law may change as well as regulatory directives, with
a consequent impact on reserving.
For certain catastrophic events there are greater uncertainties underlying the assumptions and associated estimated reserves for losses and loss
adjustment expenses. Complexity resulting from problems such as policy coverage issues, multiple events affecting one geographic area and
the resulting impact on claims adjusting (including the allocation of claims to the specific event and the effect of demand surge on the cost
of building materials and labour)by, and communications from, insureds or ceding companies, can cause delays to the timing with which the
Group is notified of changes to loss estimates.
As at 31 December 2016, management’s estimates for IBNR represented 34.6 per cent of total net loss reserves (31 December 2015 – 35.2 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.
110
Lancashire Holdings Limited | Annual Report & Accounts 2016
B. MARKET RISK
The Group is at risk of loss due to movements in market factors. The main risks include:
i.
Insurance risk;
ii. Investment risk;
iii. Debt risk; and
iv. Currency risk.
These risks, and the management thereof, are described below.
I. INSURANCE RISK
The Group is exposed to insurance market risk from several sources, including the following:
• the advent or continuation of a soft market, which may result in a stabilisation or decline in premium rates and/or terms and conditions for
certain lines, or across all lines;
• the actions and reactions of key competitors, which may directly result in volatility in premium volumes and rates, fee levels and other
input costs;
• market events, including unusual inflation in rates, may result in a limit in the availability of cover, causing political intervention or
national remedies;
• failure to maintain broker, binding authority and client relationships, leading to a limited or substandard choice of risks inconsistent with
the Group’s risk appetite;
• changes in regulation including capital, governance or licensing requirements; and
• changes in the geopolitical environment including Great Britain’s impending exit from the EU and the implications for business
passporting within the EEA.
The most important method to mitigate insurance market risk is to maintain strict underwriting standards. The Group manages insurance
market risk in numerous ways, including the following:
• reviews and amends underwriting plans and outlook as necessary;
• reduces exposure to market sectors where conditions have reached unattractive levels;
• purchases appropriate, cost-effective reinsurance cover to mitigate exposures;
• closely monitors changes in rates and terms and conditions;
• ensures through continuous capital management that it does not allow surplus capital to drive underwriting appetite;
• holds a daily underwriting meeting for LICL and LUK to discuss, inter alia, market conditions and opportunities;
• reviews all new and renewal business post-underwriting for Cathedral;
• regularly reviews output from BLAST to assess up-to-date profitability of classes and sectors;
• holds a quarterly Underwriting and Underwriting Risk Committee meeting to review underwriting strategy;
• holds a fortnightly RRC meeting to monitor estimated exposures to peak zone elemental losses and RDSs; and
• holds regular meetings with regulators.
Insurance contract liabilities are not directly sensitive to the level of market interest rates, as they are undiscounted and contractually
non-interest bearing.
www.lancashiregroup.com
111
FINANCIAL STATEMENTS
RISK DISCLOSURES CONTINUED
II. INVESTMENT RISK
Movements in investments resulting from changes in interest and inflation rates and currency exchange rates, amongst other factors, may lead
to an adverse impact on the value of the Group’s investment portfolio. Investment guidelines are established by the Investment Committee
of the Board of Directors to manage this risk. Investment guidelines set parameters within which the Group’s external investment managers
must operate. Important parameters include guidelines on permissible asset classes, duration ranges, credit quality, currency, maturity, sectors,
geographical, sovereign and issuer exposures. Compliance with guidelines is monitored on a monthly basis. Any adjustments to the investment
guidelines are approved by the Investment Committee and the Board of Directors.
The Group’s fixed maturity portfolios are managed by four external investment managers. The Group also has a diversified low volatility
portfolio of multi-strategy hedge funds, and a small equity portfolio. The performance of the managers is monitored on an ongoing basis.
Within the Group guidelines is a subset of guidelines for the portion of funds required to meet near-term obligations and cash flow needs
following an extreme event. The subset of guidelines adds a further degree of requirements, including fewer allowable asset classes, higher
credit quality, shorter duration and higher liquidity. The primary objectives for this portion of assets are capital preservation and providing
liquidity to meet insurance and other near-term obligations. In addition to cash managed internally, funds held in the investment portfolio
to cover this potential liability are designated as the ‘core’ portfolio and the portfolio duration is matched to the duration of the insurance
liabilities, within an agreed range. The core portfolio is invested in fixed maturity securities, fixed maturity funds and cash and cash
equivalents. The core portfolio may, at times, contain assets significantly in excess of those required to meet insurance liabilities or other
defined funding needs.
Assets in excess of those required to be held in the core portfolio are typically held in the ‘core plus’ or the ‘surplus’ portfolios. The core plus
portfolio is invested in fixed maturity securities and cash and cash equivalents. The surplus portfolio is invested in fixed maturity securities,
principal protected equity linked notes, derivative instruments, cash and cash equivalents, equity securities and hedge funds. In general,
the duration of the surplus portfolio is slightly longer than the core or core plus portfolio, 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 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.
112
Lancashire Holdings Limited | Annual Report & Accounts 2016
The investment mix of the fixed maturity portfolios is as follows:
Core
Core plus
Surplus
Total
As at 31 December 2016
– Short-term investments
– Fixed maturity funds
– U.S. treasuries
– Other government bonds
– U.S. municipal bonds
– U.S. government agency debt
– Asset backed securities
– U.S. government agency mortgage
backed securities
– Non-agency mortgage backed
securities
– Non-agency commercial mortgage
backed securities
– Bank loans
– Corporate bonds
Total fixed maturity securities – AFS
Fixed maturity securities – at FVTPL
Total fixed maturity securities
As at 31 December 2015
– Short-term investments
– Fixed maturity funds
– U.S. treasuries
– Other government bonds
– U.S. municipal bonds
– U.S. government agency debt
– Asset backed securities
– U.S. government agency mortgage
backed securities
– Non-agency mortgage backed
securities
– Non-agency commercial mortgage
backed securities
– Bank loans
– Corporate bonds
Total fixed maturity securities – AFS
Fixed maturity securities – at FVTPL
Total fixed maturity securities
$m
–
14.5
120.6
15.6
0.6
17.1
13.4
10.3
4.5
3.0
–
151.6
351.2
–
351.2
%
–
1.0
8.1
1.0
–
1.2
0.9
0.7
0.3
0.2
–
10.1
23.5
–
23.5
$m
1.3
–
158.2
36.3
–
34.9
69.9
30.5
7.9
2.9
–
292.3
634.2
–
634.2
%
0.1
–
10.6
2.4
–
2.3
4.7
2.0
0.5
0.2
–
19.5
42.3
–
42.3
$m
4.0
–
26.7
14.7
0.5
29.9
26.9
77.5
1.9
3.7
121.6
153.4
460.8
51.6
512.4
%
0.3
–
1.8
1.0
–
2.0
1.8
5.2
0.1
0.2
8.1
10.2
30.7
3.5
34.2
$m
5.3
14.5
305.5
66.6
1.1
81.9
110.2
118.3
14.3
9.6
121.6
597.3
1,446.2
51.6
1,497.8
Core
Core plus
Surplus
Total
$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
$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
4.2
13.2
115.0
192.5
521.4
24.8
546.2
%
–
–
3.6
1.2
0.3
–
2.0
5.3
0.3
0.8
7.2
12.0
32.7
1.6
34.3
$m
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
1,601.7
%
0.4
1.0
20.5
4.4
–
5.5
7.4
7.9
0.9
0.6
8.1
39.8
96.5
3.5
100.0
%
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
100.0
www.lancashiregroup.com
113
FINANCIAL STATEMENTS
RISK DISCLOSURES CONTINUED
Bank loans, corporate bonds, fixed maturity securities at FVTPL and other government bonds by country are as follows:
Financials
$m
168.9
41.5
13.9
16.4
8.7
23.4
5.0
6.6
9.6
1.8
1.0
–
2.8
–
–
1.8
301.4
Financials
$m
126.6
48.8
19.4
19.2
26.8
14.2
5.2
15.4
8.0
11.2
12.2
–
–
–
–
2.0
309.0
Other
industries
$m
388.2
10.3
13.2
17.7
8.3
4.0
9.3
0.5
–
7.1
–
4.8
1.5
–
–
4.2
469.1
Other
industries
$m
372.9
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
484.6
Other
government
bonds
$m
–
2.0
15.5
7.4
12.9
–
4.2
4.2
–
–
5.3
–
–
2.8
2.4
9.9
66.6
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
65.4
Total1
$m
557.1
51.8
27.1
34.1
17.0
27.4
14.3
7.1
9.6
8.9
1.0
4.8
4.3
–
–
6.0
770.5
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
793.6
Total2
$m
557.1
53.8
42.6
41.5
29.9
27.4
18.5
11.3
9.6
8.9
6.3
4.8
4.3
2.8
2.4
15.9
837.1
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
As at 31 December 2016
United States
United Kingdom
Canada
Netherlands
Germany
Australia
France
Sweden
Japan
Luxembourg
Norway
Hong Kong
Switzerland
Russian Federation
Denmark
Other
Total
(1) Includes bank loans, corporate bonds and fixed maturity securities at FVTPL.
(2) Includes bank loans, corporate bonds, fixed maturity securities at FVTPL and other government bonds.
As at 31 December 2015
United States
United Kingdom
Canada
Netherlands
Australia
France
Germany
Japan
Norway
Switzerland
Sweden
Luxembourg
Hong Kong
Mexico
Russian Federation
Other
Total
(1) Includes bank loans, corporate bonds and fixed maturity securities at FVTPL.
(2) Includes bank loans, corporate bonds, fixed maturity securities at FVTPL and other government bonds.
114
Lancashire Holdings Limited | Annual Report & Accounts 2016
The sector allocation of bank loans, corporate bonds and fixed maturity securities at FVTPL is as follows:
As at 31 December
Industrial
Financial
Utility
Supranationals
Total
2016
2015
$m
425.4
300.9
43.7
0.5
770.5
%
55.2
39.1
5.7
–
100.0
$m
457.9
308.5
26.7
0.5
793.6
%
57.7
38.9
3.4
–
100.0
The Group’s net asset value is directly impacted by movements in the value of investments held. Values can be impacted by movements in
interest rates, credit ratings, exchange rates and economic environment and outlook.
The Group’s investment portfolio is mainly comprised of fixed maturity securities and cash and cash equivalents. The fixed maturity funds are
overseas deposits held by Syndicate 2010 and Syndicate 3010 in trust for the benefit of the policyholders in those overseas jurisdictions. They
consist of high quality, short duration fixed maturity securities. The Group also has small equity and hedge fund portfolios. The estimated fair
value of the Group’s fixed maturity portfolio is generally inversely correlated to movements in market interest rates. If market interest rates fall,
the fair value of the Group’s fixed maturity securities would tend to rise and vice versa.
The sensitivity of the price of fixed maturity securities, and certain derivatives, to movements in interest rates is indicated by their duration.
The greater a security’s duration, the greater its price volatility to movements in interest rates. The sensitivity of the Group’s fixed maturity
and derivative investment portfolio to interest rate movements is detailed below, assuming linear movements in interest rates:
As at 31 December
Immediate shift in yield (basis points)
100
75
50
25
(25)
(50)
(75)
(100)
2016
$m
(28.7)
(21.6)
(14.4)
(7.2)
7.8
15.6
23.4
31.2
%
(1.9)
(1.4)
(1.0)
(0.5)
0.5
1.0
1.6
2.1
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
The Group mitigates interest rate risk on the investment portfolio by establishing and monitoring duration ranges in its investment guidelines.
The Group may manage duration through the use of interest rate futures and swaptions from time to time. The duration of the core portfolio
is matched to the modeled duration of the insurance reserves, within a permitted range. The permitted duration range for the core plus
portfolio is between zero and four years and the surplus portfolio is between one and five years.
The total durations of the externally managed portfolios which are comprised of fixed maturity, cash and cash equivalents and certain
derivatives, are as follows:
As at 31 December
Core portfolio
Core plus portfolio
Surplus portfolio1
Overall external portfolio1
(1) Including duration overlay.
2016
years
1.6
1.8
2.2
1.9
2015
years
1.7
1.7
1.3
1.6
The overall duration for fixed maturity, managed cash and cash equivalents and certain derivatives is 1.8 years (2015 – 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.
www.lancashiregroup.com
115
FINANCIAL STATEMENTS
RISK DISCLOSURES CONTINUED
The principal VaR measure that is produced is an annual VaR at the 99th percentile confidence level. Under normal conditions, the portfolio is
not expected to lose more than the VaR metric listed in the table below, 99 per cent of the time over a one-year time horizon.
The Group’s annual VaR calculations are as follows:
As at 31 December
99th percentile confidence level1
(1) Including the impact of internal foreign exchange hedges.
2016
2015
% of
shareholders’
equity
2.8
$m
33.3
% of
shareholders’
equity
2.4
$m
28.9
DERIVATIVE FINANCIAL INSTRUMENTS
The Group’s investment guidelines permit the investment managers to utilise exchange-traded futures and options contracts, and OTC
instruments including interest rate swaps, credit default swaps, interest rate swaptions and forward foreign currency contracts. Derivatives are
used for yield enhancement, duration management, interest rate and foreign currency exposure management or to obtain an exposure to a
particular financial market. These positions are monitored regularly. The Group may also use OTC or exchange traded managed derivatives
to mitigate interest rate risk and foreign currency exposures. The Group principally has exposure to derivatives related to the following types
of risks: foreign currency risk, interest rate risk and credit risk.
The Group currently invests in the following derivative financial instruments:
a. Futures;
b. Options;
c. Forward foreign currency contracts; and
d. Swaps.
The net 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 2016
Treasury futures
Forward foreign currency contracts
Interest rate swaps
Total
As at 31 December 2015
Treasury futures
Forward foreign currency contracts
Interest rate swaps
Total
Net realised
(losses)
$m
(2.1)
–
–
(2.1)
Net realised
(losses)
$m
(1.4)
–
–
(1.4)
Net foreign
exchange
(losses)
$m
–
(1.8)
–
(1.8)
Net foreign
exchange
gains
$m
–
3.6
–
3.6
Financing
(losses)
$m
–
–
(1.0)
(1.0)
Financing
(losses)
$m
–
–
(2.5)
(2.5)
116
Lancashire Holdings Limited | Annual Report & Accounts 2016
The estimated fair values of the Group’s derivative instruments are as follows:
As at 31 December
Forward foreign currency contracts
Interest rate swaps
Total
Other
receivables
$m
0.6
–
0.6
2016
Other
payables
$m
(0.6)
–
(0.6)
Interest
rate swaps
$m
–
(3.7)
(3.7)
Other
receivables
$m
1.6
–
1.6
2015
Other
payables
$m
(0.7)
–
(0.7)
Interest
rate swaps
$m
–
(4.8)
(4.8)
A. FUTURES
The Group’s investment guidelines permit the use of futures which provide the Group with participation in market movements, determined by
the underlying instrument on which the futures contract is based, without holding the instrument itself or the individual securities. This approach
allows the Group more efficient and less costly access to the exposure than would be available by the exclusive use of individual fixed maturity
and money market securities. Exchange-traded futures contracts may also be used as substitutes for ownership of the physical securities.
All futures contracts are held on a non-leveraged basis. An initial margin is provided, which is a deposit of cash and/or securities in an amount
equal to a prescribed percentage of the contract value. The fair value of futures contracts is estimated daily and the margin is adjusted accordingly
with unrealised gains and/or losses settled daily in cash and/or securities. A realised gain or loss is recognised when the contract is closed.
Futures contracts expose the Group to market risk to the extent that adverse changes occur in the estimated fair values of the underlying
securities. Exchange-traded futures are, however, subject to a number of safeguards to ensure that obligations are met. These include the use
of clearing houses (thus reducing counterparty credit risk), the posting of margins and the daily settlement of unrealised gains and losses. The
amount of credit risk is therefore considered low. The investment guidelines restrict the maximum notional futures position as a percentage of
the investment portfolio’s estimated fair value.
As at 31 December, the Group had the following exposure to treasury futures:
As at 31 December
Treasury futures
Total
Notional
long
$m
76.4
76.4
2016
Notional
short
$m
104.1
104.1
Net notional
long (short)
$m
(27.7)
(27.7)
Notional
long
$m
56.1
56.1
2015
Notional
short
$m
152.5
152.5
Net notional
long (short)
$m
(96.4)
(96.4)
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 2016 and 2015.
The investment guidelines also restrict the maximum notional options exposure as a percentage of the investment portfolio’s estimated
fair value.
www.lancashiregroup.com
117
FINANCIAL STATEMENTS
RISK DISCLOSURES CONTINUED
C. FORWARD FOREIGN CURRENCY CONTRACTS
A forward foreign currency contract is a commitment to purchase or sell a foreign currency at a future date, at a defined rate. The Group
may utilise forward foreign currency contracts to gain exposure to a certain currency or market rate or manage the impact of fluctuations
in foreign currencies on the value of its foreign currency denominated investments, debt and/or insurance related currency exposures.
Forward contracts expose the Group to credit, market and liquidity risks. Credit risk arises from the potential inability of counterparties
to perform under the terms of the contract. The Group is exposed to market risk to the extent that adverse changes occur in the exchange
rate of the underlying foreign currency. Liquidity risk represents the possibility that the Group may not be able to rapidly adjust the size of
its forward positions at a reasonable price in times of high volatility and financial stress. These risks are mitigated by requiring a minimum
counterparty credit quality, restricting the maximum notional exposure as a percentage of the investment portfolio’s estimated fair value and
restricting exposures to foreign currencies, individually and in aggregate, as a percentage of the investment portfolio’s estimated fair value.
The notional amount of a derivative contract is the underlying quantity upon which payment obligations are calculated. A long position is
equivalent to buying the underlying currency whereas a short position is equivalent to having sold the underlying currency.
The Group has the following open forward foreign currency contracts:
As at 31 December
Canadian dollar
Swedish Krona
Euro
Australian Dollar
Japanese Yen
Malaysian Ringgit
British Pound
Total
Notional
long
$m
–
–
–
–
–
2.7
13.4
16.1
2016
2015
Notional
short
$m
29.8
2.7
0.6
–
–
–
0.9
34.0
Net notional
long (short)
$m
(29.8)
(2.7)
(0.6)
–
–
2.7
12.5
(17.9)
Notional
long
$m
–
–
28.9
7.1
5.9
3.0
10.4
55.3
Notional
short
$m
21.4
–
15.9
17.8
7.4
–
8.6
71.1
Net notional
long (short)
$m
(21.4)
–
13.0
(10.7)
(1.5)
3.0
1.8
(15.8)
D. SWAPS
The Group’s investment guidelines permit the use of interest rate swaps and credit default swaps which are traded primarily OTC.
Interest rate swaps are used to manage interest rate exposure, portfolio duration or capitalise on anticipated changes in interest rate
volatility without investing directly in the underlying securities. Interest rate swap agreements entail the exchange of commitments to pay
or receive interest, such as an exchange of floating rate payments for fixed rate payments, with respect to a notional amount of principal.
These agreements involve elements of credit and market risk. Such risks include the possibility that there may not be a liquid market, that
the counterparty may default on its obligation to perform, or that there may be unfavourable movements in interest rates. These risks are
mitigated through defining a minimum counterparty credit quality and a maximum notional exposure to interest rate swaps as a percentage
of the investment portfolio’s estimated fair value. The notional amount of interest rate swaps held in the investment portfolio is not material as
at 31 December 2016 and 2015. Through the use of interest rate swaps, the Group has fixed the interest rate on Lancashire’s subordinated
loan notes until December 2020. These swaps were entered into in two separate tranches to extend the maturity of the swaps, the first of which
expired in 2016. As at 31 December 2016 the notional amount of interest rate swaps held for hedging purposes was $122.3 million
(31 December 2015 – $246.4 million).
118
Lancashire Holdings Limited | Annual Report & Accounts 2016
III. DEBT RISK
The Group has issued long-term debt as described in note 17. 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
15 December 2035
15 June 2035
Interest hedged
100%
100%
The interest rate swaps expire on 15 December 2020, therefore until 2020 the Group has no cash flow interest rate risk on the LHL 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 17. 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 discussed in note 17. See page 118 for a listing of the
Group’s open forward foreign currency contracts.
www.lancashiregroup.com
119
FINANCIAL STATEMENTS
RISK DISCLOSURES CONTINUED
The Group’s assets and liabilities, categorised by currency at their translated carrying amount, are as follows:
Assets
Cash and cash equivalents
Accrued interest receivable
Investments
Inwards premiums receivable from insureds
and cedants
Reinsurance assets
Other receivables
Corporation tax receivable
Investment in associate
Property, plant and equipment
Deferred acquisition costs
Intangible assets
Total assets as at 31 December 2016
Liabilities
Losses and loss adjustment expenses
Unearned premiums
Insurance contracts – other payables
Amounts payable to reinsurers
Deferred acquisition costs ceded
Other payables
Deferred tax liability
Interest rate swap
Long-term debt
Total liabilities as at 31 December 2016
U.S. $
$m
201.0
6.6
1,593.9
235.4
177.3
41.1
–
49.7
0.6
60.8
153.8
2,520.2
U.S. $
$m
548.8
287.7
27.0
51.4
0.4
31.0
7.8
1.5
283.3
1,238.9
Sterling
$m
15.9
–
14.8
8.4
5.3
1.9
1.1
–
4.7
6.5
–
58.6
Sterling
$m
34.1
19.8
5.6
0.9
–
29.9
10.9
–
–
101.2
Euro
$m
25.0
–
27.4
17.1
3.5
–
–
–
–
7.4
–
80.4
Euro
$m
41.1
34.6
3.0
0.4
–
–
–
2.2
37.6
118.9
Japanese Yen
$m
14.0
–
–
2.7
0.3
–
–
–
–
0.7
–
17.7
Japanese Yen
$m
20.1
7.4
–
–
–
–
–
–
–
27.5
Other
$m
52.9
–
12.3
6.4
0.7
0.6
–
–
–
6.1
–
79.0
Other
$m
35.7
24.0
1.8
–
–
0.1
–
–
–
61.6
Total
$m
308.8
6.6
1,648.4
270.0
187.1
43.6
1.1
49.7
5.3
81.5
153.8
2,755.9
Total
$m
679.8
373.5
37.4
52.7
0.4
61.0
18.7
3.7
320.9
1,548.1
120
Lancashire Holdings Limited | Annual Report & Accounts 2016
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
–
–
–
–
–
–
–
24.9
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
–
–
–
–
–
–
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
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 $1.5 million (2015 – $2.6 million).
The Group uses forward foreign currency contracts for the purposes of managing currency exposures. See page 118 for details of the Group’s
open forward foreign currency contracts.
www.lancashiregroup.com
121
FINANCIAL STATEMENTS
RISK DISCLOSURES CONTINUED
C. LIQUIDITY RISK
Liquidity risk is the risk that cash may not be available to pay obligations when they are due without incurring an unreasonable cost. The
Group’s main exposures to liquidity risk are with respect to its insurance and investment activities. The Group is exposed if proceeds from
financial assets are not sufficient to fund obligations arising from its insurance contracts. The Group can be exposed to daily calls on its
available investment assets, principally to settle insurance claims and to fund trust accounts following a large catastrophe loss.
Exposures in relation to insurance activities are as follows:
• large catastrophic events, or multiple medium-sized events in quick succession, resulting in a requirement to pay a large value of claims
within a relatively short time frame;
• failure of insureds or cedants to meet their contractual obligations with respect to the payment of premiums in a timely manner; and
• failure of reinsurers to meet their contractual obligations with respect to the payment of claims in a timely manner.
Exposures in relation to investment activities are as follows:
• adverse market movements and/or a duration mismatch to obligations, resulting in investments being disposed of at a significant realised
loss; and
• an inability to liquidate investments due to market conditions.
The maturity dates of the Group’s fixed maturity portfolio are as follows:
As at 31 December 2016
Less than one year
Between one and two years
Between two and three years
Between three and four years
Between four and five years
Over five years
Asset backed and mortgage backed securities
Total fixed maturity securities
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 maturity securities
Core
$m
75.7
108.7
71.7
26.3
13.8
23.8
31.2
351.2
Core
$m
58.0
185.3
96.6
25.1
21.3
21.3
45.9
453.5
Core plus
$m
128.1
164.0
116.1
62.8
35.8
16.2
111.2
634.2
Core plus
$m
93.0
190.7
102.8
28.3
46.5
11.8
128.9
602.0
Surplus
$m
47.8
20.4
32.4
42.9
75.6
183.3
110.0
512.4
Surplus
$m
24.5
70.3
35.9
53.3
96.2
132.5
133.5
546.2
Total
$m
251.6
293.1
220.2
132.0
125.2
223.3
252.4
1,497.8
Total
$m
175.5
446.3
235.3
106.7
164.0
165.6
308.3
1,601.7
122
Lancashire Holdings Limited | Annual Report & Accounts 2016
The maturity profile of the financial liabilities of the Group is as follows:
As at 31 December 2016
Losses and loss adjustment expenses
Insurance contracts – other payables
Amounts payable to reinsurers
Other payables
Interest rate swap
Long-term debt
Total
As at 31 December 2015
Losses and loss adjustment expenses
Insurance contracts – other payables
Amounts payable to reinsurers
Other payables
Interest rate swap
Long-term debt
Total
Balance sheet
$m
679.8
37.4
52.7
61.0
3.7
320.9
1,155.5
Balance sheet
$m
671.0
36.2
26.6
67.0
4.8
322.3
1,127.9
Years until liability becomes due – undiscounted values
Less than one
$m
269.0
34.4
52.7
61.0
1.6
14.0
432.7
One to three
$m
255.2
3.0
–
–
1.8
34.6
294.6
Three to five
$m
90.6
–
–
–
0.3
36.8
127.7
Years until liability becomes due – undiscounted values
Less than one
$m
269.5
33.1
26.6
67.0
2.0
14.0
412.2
One to three
$m
246.4
3.1
–
–
2.3
33.8
285.6
Three to five
$m
88.6
–
–
–
0.5
36.5
125.6
Over five
$m
65.0
–
–
–
–
496.5
561.5
Over five
$m
66.5
–
–
–
–
521.3
587.8
Total
$m
679.8
37.4
52.7
61.0
3.7
581.9
1,416.5
Total
$m
671.0
36.2
26.6
67.0
4.8
605.6
1,411.2
Actual maturities of the above may differ from contractual maturities because certain borrowers have the right to call or prepay certain
obligations with or without call or prepayment penalties. While the estimation of the ultimate liability for losses and loss adjustment expenses
is complex and incorporates a significant amount of judgement, the timing of payment of losses and loss adjustment expenses is also uncertain
and cannot be predicted as simply as for other financial liabilities. Actuarial and statistical techniques, past experience and management’s
judgement have been used to determine a likely settlement pattern.
The Group manages its liquidity risks via its investment strategy to hold high quality, highly liquid securities, sufficient to meet its insurance
liabilities and other near-term liquidity requirements. The creation of the core portfolio with its subset of guidelines aims to ensure funds are
readily available to meet potential insurance liabilities in an extreme event plus other near-term liquidity requirements. In addition, the Group
has established asset allocation and maturity parameters within the investment guidelines such that the majority of the investments are in high
quality assets which could be converted into cash promptly and at minimal expense. The Group monitors market changes and outlook and
reallocates assets as deemed necessary.
www.lancashiregroup.com
123
FINANCIAL STATEMENTS
RISK DISCLOSURES CONTINUED
D. CREDIT RISK
Credit risk is the risk that a counterparty may fail to pay, or repay, a debt or obligation. The Group is exposed to credit risk on its fixed maturity
investment portfolio and derivative instruments, its inwards premiums receivable from insureds and cedants, and on any amounts recoverable
from reinsurers.
Credit risk on the fixed maturity portfolio is mitigated through the Group’s policy to invest in instruments of high credit quality issuers and to
limit the amounts of credit exposure with respect to particular ratings categories and any one issuer. Securities rated below an S&P or equivalent
rating of BBB-/Baa3 may comprise no more than 10.0 per cent of shareholders’ equity. In addition, no one issuer, with the exception of U.S.
government and agency securities, other G10 government guaranteed securities (excluding Italy) and Australian sovereign debt should
exceed 5.0 per cent of shareholders’ equity. The Group is therefore not exposed to any significant credit concentration risk on its investment
portfolio, except for fixed maturity securities issued by the U.S. government and government agencies and other highly rated governments.
Credit risk on exchange-traded derivative instruments is mitigated by the use of clearing houses to reduce counterparty credit risk,
requiring the posting of margins and settling of unrealised gains and losses daily. Credit risk on OTC derivatives is mitigated by monitoring
the creditworthiness of the counterparties and by requiring collateral amounts exceeding predetermined thresholds to be posted for positions
which have accrued gains.
Credit risk on inwards premiums receivable from insureds and cedants is managed by conducting business with reputable broking
organisations, with whom the Group has established relationships, and by rigorous cash collection procedures. The Group also has a broker
approval process in place. Binding authorities are subject to standard market controls including credit control. Credit risk from reinsurance
recoverables is primarily managed by the review and approval of reinsurer security, as discussed on page 109.
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 2016
AAA
AA+, AA, AA-
A+, A, A-
BBB+, BBB, BBB-
Other1
Total
(1) Reinsurance recoveries classified as ‘other’ include $5.6 million of reserves that are fully collateralised.
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.
The counterparty to the Group’s long-term debt interest rate swaps is currently rated A by S&P.
Cash and fixed
maturity securities
$m
221.6
735.8
502.5
231.7
115.0
1,806.6
Inwards premiums
receivable and
other receivables
$m
–
–
84.5
–
245.6
330.1
Cash and fixed
maturity securities
$m
302.8
744.0
502.2
232.0
112.5
1,893.5
Inwards premiums
receivable and
other receivables
$m
–
–
81.3
–
212.9
294.2
Reinsurance
recoveries
$m
–
2.6
126.4
–
7.7
136.7
Reinsurance
recoveries
$m
–
–
77.5
–
6.4
83.9
124
Lancashire Holdings Limited | Annual Report & Accounts 2016
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
2016
$m
12.3
5.9
16.1
34.3
2015
$m
16.1
5.6
6.4
28.1
Provisions of $1.0 million (2015 – $2.2 million) have been made for impaired or irrecoverable balances and $1.2 million (2015 – $1.0 million
charge) was released 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 ORSA report to the LHL Board and entity boards and in 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 four years, on a rotational basis.
F. STRATEGIC RISK
The Group has identified several strategic risks. These include:
• the risks that either the poor execution of the business plan or an inappropriate business plan in itself results in a strategy that
fails to adequately reflect the trading environment, resulting in an inability to optimise performance, including reputational risk;
• the risks of the failure to maintain adequate capital, accessing capital at an inflated cost or the inability to access capital. This includes
unanticipated changes in vendor, regulatory and/or rating agency models that could result in an increase in capital requirements or
a change in the type of capital required; and
• the risks of succession planning, staff retention and key man risks.
I. BUSINESS PLAN RISK
The Group addresses the risks associated with the planning and execution of the business plan through a combination of the following:
• an iterative annual forward-looking business planning process with cross departmental involvement;
• evaluation and approval of the annual business plan by the Board of Directors;
• regular monitoring of actual versus planned results;
• periodic review and re-forecasting as market conditions change; and
• feedback to senior management via the daily UMCC and fortnightly RRC meetings.
www.lancashiregroup.com
125
FINANCIAL STATEMENTS
RISK DISCLOSURES CONTINUED
II. CAPITAL MANAGEMENT RISK
The total capital of the Group is as follows:
As at 31 December
Shareholders’ equity
Long-term debt
Total capital
Intangible assets
Total tangible capital
2016
$m
1,207.3
320.9
1,528.2
(153.8)
1,374.4
2015
$m
1,220.3
322.3
1,542.6
(153.8)
1,388.8
Risks associated with the effectiveness of the Group’s capital management, are mitigated as follows:
• regular monitoring of current and prospective regulatory and rating agency capital requirements;
• regular discussion with the Cathedral management team regarding Lloyd’s capital requirements;
• oversight of capital requirements by the Board of Directors;
• ability to purchase sufficient, cost effective reinsurance;
• maintaining contact with vendors, regulators and rating agencies in order to stay abreast of upcoming developments; and
• participation in industry groups such as the International Underwriters Association, the Association of Bermuda Insurers and Reinsurers
and the Lloyd’s Market Association.
The Group reviews the level and composition of capital on an ongoing basis with a view to:
• maintaining sufficient capital for underwriting opportunities and to meet obligations to policyholders;
• maximising the risk-adjusted return to shareholders within predetermined risk tolerances;
• maintaining adequate financial strength ratings; and
• meeting internal and regulatory capital requirements.
Capital is increased or returned as appropriate. The retention of earnings generated leads to an increase in capital. Capital raising can include
debt or equity and returns of capital may be made through dividends, share repurchases, a redemption of debt or any combination thereof.
Other capital management tools and products available to the Group may also be utilised. All capital actions require approval by the Board
of Directors.
Internal methods have been developed to review the profitability of classes of business and their estimated capital requirements plus the capital
requirements of the combination of a wide range of other risk categories. These approaches are used by management in decision making.
The Group’s aim is to provide its shareholders with an RoE of 13.0 per cent in excess of a risk-free rate over the longer term. The return
is generated within a broad framework of risk parameters. The return is measured by management in terms of the IRR of the increase in
FCBVS in the period adjusted for dividends accrued. This aim is a long-term goal, acknowledging that management expects both higher
and lower results in the shorter term. The cyclicality and volatility of the insurance market is expected to be the largest driver of this pattern.
Management monitors these peaks and troughs – adjusting the Group’s portfolio to make the most effective use of available capital and
seeking to maximise the risk-adjusted return.
126
Lancashire Holdings Limited | Annual Report & Accounts 2016
IRR achieved is as follows:
31 December 20051
31 December 2006
31 December 2007
31 December 2008
31 December 2009
31 December 2010
31 December 2011
31 December 2012
31 December 2013
31 December 2014
31 December 2015
31 December 2016
(1) The returns shown are for the period from date of incorporation, 12 October 2005 to 31 December 2005.
IRR achieved in excess of the three-month treasury yield is as follows:
31 December 20051
31 December 2006
31 December 2007
31 December 2008
31 December 2009
31 December 2010
31 December 2011
31 December 2012
31 December 2013
31 December 2014
31 December 2015
31 December 2016
(1) The returns shown are for the period from date of incorporation, 12 October 2005 to 31 December 2005.
Annual
return
%
(3.2)
17.8
31.4
7.8
26.5
23.3
13.4
16.7
18.9
13.9
10.9
13.5
Annual
return
%
(3.4)
13.0
26.9
6.4
26.4
23.2
13.3
16.6
18.9
13.9
10.9
13.2
Compound
annual return
%
n/a
14.0
22.4
17.9
19.8
20.3
19.5
19.2
19.2
18.9
18.6
18.4
Compound
annual return
%
n/a
9.2
17.8
14.3
17.1
18.2
17.7
17.7
17.9
17.7
17.5
17.4
Inception to
date return
%
(3.2)
14.0
50.3
63.7
105.8
152.4
191.2
242.7
308.0
375.3
449.1
541.1
Inception to
date return
%
(3.4)
9.2
40.8
52.7
94.6
141.1
179.9
231.3
296.6
363.8
437.5
529.2
www.lancashiregroup.com
127
FINANCIAL STATEMENTS
RISK DISCLOSURES CONTINUED
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.
On 1 January 2016 Solvency II, a regulatory regime for (re)insurers domiciled in the EEA, came into effect, with the PRA as the Group’s
supervisor. Solvency II introduces a new basis for assessing capital and solvency, comprising a market-consistent economic balance sheet and an
SCR, using either an internal model or the standard formula. Both the Group and LUK calculate their SCR using the standard formula. As the
Group’s long-term debt is excluded from Solvency II capital (‘own funds’) both the Group’s and LUK’s Solvency II own funds are comprised
entirely of Tier 1 items for the year ended 31 December 2016. Tier 1 capital is the highest quality capital under Solvency II with the greatest
loss absorbing capacity, comprising share capital and retained earnings. For the year ended 31 December 2016 the Group and LUK were
more than adequately capitalised under the Solvency II regime.
LICL is regulated by the BMA and is required to monitor its solvency capital requirement under the BMA’s regulatory framework, which is
considered equivalent to the Solvency II regime. LICL’s capital requirement is calculated using the BSCR. For the year ended
31 December 2016 LICL was more than adequately capitalised under the BMA regulatory regime.
The Group’s underwriting capacity in its Lloyd’s syndicates must be supported by providing a deposit in the form of cash, securities or LOCs,
which are referred to as FAL. The capital framework at Lloyd’s requires each managing agent to calculate the capital requirement for each
syndicate they manage. Solvency II internal models are used to determine capital requirements for Syndicate 2010 and Syndicate 3010 based
on the uSCR. Lloyd’s has the discretion to take into account other factors at syndicate or member level to uplift the calculated uSCR. This
may include perceived deficiencies in the internal model result as well as the need to maintain Lloyd’s overall security rating. Currently,
as a minimum, Lloyd’s applies a 35.0 per cent uplift to each syndicate’s uSCR to arrive at the ECA.
Lloyd’s then uses each syndicate’s ECA as a basis for determining member level capital requirements, which is backed by FAL. For the 2017
calendar year the Group’s corporate member’s FAL requirement was set at 75.6 per cent (2016 – 56.8 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 increase was primarily driven by a change in model version and the depreciation of Sterling during the second
half of 2016. The Group has met its FAL requirement of £209.4 million as at 31 December 2016 (31 December 2015 – £157.3 million).
For the years ended 31 December 2016 and 2015 the capital requirements of all the Group’s regulatory jurisdictions were met.
III. RETENTION RISK
Risks associated with succession planning, staff retention and key man risks are mitigated through a combination of resource planning
processes and controls, including:
• the identification of key personnel with appropriate succession plans;
• the identification of key team profit generators and function holders with targeted retention packages;
• documented recruitment procedures, position descriptions and employment contracts;
• resource monitoring and the provision of appropriate compensation, including equity based compensation which vests over a defined time
horizon; and
• training schemes.
128
Lancashire Holdings Limited | Annual Report & Accounts 2016
NOTES TO THE ACCOUNTS
1. GENERAL INFORMATION
The Group is a provider of global specialty insurance and reinsurance products with operations in London and Bermuda. LHL was
incorporated under the laws of Bermuda on 12 October 2005. On 16 March 2009, LHL was added to the official list and its common shares
were admitted to trading on the main market of the LSE; previously LHL’s shares were listed on AIM, a subsidiary market of the LSE. Since
21 May 2007, LHL’s shares have had a secondary listing on the BSX. LHL’s registered office is Power House, 7 Par-la-Ville Road, Hamilton
HM 11, Bermuda. LHL’s head office is Level 29, 20 Fenchurch Street, London, EC3M 3BY, United Kingdom.
The consolidated financial statements for the year ended 31 December 2016 include the Company’s subsidiary companies, the Company’s
interest in associate, and the Group’s share of the Syndicates’ assets and liabilities and income and expenses. A full listing of the Group’s
related parties can be found in note 22.
2. SEGMENTAL REPORTING
Management and the Board of Directors review the Group’s business primarily by its five principal segments: Property, Energy, Marine,
Aviation and Lloyd’s. These segments are therefore deemed to be the Group’s operating segments for the purposes of segmental reporting.
Further sub-classes of business are underwritten within each operating segment. The nature of these individual sub-classes is discussed further
in the risk disclosures section on pages 105 to 108. 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.
www.lancashiregroup.com
129
FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
2. SEGMENTAL REPORTING CONTINUED
REVENUE AND EXPENSE BY OPERATING SEGMENT
For the year ended 31 December 2016
Gross premiums written by geographic area
U.S. and Canada
Worldwide offshore
Worldwide, including the U.S. and Canada1
Europe
Far East
Worldwide, excluding the U.S. and Canada2
Middle East
Rest of world
Total
Outwards reinsurance premiums
Change in unearned premiums
Change in unearned premiums on premiums ceded
Net premiums earned
Insurance losses and loss adjustment expenses
Insurance losses and loss adjustment expenses
recoverable
Insurance acquisition expenses
Insurance acquisition expenses ceded
Net underwriting profit
Net unallocated income and expenses
Profit before tax
Net loss ratio
Net acquisition cost ratio
Expense ratio
Combined ratio
Property
$m
84.0
0.9
23.5
27.7
20.0
9.4
11.5
42.5
219.5
(62.2)
(15.0)
6.2
148.5
(14.6)
0.9
(29.4)
1.4
106.8
9.2%
18.9%
–
28.1%
Energy
$m
0.4
123.4
2.0
–
–
0.1
–
0.1
126.0
(40.2)
20.9
(1.2)
105.5
(91.3)
49.8
(48.2)
0.6
16.4
Marine
$m
–
36.6
–
–
–
–
–
0.6
37.2
(8.3)
6.6
(0.1)
35.4
(15.1)
0.3
(10.2)
0.5
10.9
Aviation
$m
–
0.2
36.0
–
–
–
–
–
36.2
(9.5)
0.6
(1.8)
25.5
1.1
0.1
(8.1)
0.3
18.9
Lloyd’s
$m
95.3
–
54.1
19.2
9.2
5.9
2.0
29.3
215.0
(55.0)
12.6
0.6
173.2
(92.3)
18.6
(39.2)
0.2
60.5
39.3%
45.1%
–
84.4%
41.8%
27.4%
–
69.2%
(4.7%)
30.6%
–
25.9%
42.6%
22.5%
–
65.1%
Total
$m
179.7
161.1
115.6
46.9
29.2
15.4
13.5
72.5
633.9
(175.2)
25.7
3.7
488.1
(212.2)
69.7
(135.1)
3.0
213.5
(63.1)
150.4
29.2%
27.1%
20.2%
76.5%
(1) Worldwide, including the U.S. and Canada, comprises insurance and reinsurance contracts that insure or reinsure risks in more than one geographic area.
(2) Worldwide, excluding the U.S. and Canada, comprises insurance and reinsurance contracts that insure or reinsure risks in more than one geographic area, but that specifically exclude the U.S. and Canada.
130
Lancashire Holdings Limited | Annual Report & Accounts 2016
REVENUE AND EXPENSE BY OPERATING SEGMENT
For the year ended 31 December 2015
Gross premiums written by geographic area
U.S. and Canada
Worldwide offshore
Worldwide, including the U.S. and Canada1
Europe
Far East
Worldwide, excluding the U.S. and Canada2
Middle East
Rest of world
Total
Outwards reinsurance premiums
Change in unearned premiums
Change in unearned premiums on premiums ceded
Net premiums earned
Insurance losses and loss adjustment expenses
Insurance losses and loss adjustment expenses
recoverable
Insurance acquisition expenses
Insurance acquisition expenses ceded
Net underwriting profit
Net unallocated income and expenses
Profit before tax
Net loss ratio
Net acquisition cost ratio
Expense ratio
Combined ratio
Property
$m
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
10.6%
18.4%
–
29.0%
Energy
$m
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
Marine
$m
Aviation
$m
–
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
Lloyd’s
$m
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
37.0%
37.4%
–
74.4%
13.8%
34.2%
–
48.0%
57.8%
26.3%
–
84.1%
33.4%
23.0%
–
56.4%
Total
$m
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.
www.lancashiregroup.com
131
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 2016
Fixed maturity securities – AFS
Fixed maturity securities – at FVTPL
Equity securities – AFS
Hedge funds – at FVTPL
Other investments
Cash and cash equivalents
Total investment return
Net investment
income and net
other investment
income (losses)1
$m
28.4
1.2
0.3
4.3
1.4
1.1
36.7
Net realised
(losses) gains
and impairments
$m
1.8
–
(1.3)
(0.8)
(2.1)
–
(2.4)
Net change
in unrealised
gains/losses
on AFS
$m
3.7
–
0.4
–
–
–
4.1
Total investment
return excluding
foreign exchange
$m
33.9
1.2
(0.6)
3.5
(0.7)
1.1
38.4
Net foreign
exchange
losses
$m
(0.5)
–
–
–
(0.2)
(0.9)
(1.6)
Total investment
return including
foreign exchange
$m
33.4
1.2
(0.6)
3.5
(0.9)
0.2
36.8
(1) Net unrealised gains/(losses) on our FVTPL investments are included within net investment income and net other investment income.
For the year ended 31 December 2015
Fixed maturity securities – AFS
Fixed maturity securities – at FVTPL
Equity securities – AFS
Hedge funds – at FVTPL
Other investments
Cash and cash equivalents
Total investment return
Net investment
income and net
other investment
income (losses)1
$m
28.8
(1.3)
0.4
–
–
0.6
28.5
Net realised
(losses) gains
and impairments
$m
(1.8)
2.7
(0.7)
(1.6)
(1.4)
–
(2.8)
Net change
in unrealised
gains/losses
on AFS
$m
(11.4)
–
(0.2)
–
–
–
(11.6)
Total investment
return excluding
foreign exchange
$m
15.6
1.4
(0.5)
(1.6)
(1.4)
0.6
14.1
Net foreign
exchange
(losses) gains
$m
(9.2)
–
–
–
2.1
(0.3)
(7.4)
Total investment
return including
foreign exchange
$m
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.
Net realised (losses) gains and impairments include impairment losses of $3.5 million (2015 – $2.4 million) recognised on fixed maturity
securities and $0.4 million (2015 – $0.5 million) recognised on equity securities held by the Group.
Refer to pages 116 and 117 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 $4.5 million (2015 – $3.2 million) of investment management, accounting and custodian fees.
4. NET INSURANCE ACQUISITION EXPENSES
Insurance acquisition expenses
Changes in deferred insurance acquisition expenses
Insurance acquisition expenses ceded
Changes in deferred insurance acquisition expenses ceded
Total net insurance acquisition expenses
2016
$m
129.4
5.7
(3.1)
0.1
132.1
2015
$m
130.8
17.4
(2.2)
0.2
146.2
132
Lancashire Holdings Limited | Annual Report & Accounts 2016
5. RESULTS OF OPERATING ACTIVITIES
Results of operating activities are stated after charging the following amounts:
Depreciation on owned assets
Operating lease charges
Auditors’ remuneration
– Group audit fees
– Other services
Total
2016
$m
2.3
2.3
1.8
0.1
6.5
During 2016 and 2015, EY provided non-audit services in relation to taxation services. All fees paid to the Group’s auditors for non-audit
services are approved by the Group’s Audit Committee.
6. EMPLOYEE BENEFITS
Wages and salaries
Pension costs
Bonus and other benefits
Total cash compensation
RSS – performance1
RSS – ordinary
RSS – bonus deferral
RSS – Cathedral acquisition grant
Total equity based compensation
Total employee benefits
2016
$m
27.1
3.1
31.2
61.4
8.3
1.2
2.0
(0.8)
10.7
72.1
2015
$m
1.9
3.4
1.8
0.1
7.2
2015
$m
30.4
3.1
30.8
64.3
7.3
–
2.1
6.4
15.8
80.1
(1) Previously the performance RSS options were referred to as ordinary RSS options. The terminology has been updated as RSS options without performance criteria for vesting were issued for the first time in 2016 and are
referred to as ordinary RSS options.
EQUITY BASED COMPENSATION
The Group’s equity based compensation scheme is its RSS. Previously the Group also authorised and issued warrants at its formation in 2005
and 2006. These were all exercised during 2015 and expired on 16 December 2015.
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.
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 2016
and 2015:
Assumptions
Dividend yield
Expected volatility1
Risk-free interest rate2
Expected average life of options
Share price
2016
–
22.2%
0.5%
3 years
$8.85
2015
–
19.5%
0.7%
3 years
$9.87
(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.
www.lancashiregroup.com
133
FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
6. EMPLOYEE BENEFITS CONTINUED
RSS – PERFORMANCE
The performance RSS options vest after a three-year period and are dependent on certain performance criteria. A maximum of 75.0 per cent
of the performance RSS options will vest only on the achievement of an RoE in excess of a required amount. A maximum of 25.0 per cent of
the performance RSS options will vest only on the achievement of a TSR in excess of the 75th percentile of the TSR of a predefined comparator
group. For all RSS options issued in 2012 and earlier the performance criteria was split as 50.0 per cent relating to RoE and 50.0 per cent
relating to TSR. An amount equivalent to the dividends paid between the grant date and the exercise date accrues and is paid at the time
of exercise, pro-rata according to the number of RSS options that vest.
Outstanding as at 31 December 2014
Granted
Exercised
Forfeited
Lapsed
Outstanding as at 31 December 2015
Granted
Exercised
Forfeited
Lapsed
Outstanding as at 31 December 2016
Exercisable as at 31 December 2015
Exercisable as at 31 December 2016
Number of
employee
restricted stock
3,154,216
1,529,507
(662,345)
(223,893)
(525,348)
3,272,137
886,916
(499,296)
(72,024)
(224,576)
3,363,157
956,911
226,863
Number of
non-employee
restricted stock
221,833
–
(128,839)
–
(92,994)
–
–
–
–
–
–
Total number of
restricted stock
3,376,049
1,529,507
(791,184)
(223,893)
(618,342)
3,272,137
886,916
(499,296)
(72,024)
(224,576)
3,363,157
–
–
956,911
226,863
Weighted average remaining contractual life
Weighted average fair value at date of grant
during the year
Weighted average share price at date of
exercise during the year
2016
2015
Employee
restricted stock
8.0 years
Non-employee
restricted stock
–
Total
restricted stock
8.0 years
Employee
restricted stock
7.9 years
Non-employee
restricted stock
–
Total
restricted stock
7.9 years
$7.60
$8.27
–
–
$7.60
$8.27
$8.72
$9.98
–
$9.86
$8.72
$9.97
RSS – ORDINARY
The ordinary RSS options were issued for the first time in 2016 and vest three years from the date of grant and do not have associated
performance criteria for vesting. An amount equivalent to the dividends paid between the grant date and the exercise date accrues and is paid
at the time of exercise. These awards will become exercisable in the first open period following the release of the Company’s 2018 year-end
results after the Board meeting in February 2019.
Granted
Forfeited
Outstanding as at 31 December 2016
Weighted average remaining contractual life
Weighted average fair value at date of grant during the year
134
Lancashire Holdings Limited | Annual Report & Accounts 2016
Total number of
restricted stock
688,714
(91,194)
597,520
2016 Total
restricted stock
9.1 years
$8.85
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 2014
Granted
Exercised
Forfeited
Outstanding as at 31 December 2015
Granted
Exercised
Forfeited
Outstanding as at 31 December 2016
Exercisable as at 31 December 2015
Exercisable as at 31 December 2016
Number of
employee
restricted stock
363,610
268,738
(170,844)
(26,229)
435,275
270,752
(180,737)
(1,727)
523,563
Number of
non-employee
restricted stock
13,738
–
(11,183)
–
2,555
–
–
–
2,555
Total number of
restricted stock
377,348
268,738
(182,027)
(26,229)
437,830
270,752
(180,737)
(1,727)
526,118
60,882
80,576
–
2,555
60,882
83,131
Weighted average remaining contractual life
Weighted average fair value at date of grant during
the year
Weighted average share price at date of exercise
during the year
2016
2015
Employee
restricted stock
8.5 years
Non-employee
restricted stock
0.1 years
Total
restricted stock
8.5 years
Employee
restricted stock
8.0 years
Non-employee
restricted stock
1.1 years
Total
restricted stock
8.0 years
$7.72
$8.24
–
–
$7.72
$9.69
–
$9.69
$8.24
$10.08
$9.96
$10.08
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 first tranche of awards are exercisable in 2017.
Outstanding as at 31 December 2015
Forfeited
Outstanding as at 31 December 2016
Weighted average remaining contractual life
Weighted average fair value at date of grant
Total number of
restricted stock
2,307,157
(950,907)
1,356,250
Total restricted
stock
6.9 years
$13.01
MANAGEMENT WARRANTS
During the year ended 31 December 2015 all of the remaining management team ordinary and performance warrants were exercised
as follows:
Management team performance warrants
Management team ordinary warrants
Number exercised
559,182
117,480
Weighted average
exercise price
$4.72
$3.62
Fair value of
warrants granted
$2.62
$2.62
www.lancashiregroup.com
135
FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
7. FINANCING COSTS
Interest expense on long-term debt
Net losses on interest rate swaps
Other financing costs
Total
2016
$m
15.6
1.0
1.6
18.2
2015
$m
15.1
2.5
0.8
18.4
Refer to note 17 for details of long-term debt and financing arrangements.
8. TAX
BERMUDA
LHL, LICL and LUK have received an undertaking from the Bermuda government exempting them from all Bermuda local income,
withholding and capital gains taxes until 31 March 2035. At the present time no such taxes are levied in Bermuda.
UNITED KINGDOM
LHL and its UK subsidiaries are subject to normal UK corporation tax on all their taxable profits.
Corporation tax charge for the period
Adjustments in respect of prior period corporation tax
Deferred tax credit for the period
Tax rate change adjustment
Adjustments in respect of prior period deferred tax
Total tax credit
Tax reconciliation1
Profit before tax
UK corporation tax at 20.0% (2015 – 20.3%)
Non-taxable income
Adjustments in respect of prior period
Differences related to equity based compensation
Other expense permanent differences
Tax rate change adjustment
Unused tax losses not recognised for deferred tax
Utilisation of tax losses previously unrecognised for deferred tax
Total tax credit
(1) All tax reconciling balances have been classified as recurring items.
2016
$m
2.7
(2.4)
(4.0)
(0.8)
0.6
(3.9)
2016
$m
150.4
30.1
(34.4)
(1.8)
0.6
3.1
(0.8)
0.6
(1.3)
(3.9)
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)
Due to the different taxpaying jurisdictions throughout the Group, the current tax credit as a percentage of the Group’s profit before tax is
2.6 per cent (2015 – 5.8 per cent). Non-taxable income relates to profits of companies within the Group that are non-tax resident in the UK,
intra-group dividends and the share of profit of associate.
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.
Deferred tax credit
Total tax credit in other reserves
2016
$m
–
–
2015
$m
(0.1)
(0.1)
Refer to note 10 for details of the tax expense related to the net change in unrealised gains/losses on investments that is included in
accumulated other comprehensive loss within shareholders’ equity.
136
Lancashire Holdings Limited | Annual Report & Accounts 2016
9. CASH AND CASH EQUIVALENTS
Cash at bank and in hand
Cash equivalents
Total cash and cash equivalents
2016
$m
122.4
186.4
308.8
2015
$m
131.7
160.1
291.8
Cash equivalents have an original maturity of three months or less. The carrying amount of these assets approximates their fair value. Refer to
note 17 for the cash and cash equivalent balances on deposit as collateral.
10. INVESTMENTS
As at 31 December 2016
Fixed maturity securities – AFS
– Short-term investments
– Fixed maturity funds
– U.S. treasuries
– Other government bonds
– U.S. municipal bonds
– U.S. government agency debt
– Asset backed securities
– U.S. government agency mortgage backed securities
– Non-agency mortgage backed securities
– Non-agency commercial mortgage backed securities
– Bank loans
– Corporate bonds
Total fixed maturity securities – AFS
Fixed maturity securities – at FVTPL
Equity securities – AFS
Hedge funds – at FVTPL
Total investments
Cost or
amortised cost
$m
Unrealised
gains
$m
Unrealised
losses
$m
Estimated
fair value
$m
5.3
14.5
307.8
67.6
1.0
83.2
111.1
119.8
14.6
9.7
120.8
600.2
1,455.6
50.5
20.8
122.5
1,649.4
–
–
0.1
0.1
0.1
–
0.3
0.7
0.1
–
1.4
1.7
4.5
1.1
0.8
7.4
13.8
–
–
(2.4)
(1.1)
–
(1.3)
(1.2)
(2.2)
(0.4)
(0.1)
(0.6)
(4.6)
(13.9)
–
(0.4)
(0.5)
(14.8)
5.3
14.5
305.5
66.6
1.1
81.9
110.2
118.3
14.3
9.6
121.6
597.3
1,446.2
51.6
21.2
129.4
1,648.4
www.lancashiregroup.com
137
FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
10. INVESTMENTS CONTINUED
As at 31 December 2015
Fixed maturity securities – AFS
– Short-term investments
– Fixed maturity funds
– U.S. treasuries
– Other government bonds
– U.S. municipal bonds
– U.S. government agency debt
– Asset backed securities
– U.S. government agency mortgage backed securities
– Non-agency mortgage backed securities
– Non-agency commercial mortgage backed securities
– Bank loans
– Corporate bonds
Total fixed maturity securities – AFS
Fixed maturity securities – at FVTPL
Equity securities – AFS
Hedge funds – at FVTPL
Total investments
Cost or
amortised cost
$m
Unrealised
gains
$m
Unrealised
losses
$m
Estimated
fair value
$m
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
1,792.0
–
–
0.2
0.3
0.2
–
0.1
1.7
0.3
0.1
0.2
1.4
4.5
–
1.6
5.3
11.4
–
(2.5)
(1.8)
(4.9)
–
–
(1.4)
(1.9)
(0.6)
(0.1)
(5.1)
(7.0)
(25.3)
(0.1)
(1.8)
(2.9)
(30.1)
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
2015
$m
6.1
(27.1)
10.4
0.1
(10.5)
Accumulated other comprehensive loss is in relation to the Group’s AFS fixed maturity and equity securities and is as follows:
Unrealised gains
Unrealised losses
Net unrealised foreign exchange losses on fixed maturity securities – AFS
Tax provision
Accumulated other comprehensive loss
2016
$m
5.3
(14.3)
2.5
0.1
(6.4)
Fixed maturity securities are presented in the risk disclosures section on page 122. Refer to note 17 for the investment balances in trusts in
favour of ceding companies and on deposit as collateral.
The Group determines the estimated fair value of each individual security utilising the highest level inputs available. Prices for the Group’s
investment portfolio are provided by a third-party investment accounting firm whose pricing processes and the controls thereon are subject
to an annual audit on both the operation and the effectiveness of those controls. The audit reports are available to clients of the firm and the
report is reviewed annually by management. In accordance with their pricing policy, various recognised reputable pricing sources are used
including broker-dealers and pricing vendors. The pricing sources use bid prices where available, otherwise indicative prices are quoted
based on observable market trade data. The prices provided are compared to the investment managers’ pricing. The Group has not made any
adjustments to any pricing provided by independent pricing services or its third-party investment managers for either year ending 31 December.
The fair value of securities in the Group’s investment portfolio is estimated using the following techniques:
LEVEL (I)
Level (i) investments are securities with quoted prices in active markets. A financial instrument is regarded as quoted in an active market if
quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and
those prices represent actual and regularly occurring market transactions on an arm’s length basis. The Group determines securities classified
as Level (i) to include highly liquid U.S. treasuries, certain highly liquid short-term investments and quoted equity securities.
138
Lancashire Holdings Limited | Annual Report & Accounts 2016
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 maturity 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;
• Non-agency commercial mortgage backed securities;
• Bank loans;
• Corporate bonds; and
• OTC derivatives, such as options, forward foreign exchange contracts, interest rate swaps and credit default swaps.
www.lancashiregroup.com
139
FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
10. INVESTMENTS CONTINUED
LEVEL (III)
Level (iii) investments are securities for which valuation techniques are not based on observable market data. The Group classifies hedge
funds as Level (iii) assets as the valuation technique incorporates both observable and unobservable inputs.
The estimated fair values of the Group’s hedge funds are determined using a combination of the most recent NAVs provided by each fund’s
independent administrator and the estimated performance provided by each hedge fund manager. Independent administrators provide
monthly reported NAVs with up to a one-month delay in valuation. The most recent NAV available for each hedge fund is adjusted for the
estimated performance, as provided by the fund manager, between the NAV date and the reporting date. 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 2016
Fixed maturity securities – AFS
– Short-term investments
– Fixed maturity funds
– U.S. treasuries
– Other government bonds
– U.S. municipal bonds
– U.S. government agency debt
– Asset backed securities
– U.S. government agency mortgage backed securities
– Non-agency mortgage backed securities
– Non-agency commercial mortgage backed securities
– Bank loans
– Corporate bonds
Total fixed maturity securities – AFS
Fixed maturity securities – at FVTPL
Equity securities – AFS
Hedge funds – at FVTPL
Total investments
Level (i)
$m
Level (ii)
$m
Level (iii)
$m
Total
$m
4.0
–
305.5
–
–
–
–
–
–
–
–
–
309.5
–
21.2
–
330.7
1.3
14.5
–
66.6
1.1
81.9
110.2
118.3
14.3
9.6
121.6
597.3
1,136.7
51.6
–
–
1,188.3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
129.4
129.4
5.3
14.5
305.5
66.6
1.1
81.9
110.2
118.3
14.3
9.6
121.6
597.3
1,446.2
51.6
21.2
129.4
1,648.4
140
Lancashire Holdings Limited | Annual Report & Accounts 2016
As at 31 December 2015
Fixed maturity securities – AFS
– Short-term investments
– Fixed maturity funds
– U.S. treasuries
– Other government bonds
– U.S. municipal bonds
– U.S. government agency debt
– Asset backed securities
– U.S. government agency mortgage backed securities
– Non-agency mortgage backed securities
– Non-agency commercial mortgage backed securities
– Bank loans
– Corporate bonds
Total fixed maturity securities – AFS
Fixed maturity securities – at FVTPL
Equity securities – AFS
Hedge funds – at FVTPL
Total investments
Level (i)
$m
Level (ii)
$m
Level (iii)
$m
Total
$m
10.9
–
393.3
–
–
–
–
–
–
–
–
–
404.2
–
15.6
–
419.8
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
–
–
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
Hedge funds
$m
152.1
18.1
(12.9)
(1.3)
156.0
(30.3)
3.7
129.4
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 2014
Purchases
Sales
Total net realised and unrealised losses recognised in profit or loss
As at 31 December 2015
Sales
Total net realised and unrealised gains recognised in profit or loss
As at 31 December 2016
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 2016, the Group’s total interest
in unconsolidated structured entities was $431.5 million (31 December 2015 – $511.8 million). The Group does not sponsor any of the
unconsolidated structured entities.
www.lancashiregroup.com
141
FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
11. INTERESTS IN STRUCTURED ENTITIES CONTINUED
A summary of the Group’s interest in unconsolidated structured entities is as follows:
As at 31 December 2016
Fixed maturity securities
– Asset backed securities
– U.S. government agency mortgage backed securities
– Non-agency mortgage backed securities
– Non-agency commercial mortgage backed securities
Total fixed maturity securities
Investment funds
– Hedge funds
Total investment funds
Specialised investment vehicles
– KHL (see note 15)
Total
As at 31 December 2015
Fixed maturity securities
– Asset backed securities
– U.S. government agency mortgage backed securities
– Non-agency mortgage backed securities
– Non-agency commercial mortgage backed securities
Total fixed maturity securities
Investment funds
– Hedge funds
Total investment funds
Specialised investment vehicles
– KHL (see note 15)
Total
Investments
$m
Interest in
associate
$m
110.2
118.3
14.3
9.6
252.4
129.4
129.4
–
381.8
–
–
–
–
–
–
–
49.7
49.7
Investments
$m
Interest in
associate
$m
113.9
143.8
21.8
28.8
308.3
156.0
156.0
–
464.3
–
–
–
–
–
–
–
47.5
47.5
Total
$m
110.2
118.3
14.3
9.6
252.4
129.4
129.4
49.7
431.5
Total
$m
113.9
143.8
21.8
28.8
308.3
156.0
156.0
47.5
511.8
The fixed maturity structured entities are created to meet specific investment needs of borrowers and investors which cannot be met from
standardised financial instruments available in the capital markets. As such, they provide liquidity to the borrowers in these markets and
provide investors with an opportunity to diversify risk away from standard fixed maturity securities. Whilst individual securities may differ
in structure, the principles of the instruments are broadly the same and it is appropriate to aggregate the investments into the categories
detailed above.
The risk that the Group faces in respect of the investments in structured entities is similar to the risk it faces in respect of other financial
investments held on the consolidated balance sheet in that fair value is determined by market supply and demand. This is in turn driven by
investor evaluation of the credit risk of the structure and changes in term structure of interest rates which change investors’ expectation of the
cash flows associated with the instrument and, therefore, its value in the market. Risk management disclosure for these financial instruments
and other investments is provided on pages 112 to 124. 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 2016 and 31 December 2015. 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.
142
Lancashire Holdings Limited | Annual Report & Accounts 2016
As at 31 December 2016 the Group has a commitment of $50.0 million (31 December 2015 – $50.0 million) 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 2016 is $37.5 million (31 December 2015 – $14.3 million), which currently remains unfunded. The maximum
exposure to the credit facility fund is $50.0 million and as at 31 December 2016 there have been no defaults under this facility.
12. 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
Net incurred losses for:
Prior years
Current year
Exchange adjustments
Incurred losses and loss adjustment expenses
Net paid losses for:
Prior years
Current year
Paid losses and loss adjustment expenses
As at 31 December 2016
Losses and
loss adjustment
expenses
$m
752.6
Reinsurance
recoveries
$m
(112.4)
Net losses and
loss adjustment
expenses
$m
640.2
(101.4)
278.9
4.9
182.4
210.0
54.0
264.0
671.0
(89.7)
301.9
(3.8)
208.4
139.4
60.2
199.6
679.8
(6.3)
(15.5)
0.8
(21.0)
(40.7)
(8.8)
(49.5)
(83.9)
3.9
(73.6)
1.4
(68.3)
(8.0)
(7.5)
(15.5)
(136.7)
(107.7)
263.4
5.7
161.4
169.3
45.2
214.5
587.1
(85.8)
228.3
(2.4)
140.1
131.4
52.7
184.1
543.1
Further information on the calculation of loss reserves and the risks associated with them is provided in the risk disclosures section from page
109. 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 $136.0 million (2015 – $134.2 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
2016
2015
$m
328.1
144.5
207.2
679.8
%
48.3
21.3
30.4
100.0
$m
286.0
162.1
222.9
671.0
%
42.6
24.2
33.2
100.0
The Group’s reserve for unpaid losses and loss adjustment expenses as at 31 December 2016 and 2015 had an estimated duration of
approximately two years.
www.lancashiregroup.com
143
FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
12. 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
At end of accident year
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
2006
and prior
$m
2007
$m
2008
$m
2009
$m
2010
$m
2011
$m
2012
$m
2013
$m
2014
$m
2015
$m
2016
$m
Total
$m
298.5
276.0
214.6
274.8
226.7
206.0
280.0
259.8
224.0
224.4
250.3
350.4
338.8
326.9
313.3
397.0
371.9
447.0
450.4
460.0
450.7
297.4
209.4
204.2
235.8
229.4
231.4
229.8
163.3
107.8
73.1
66.0
89.1
81.7
72.9
90.8
444.6
417.4
377.5
345.1
340.8
355.6
350.9
353.6
352.5
154.8
131.2
103.5
94.8
83.5
81.0
87.6
87.8
86.6
87.3
39.1
34.7
32.0
27.6
27.2
24.4
24.0
60.6
58.6
56.5
55.1
Current estimate of cumulative
liability
Paid
Total Group gross liability
55.1
(31.1)
24.0
87.3
352.5
(81.6) (340.7)
11.8
5.7
(1) Adjusted for revaluation of foreign currencies at the exchange rate as at 31 December 2016.
450.7
229.8
90.8
214.6
313.3
(60.8) (211.0) (349.0) (257.5) (185.1) (158.6) (107.6)
107.0
55.8
30.0
224.4
206.0
101.7
18.8
39.3
47.4
298.5
(60.2)
238.3
2,523.0
(1,843.2)
679.8
Accident year
Reinsurance
Estimate of ultimate recovery1
At end of accident year
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Current estimate of cumulative
recovery
Paid
Total Group gross recovery
2006
and prior
$m
–
–
–
–
–
–
–
25.1
25.1
24.7
23.7
2007
$m
2008
$m
2009
$m
2010
$m
2011
$m
2012
$m
2013
$m
2014
$m
2015
$m
2016
$m
Total
$m
73.1
15.3
12.2
17.8
14.1
13.1
9.9
8.9
8.8
8.0
48.9
121.8
122.0
121.2
121.2
56.2
52.6
92.4
88.9
103.3
102.8
33.8
23.6
24.1
33.5
34.4
34.6
35.7
1.6
1.3
0.7
0.7
10.0
7.0
2.5
2.5
40.7
47.1
43.1
40.9
38.1
40.7
39.8
40.4
40.9
3.6
6.2
4.0
3.5
3.3
3.1
4.0
4.1
4.1
4.1
23.7
(3.2)
20.5
4.1
(3.7)
0.4
40.9
(39.1)
1.8
2.5
(0.2)
2.3
35.7
(33.0)
2.7
102.8
121.2
(73.0) (116.4)
4.8
29.8
8.0
(6.9)
1.1
13.1
(7.9)
5.2
12.2
(9.7)
2.5
73.1
(7.5)
65.6
437.3
(300.6)
136.7
(1) Adjusted for revaluation of foreign currencies at the exchange rate as at 31 December 2016.
144
Lancashire Holdings Limited | Annual Report & Accounts 2016
Accident year
Net Group losses
Estimate of ultimate liability1
At end of accident year
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
2006
and prior
$m
2007
$m
2008
$m
2009
$m
2010
$m
2011
$m
2012
$m
2013
$m
2014
$m
2015
$m
2016
$m
Total
$m
225.4
260.7
202.4
257.0
212.6
192.9
270.1
250.9
215.2
216.4
201.4
228.6
216.8
205.7
192.1
340.8
319.3
354.6
361.5
356.7
347.9
263.6
185.8
180.1
202.3
195.0
196.8
194.1
161.7
106.5
72.4
65.3
79.1
74.7
70.4
88.3
403.9
370.3
334.4
304.2
302.7
314.9
311.1
313.2
311.6
151.2
125.0
99.5
91.3
80.2
77.9
83.6
83.7
82.5
83.2
39.1
34.7
32.0
27.6
27.2
24.4
24.0
35.5
33.5
31.8
31.4
Current estimate of cumulative
liability
Paid
Total Group net liability
31.4
(27.9)
3.5
83.2
311.6
(77.9) (301.6)
10.0
5.3
(1) Adjusted for revaluation of foreign currencies at the exchange rate as at 31 December 2016.
194.1
347.9
88.3
192.9
(60.6) (178.0) (276.0) (141.1) (178.2) (150.7)
42.2
27.7
216.4
192.1
71.9
38.2
51.0
16.1
202.4
(97.9)
104.5
225.4
(52.7)
172.7
2,085.7
(1,542.6)
543.1
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
2015 accident year
Total favourable development
2016
$m
0.3
(0.7)
1.6
(18.0)
3.2
9.9
13.5
(1.6)
19.9
57.7
85.8
2015
$m
1.6
1.1
(2.1)
4.1
(3.5)
17.1
10.8
35.4
43.2
–
107.7
Despite some adverse development on prior accident year marine and energy claims during the year ended 31 December 2016, the overall
favourable development was primarily due to general IBNR releases across most lines of business due to a lack of reported claims. Experience
during the year ended 31 December 2015 was similar in terms of releases, plus there was a further benefit of additional recoveries on the 2011
Thai flood losses.
13. INSURANCE, REINSURANCE AND OTHER RECEIVABLES
All receivables are considered current other than $58.4 million (31 December 2015 – $53.8 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.
www.lancashiregroup.com
145
FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
14. PROVISION FOR DEFERRED TAX
Equity based compensation
Claims equalisation reserves
Syndicate underwriting profits
Syndicate participation rights
Other temporary differences
Tax losses carried forward
Net deferred tax liability
2016
$m
(3.8)
8.1
2.7
12.8
(0.9)
(0.2)
18.7
2015
$m
(4.6)
14.6
3.3
13.6
0.6
(1.9)
25.6
Deferred tax assets are recognised to the extent that realising the related tax benefit through future taxable profits is likely. It is anticipated
that sufficient taxable profits will be available within the Group in 2017 and subsequent years to utilise the deferred tax assets recognised
when the underlying temporary differences reverse.
A deferred tax asset of $11.4 million (31 December 2015 – $14.1 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.
Changes to the UK main rate of corporation tax have been enacted under the Finance Act 2015 and Finance Act 2016 reducing the rate to
19 per cent from 1 April 2017 and to 17 per cent from 1 April 2020.
All deferred tax assets and liabilities are classified as non-current.
15. INVESTMENT IN ASSOCIATE
The Group holds a 10.0 per cent interest in the preference shares of each segregated account of KHL, a company incorporated in Bermuda.
KHL’s operating subsidiary, KRL, is authorised by the BMA as a Special Purpose Insurer. KRL commenced writing insurance business on
1 January 2014. As at 31 December 2016, the carrying value of the Group’s investment in KHL was $49.7 million (31 December 2015 –
$47.5 million). The Group’s share of comprehensive income for KHL for the period was $5.1 million (2015 – $4.1 million). Key financial
information for KHL is as follows:
Assets
Liabilities
Shareholders’ equity
Gross premium earned
Comprehensive income
2016
$m
506.5
9.2
497.3
54.2
51.1
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.
Refer to note 22 for details of transactions between the Group and its associate.
16. INTANGIBLE ASSETS
Net book value as at 31 December 2016 and 2015
Syndicate
participation
rights
$m
82.6
Goodwill
$m
71.2
Total
$m
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.
For the purpose of impairment testing, intangible assets are allocated to the Group’s CGUs, in accordance with the manner in which
management operates and monitors the business. The syndicate participation rights and goodwill have therefore been allocated to the
Lloyd’s CGU.
When testing for impairment, the recoverable amount of the Lloyd’s CGU is determined based on value in use. Value in use is calculated
using projected cash flows based on the financial projections of the CGU. These are approved by management and cover a three year period.
The most significant assumptions used to derive the projected cash flows include an assessment of business prospects, projected loss ratios,
outwards reinsurance expenditure and investment returns. A pre-tax discount rate of 6.9 per cent (31 December 2015 – 6.8 per cent) has been
used to discount the projected cash flows, which reflects a combination of factors including the Group’s expected cost of equity and cost of
146
Lancashire Holdings Limited | Annual Report & Accounts 2016
borrowing. The growth rate used to extrapolate the cash flows of the unit beyond the three-year period is 3.0 per cent (2015 – 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 years ended 31 December 2016 and 2015.
17. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
LONG-TERM DEBT
On 5 October 2012, the Group issued $130.0 million 5.70 per cent senior unsecured notes due 2022 pursuant to a private offering to U.S.
Qualified Institutional Buyers. Interest on the principal is payable semi-annually. The notes were listed and admitted to trading on the LSE
on 16 October 2012.
On 15 December 2005, the Group issued $97.0 million and €24.0 million in aggregate principal amount of floating rate subordinated
loan notes. The U.S. dollar subordinated loan notes are repayable on 15 December 2035. Interest on the principal is based on a set margin,
3.70 per cent, above the three-month LIBOR 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 the three-month EURIBOR;
• $10.0 million floating rate subordinated note loan issued on 26 November 2004 and repayable in September 2034, paying interest quarterly
based on a set margin, 3.75 per cent, above the three-month LIBOR;
• $25.0 million floating rate subordinated loan note issued on 13 May 2005 and repayable in June 2035, paying interest quarterly based on a
set margin, 3.25 per cent, above the three-month LIBOR; and
• $25.0 million floating rate subordinated loan note issued on 18 November 2005 and repayable in December 2035, paying interest quarterly
based on a set margin, 3.25 per cent, above the three-month LIBOR.
The Group has the option to redeem its senior unsecured notes and all of its subordinated loan notes, in whole or in part, prior to the
respective maturity dates.
The terms of the $130.0 million senior unsecured notes include standard default and cross-default provisions which require certain covenants
to be adhered to. These include the following:
• a maximum debt to capital ratio of 30.0 per cent, where the subordinated loan notes are included as both total consolidated debt and total
consolidated capital in this calculation.
There are no such covenants for either the $97.0 million and €24.0 million in aggregate floating rate subordinated loan notes or the loan note
issued by CCHL.
As at all reporting dates the Group was in compliance with all covenants under these facilities.
The carrying values of the notes are shown below:
As at 31 December
Long-term debt $130.0 million
Long-term debt $97.0 million
Long-term debt €24.0 million
Long-term debt €12.0 million
Long-term debt $10.0 million
Long-term debt $25.0 million
Long-term debt $25.0 million
Carrying value
2016
$m
130.0
97.0
25.3
11.2
10.0
23.7
23.7
320.9
2015
$m
130.0
97.0
26.2
11.7
10.0
23.7
23.7
322.3
The Group is exposed to cash flow interest rate risk and currency risk on its long-term debt. Further information is provided in the risk
disclosures section on page 119.
www.lancashiregroup.com
147
FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
17. LONG-TERM DEBT AND FINANCING ARRANGEMENTS CONTINUED
The fair value of the long-term debt is estimated as $354.8 million (31 December 2015 – $328.8 million). The fair value measurement is
classified within Level (ii) of the fair value hierarchy. The fair value is estimated by reference to similar financial instruments quoted in
active markets.
The interest accrued on the long-term debt was $2.0 million (31 December 2015 – $2.2 million) at the balance sheet date and is included in
other payables.
Refer to note 7 for details of the interest expense for the year included in financing costs.
INTEREST RATE SWAPS
The Group hedges a portion of its floating rate borrowings using interest rate swaps to transfer floating to fixed rate. These instruments are
held at estimated fair value. Refer to the risk disclosures section from page 118 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 $3.7 million liability (31 December 2015 – $4.8 million liability).
Further information is provided on pages 116 and 118. Cash settlements are completed on a quarterly basis and the total of the next cash
settlements in the first quarter of 2017 on these instruments is $0.5 million. The net impact from cash settlements and changes in estimated
fair value are included in financing costs.
The interest rate swaps are held at estimated fair value, priced using observable market inputs, and are therefore classified as Level (ii)
securities in the fair value hierarchy.
Refer to note 7 for the net impact from cash settlement and changes in estimated fair value included in financing costs.
LETTERS OF CREDIT
As both LICL and LUK are non-admitted insurers or reinsurers throughout the U.S., the terms of certain contracts require them to provide
LOCs to policyholders as collateral. The following LOCs have been issued:
As at 31 December
Issued to third parties
LOCs are required to be fully collateralised.
LHL and LICL had the following facilities in place:
2016
$m
29.4
2015
$m
44.5
• a $300.0 million syndicated collateralised credit facility with a $75.0 million loan sub-limit that has been in place since 24 March 2016 and
will expire on 24 March 2021. There was no outstanding debt under this facility as at 31 December 2016; and
• a $350.0 million syndicated collateralised credit facility with a $75.0 million loan sub-limit that had been in place since 5 April 2012 and was
replaced on 24 March 2016 by the $300.0 million syndicated collateralised credit facility. There was no outstanding debt under this facility as
at 31 December 2015.
The existing facility is available for the issue of LOCs to ceding companies. The facility is also available for LICL to issue LOCs to LUK to
collateralise certain insurance balances.
The terms of the $300.0 million syndicated collateralised credit facility include standard default and cross-default provisions that are broadly
consistent with the previous facility, which require certain covenants to be adhered to. These include the following:
• an A.M. Best financial strength rating of at least B++;
• a maximum debt to capital ratio of 30.0 per cent, where the subordinated loan notes are excluded from this calculation;
• a maximum indebtedness regarding the subordinated loan notes of $250.0 million; and
• a maximum indebtedness regarding the Syndicate 2010 and 3010 catastrophe facilities of $150.0 million.
As at all reporting dates the Group was in compliance with all covenants under these facilities.
148
Lancashire Holdings Limited | Annual Report & Accounts 2016
SYNDICATE BANK FACILITIES
As at 31 December 2016 and 2015, 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 2016 and 2015, 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. This facility was not renewed for the
2017 year.
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. For 2017, this facility is in place for Syndicate 2010 only, providing in aggregate up to $80.0 million
with a total of $40.0 million available by way of LOCs and $40.0 million by way of RCFs.
There are no balances outstanding under either of the Syndicate bank facilities as at 31 December 2016 or 2015. 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 2016 and 2015, LICL had been granted authorised or trusteed reinsurer status in all states. The MBRT is subject to the
rules and regulations of the aforementioned states and the respective deeds of trust. These rules and regulations include minimum capital
funding requirements, investment guidelines, capital distribution restrictions and regulatory reporting requirements.
As at and for the years ended 31 December 2016 and 2015, the Group was in compliance with all covenants under its trust facilities.
The Group is required to hold a portion of its assets as FAL to support the underwriting capacities of Syndicate 2010 and Syndicate 3010. FAL
are restricted in their use and are only drawn down to pay cash calls to Syndicates supported by the Group. FAL requirements are formally
assessed twice a year and any funds surplus to requirements may be released at that time. See page 128 for more information regarding
FAL requirements.
In addition to the FAL, certain cash and investments held by Syndicate 2010 and Syndicate 3010 are only available for paying the Syndicates’
claims and expenses. See page 128 for more information regarding capital requirements for Syndicate 2010 and Syndicate 3010.
The following cash and cash equivalents and investment balances were held in trust, other collateral accounts in favour of third parties, or are
otherwise restricted:
As at 31 December
MBRT accounts
In trust accounts for policyholders
In favour of LOCs
In favour of derivative contracts
FAL
Syndicate accounts
Total
Cash and cash
equivalents
$m
5.6
3.7
6.2
3.8
13.5
26.8
59.6
2016
Fixed maturity
securities
$m
35.1
21.4
29.4
0.3
254.1
75.9
416.2
Equity
securities
$m
–
–
–
–
1.4
–
1.4
Cash and cash
equivalents
$m
0.6
0.9
7.4
6.0
11.3
9.4
35.6
2015
Fixed maturity
securities
$m
31.3
21.7
43.4
0.3
201.4
85.8
383.9
Equity
securities
$m
–
–
–
–
15.6
–
15.6
www.lancashiregroup.com
149
FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
18. SHARE CAPITAL
Authorised ordinary shares of $0.50 each
As at 31 December 2016 and 2015
Allocated, called up and fully paid
As at 31 December 2014
Shares issued
As at 31 December 2016 and 2015
Number
3,000,000,000
Number
192,112,598
9,229,320
201,341,918
The new common shares issued during 2015 were to satisfy the exercises of warrants and to fund future RSS exercises.
Own shares
As at 31 December 2014
Shares distributed
Shares purchased by trust
As at 31 December 2015
Shares distributed
Shares donated to trust
As at 31 December 2016
Number held
in treasury
2,950,947
(1,109,421)
–
1,841,526
–
(426,468)
1,415,058
$m
27.8
(9.7)
–
18.1
–
(4.1)
14.0
Number held
in trust
1,657,069
(1,354,535)
1,000,000
1,302,534
(680,033)
426,468
1,048,969
$m
15.5
(12.5)
9.3
12.3
(6.6)
3.5
9.2
Total number
of own shares
4,608,016
(2,463,956)
1,000,000
3,144,060
(680,033)
–
2,464,027
$m
1,500
$m
96.1
4.6
100.7
$m
43.3
(22.2)
9.3
30.4
(6.6)
(0.6)
23.2
The number of common shares in issue with voting rights (allocated share capital less shares held in treasury) as at 31 December 2016 was
199,926,860 (31 December 2015 – 199,500,392).
SHARE REPURCHASES
At the AGM held on 4 May 2016, LHL’s shareholders approved a renewal of the Repurchase Programme authorising the repurchase of a
maximum of 20,134,191 shares, with such authority to expire on the conclusion of the 2017 AGM or, if earlier, 15 months from the date the
resolution approving the Repurchase Programme was passed.
During the year ended 31 December 2016, 426,468 shares (2015 – nil shares) were donated to the EBT at a market value of $3.5 million.
In 2016, the trustees of the EBT acquired nil shares (2015 – 1,000,000) in accordance with the terms of the trust and distributed 680,033
(2015 – 1,354,535). 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
Interim
Special
Per share amount
$0.10
$0.50
$0.05
$0.95
$0.10
$0.05
$0.75
Record date
20 Mar 2015
20 Mar 2015
28 Aug 2015
27 Nov 2015
26 Feb 2016
5 Aug 2016
18 Nov 2016
Payment date
15 Apr 2015
15 Apr 2015
25 Sep 2015
18 Dec 2015
23 Mar 2016
31 Aug 2016
14 Dec 2016
$m
19.8
99.2
9.9
188.6
19.8
10.0
149.1
150
Lancashire Holdings Limited | Annual Report & Accounts 2016
19. OTHER RESERVES
Other reserves consist of the following:
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
Shares donated to the trust
Distributed by trust
Equity based compensation – exercises
Equity based compensation – expense
As at 31 December 2016
Contributed
surplus
$m
838.4
8.8
(17.2)
(4.2)
–
13.8
–
839.6
(0.6)
(9.5)
10.0
–
839.5
Equity based
compensation
$m
48.7
–
–
(9.6)
0.1
(13.8)
15.8
41.2
–
–
(10.0)
10.9
42.1
Total other
reserves
$m
887.1
8.8
(17.2)
(13.8)
0.1
–
15.8
880.8
(0.6)
(9.5)
–
10.9
881.6
Equity based compensation reserves represent the fair value, at the grant date, of all outstanding RSS options and management team ordinary
and performance warrants, adjusted for any applicable performance conditions.
During the year ended 31 December 2015 all of the remaining Founder warrants were exercised and amounted to $39.4 million. The
remaining number of warrants were exercised at a weighted average share price at date of exercise during 2015 of $9.98 as follows:
Exercised
Number of
Founder warrants
15,032,679
Number of
Lancashire
Foundation
warrants
648,143
Number of
ordinary
warrants
2,350,000
www.lancashiregroup.com
151
FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
20. COMMITMENTS AND CONTINGENCIES
A. LEASE COMMITMENTS
The Group has payment obligations in respect of operating leases for certain items of office equipment and office space. Operating lease
expenses for the year were $2.3 million (2015 – $3.4 million).
Future minimum lease payments under non-cancellable operating leases are as follows:
Due in less than one year
Due between one and five years
Due in more than five years
Total
2016
$m
3.0
10.2
28.1
41.3
2015
$m
1.1
12.7
36.6
50.4
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 2016 the Group has a commitment of $50.0 million (31 December 2015 – $50.0 million) relating to a credit facility fund
(refer to note 11).
C. LEGAL PROCEEDINGS AND REGULATIONS
The Group operates in the insurance industry and is subject to legal proceedings in the normal course of business. While it is not practicable
to estimate or determine the final results of all pending or threatened legal proceedings, management does not believe that such proceedings
(including litigation) will have a material effect on its results and financial position.
21. 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
2016
$m
153.8
2015
$m
181.1
Basic weighted average number of shares
Dilutive effect of RSS
Diluted weighted average number of shares
Earnings per share
Basic
Diluted
2016
Number
of shares
2015
Number
of shares
198,565,378 195,649,042
2,982,711
201,466,427 198,631,753
2,901,049
2016
$0.77
$0.76
2015
$0.93
$0.91
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.
152
Lancashire Holdings Limited | Annual Report & Accounts 2016
22. RELATED PARTY DISCLOSURES
The consolidated financial statements include LHL and the entities listed below:
Name
Subsidiaries1
LICL
KCML2
KCMMSL
LIHL
LIMSL
LISL
LUK
LMSCL
CCHL
CCL
CCL 1998
CCL 1999
CCSL
CUL
Associate
KHL
Other controlled entities
LHFT
EBT
Principal Business
Domicile
General insurance business
Insurance management services
Support services
Holding company
Insurance mediation activities
Support services
General insurance business
Support services
Investment company
Holding company
Lloyd’s corporate member
Non trading
Support services
Lloyd’s managing agent
Holding company
Trust
Trust
Bermuda
Bermuda
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Canada
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Bermuda
United States
Jersey
(1) Unless otherwise stated, the Group owns 100 per cent of the ordinary share capital and voting rights in its subsidiaries listed below.
(2) 92.68 per cent owned by the Group.
The Group has issued subordinated loan notes via a trust vehicle – LHFT, refer to note 17. The Group effectively has 100.0 per cent of the
voting rights in LHFT. These rights are subject to the property trustee’s obligations to seek the approval of the holders of LHFT’s preferred
securities in case of default and other limited circumstances where the property trustee would enforce its rights. While the ability of the Group
to influence the actions of LHFT is limited by the trust agreement, LHFT was set up by the Group with the sole purpose of issuing the
subordinated loan notes, and is in essence controlled by the Group, and is therefore consolidated.
The EBT was established to assist in the administration of the Group’s employee equity based compensation schemes. While the Group does
not have legal ownership of the EBT and the ability of the Group to influence the actions of the EBT is limited by the trust deed, the EBT was
set up by the Group with the sole purpose of assisting in the administration of these schemes, and is in essence controlled by the Group, and
is therefore consolidated.
The Group has a Loan Facility Agreement (the ‘Facility’) with RBC Cees Trustee Limited, the trustee of the EBT. The Facility is an interest free
revolving credit facility under which the trustee can request advances on demand, within the terms of the Facility, up to a maximum aggregate
amount of $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 2016, the Group had made advances of $nil (2015 – $9.0 million) to the EBT under the terms of the Facility.
During the year ended 31 December 2016, the Group donated 426,468 treasury shares to the EBT at the prevailing market rate. The total
value of the treasury share donation was $3.5 million. 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.
www.lancashiregroup.com
153
FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS CONTINUED
22. RELATED PARTY DISCLOSURES CONTINUED
LICL holds $290.8 million (31 December 2015 – $308.1 million) of cash and cash equivalents, fixed maturity securities and accrued interest in
trust for the benefit of LUK relating to intra-group reinsurance agreements. LICL is required to provide 85.0 per cent of the required FAL to
support the underwriting activities of Syndicate 2010 and 3010 and holds $230.0 million (31 December 2015 – $182.9 million) of cash and
cash equivalents and fixed maturity securities in FAL in relation to intra-group reinsurance agreements.
The senior management team shareholding in KCML 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. During the year ended 31 December 2016 dividends of $0.5 million
(31 December 2015 – $0.6 million) were paid to minority interest holders.
As at 31 December 2016 and 2015, Mr Alex Maloney, a director of LHL, had a 1.156 per cent interest in KCML. During the year ended
31 December 2016 Mr Maloney received a dividend of $0.1 million (31 December 2015 – $0.1 million) in relation to his interest in KCML.
Mr Maloney and his spouse, acquired 100.0 per cent of the shares in Nameco on 7 November 2016. Nameco provides capacity to a number of
Lloyd’s syndicates including Syndicate 2010 which is managed by CUL. Nameco has provided $0.2 million of capacity to Syndicate 2010 for the
2017 year of account. Mr Maloney receives a proportionate share of the underwriting results of Syndicate 2010 to which he is contractually
entitled through his participation.
KEY MANAGEMENT COMPENSATION
Remuneration for key management, the Group’s Executive and Non-Executive Directors, was as follows:
For the year ended 31 December
Short-term compensation
Equity based compensation
Directors’ fees and expenses
Total
2016
$m
3.2
3.3
2.2
8.7
2015
$m
4.1
3.3
1.9
9.3
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.
TRANSACTIONS WITH ASSOCIATE
In 2013, KCML entered into an underwriting services agreement with KRL and KHL to provide various services relating to underwriting,
actuarial, premium payments and relevant deductions, acquisition expenses and receipt of claims. For the year ended 31 December 2016, the
Group recognised $10.6 million (2015 – $12.9 million) of service fees and profit commissions in other income in relation to this agreement.
During 2016, the Group committed an additional $25.8 million (31 December 2015 – $23.5 million) of capital to KHL. During 2016, KHL
returned $28.7 million (31 December 2015 – $32.8 million) of capital to the Group.
Refer to note 15 for further details on the Group’s investment in associate.
23. NON-CASH TRANSACTIONS
The Group did not engage in any non-cash transactions during 2016. During 2015, the Group issued new common shares to satisfy future
exercises of RSS in the amount of $4.6 million; refer to note 18 for further details.
24. SUBSEQUENT EVENTS
DIVIDEND
On 15 February 2017 the Board of Directors declared the payment of an ordinary dividend of $0.10 per common share to shareholders of
record on 24 February 2017, with a settlement date of 22 March 2017. 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.
154
Lancashire Holdings Limited | Annual Report & Accounts 2016
SHAREHOLDER INFORMATION
ANNUAL GENERAL MEETING
The Company’s AGM is scheduled for 3 May 2017. Notice of this
year’s AGM and the form of proxy accompany this Annual Report
and Accounts. If you have any queries regarding the notice or return
of the proxy please contact Chris Head, Company Secretary, at
Lancashire Holdings Limited, 29th Floor, 20 Fenchurch Street,
London EC3M 3BY, United Kingdom, Tel: + 44 (0) 20 7264 4000
and email: chris.head@lancashiregroup.com.
FURTHER INFORMATION
Lancashire Holdings Limited is registered in Bermuda under
company number EC 37415 and has its registered office at
Power House, 7 Par-la-Ville Road, Hamilton HM 11, Bermuda.
Further information about the Group including this Annual Report,
press releases and the Company’s share price is available on our
website at www.lancashiregroup.com. Please address any enquiries
to info@lancashiregroup.com.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this document include forward-looking
statements which reflect the Directors’ current views with respect
to financial performance, business strategy, plans and objectives of
management for future operations (including development plans
relating to the Group’s products and services). These statements
include forward-looking statements both with respect to the Group
and the sectors and industries in which the Group operates.
Statements containing the words ‘believes’, ‘anticipates’, ‘plans’,
‘projects’, ‘forecasts’, ‘guidance’, ‘intends’, ‘expects’, ‘estimates’,
‘predicts’, ‘may’, ‘can’, ‘likely’, ‘will’, ‘seeks’, ‘should’ or, in each
case, their negative or comparable terminology and similar
statements are of a future or forward-looking nature. All forward-
looking statements address matters that involve known and unknown
risks and uncertainties. Accordingly, there are or will be important
factors that could cause the actual results, performance or
achievements of the Group to be materially different from future
results, performance or achievements expressed or implied by such
forward-looking statements.
These factors include, but are not limited to: the 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 maturity investments; the impact
of swings in market interest rates, currency exchange rates and
securities prices; changes by central banks regarding the level
of interest rates; the impact of inflation or deflation in relevant
economies in which the Group operates; the effect, timing and other
uncertainties surrounding future business combinations within the
insurance and reinsurance industries; the impact of terrorist activity
in the countries in which the Group writes risks; a rating downgrade
of, or a market decline in, securities in its investment portfolio;
changes in governmental regulations or tax laws in jurisdictions
where the Group conducts business; Lancashire or its Bermudian
subsidiaries becoming subject to income taxes in the United States
or the Bermudian subsidiaries becoming subject to income taxes in
the United Kingdom; the inapplicability to the Group of suitable
exclusions from the UK CFC regime; any change in UK government
policy which impacts the CFC regime or other tax changes; and the
impact of the Brexit vote and future negotiations regarding the
UK’s relationship with the European Union in the recent in-or-out
referendum on the Group’s business, regulatory relationships,
underwriting platforms or the industry generally.
Any estimates relating to loss events involve the exercise of
considerable judgement and reflect a combination of ground-up
evaluations, information available to date from brokers and insureds,
market intelligence, initial and/or tentative loss reports and other
sources. Judgements in relation to loss arising from natural
catastrophe and man-made events are influenced by complex
factors. The Group cautions as to the preliminary nature of the
information used to prepare such estimates as subsequently available
information may contribute to an increase in these types of losses.
These forward-looking statements speak only as at the date of
this document. The Company expressly disclaims any obligation or
undertaking (save as required to comply with any legal or regulatory
obligations including the rules of the LSE) to disseminate any
updates or revisions to any forward-looking statement to reflect any
changes in the Group’s expectations or circumstances on which any
such statement is based. All subsequent written and oral forward-
looking statements attributable to the Group or individuals acting
on behalf of the Group are expressly qualified in their entirety by
this paragraph. Prospective investors should specifically consider
the factors identified in this document which could cause actual
results to differ before making an investment decision.
www.lancashiregroup.com
www.lancashiregroup.com 171
155
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
AGM
Annual General Meeting
AIM
A sub-market of the LSE
AIR
AIR Worldwide
A.M. BEST COMPANY (A.M. BEST)
A.M. Best is a full-service credit rating organisation dedicated
to serving the financial services industries, focusing on the
insurance sector
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
BSCR
Bermuda Solvency Capital Requirement
BSX
Bermuda Stock Exchange
CATHEDRAL; CATHEDRAL GROUP
Refers to CCL and all direct and indirect subsidiaries of CCL
CCHL
Cathedral Capital Holdings Limited
CCL
Cathedral Capital Limited
CCL 1998
Cathedral Capital (1998) Limited
172
156
Lancashire Holdings Limited | Annual Report & Accounts 2015
Lancashire Holdings Limited | Annual Report & Accounts 2016
CCL 1999
Cathedral Capital (1999) Limited
CCSL
Cathedral Capital Services Limited
CEDED
To transfer insurance risk from a direct insurer to a reinsurer and/or
from a reinsurer to a retrocessionaire
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
GLOSSARY
ABS
Asset backed securities
ACTIVE UNDERWRITER
AFS
Available for sale
AGGREGATE
of loss
AGM
AIM
AIR
Annual General Meeting
A sub-market of the LSE
AIR Worldwide
The individual at a Lloyd’s syndicate with principal authority to
Cathedral Capital Services Limited
accept insurance and reinsurance risk on behalf of the syndicate
ADDITIONAL CASE RESERVES (ACR)
To transfer insurance risk from a direct insurer to a reinsurer and/or
Additional reserves deemed necessary by management
from a reinsurer to a retrocessionaire
Confiscation, Expropriation, Nationalisation and Deprivation
Accumulations of insurance loss exposures which result from
Chief Executive Officer
underwriting multiple risks that are exposed to common causes
Cathedral Capital (1999) Limited
CCL 1999
CCSL
CEDED
CEND
CEO
CFC
CFO
CGU
CMBS
Controlled Foreign Company
Chief Financial Officer
Cash generating unit
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
THE CODE
COMBINED RATIO
UK Corporate Governance Code published by the UK FRC
Commercial mortgage backed securities
Bathwater aggregate model
BEST LANCASHIRE ASSESSMENT OF SOLVENCY OVER TIME (BLAST)
The Group’s economic internal capital model
Bermuda Monetary Authority
BOARD OF DIRECTORS
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
Unless otherwise stated refers to the LHL Board of Directors
shareholders’ equity and the statement of consolidated cash flows
BOOK VALUE PER SHARE (BVS)
COVERHOLDER AT LLOYD’S
Calculated by dividing the value of the total shareholders’ equity
A coverholder is a company or partnership authorised by a managing
by the sum of all common voting shares outstanding
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
Refers to CCL and all direct and indirect subsidiaries of CCL
Cayman Islands Stock Exchange
Chief Risk Officer
CRO
CSX
CUL
CUO
Cathedral Underwriting Limited
Chief Underwriting Officer
BAM
BMA
BSCR
BSX
CCHL
CCL
Bermuda Solvency Capital Requirement
Bermuda Stock Exchange
CATHEDRAL; CATHEDRAL GROUP
Cathedral Capital Holdings Limited
Cathedral Capital Limited
CCL 1998
Cathedral Capital (1998) Limited
DEFERRED ACQUISITION COSTS
Costs incurred for the acquisition or the renewal of insurance
policies (e.g. brokerage and premium taxes) which are deferred
and amortised over the term of the insurance contracts to which
they relate
DELEGATED AUTHORITIES
An arrangement under which a Managing Agent or (re)insurer
delegates its authority to another to enter into contracts of insurance
on their behalf.
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
DIRECTORS’ FEES AND EXPENSES
Unless otherwise stated includes fees and expenses of all Directors
across the Group
DURATION
Duration is the weighted average maturity of a security’s cash flows,
where the present values of the cash flows serve as the weights
The effect of the convexity, or sensitivity, of the portfolio’s response
to changes in interest rates is also factored in to the calculation
EARNINGS PER SHARE (EPS)
Calculated by dividing net profit for the year attributable to
shareholders by the weighted average number of common shares
outstanding during the year, excluding treasury shares and shares
held by the EBT
EBT
Lancashire Holdings Employee Benefit Trust
ECA
Economic Capital Assessment
EEA
European Economic Area
ERM
Enterprise Risk Management
EURIBOR
The Euro Interbank Offered Rate
EXCESS OF LOSS
Reinsurance or insurance that indemnifies the reinsured or insured
against all or a specified portion of losses on an underlying insurance
policy in excess of a specified amount
EXPENSE RATIO
Ratio, in per cent, of other operating expenses to net
premiums earned
EY
Ernst & Young LLP
FACULTATIVE REINSURANCE
A reinsurance risk that is placed by means of a separately negotiated
contract as opposed to one that is ceded under a reinsurance treaty
FAL
Funds at Lloyd’s
FCA
Financial Conduct Authority
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
GROSS PREMIUMS WRITTEN
Amounts payable by the insured, excluding any taxes or duties levied
on the premium, including any brokerage and commission deducted
by intermediaries
THE GROUP
LHL and its subsidiaries
ICM
International Care Ministries
IFRIC
International Financial Reporting Interpretations Committee
IFRS
International Financial Reporting Standard(s)
INCURRED BUT NOT REPORTED (IBNR)
These are anticipated or likely losses that may result from insured
events which have taken place, but for which no losses have yet been
reported. IBNR also includes a reserve for possible adverse
development of previously reported losses
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
172
Lancashire Holdings Limited | Annual Report & Accounts 2015
www.lancashiregroup.com
www.lancashiregroup.com
173
157
FINANCIAL STATEMENTS
GLOSSARY CONTINUED
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
LIHL
Lancashire Insurance Holdings (UK) Limited
LIMSL
Lancashire Insurance Marketing Services Limited
INTERNATIONAL ACCOUNTING STANDARD(S) (IAS)
Standards, created by the IASB, for the preparation and presentation
of financial statements
INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB)
An international panel of accounting experts responsible for
developing IAS and IFRS
IRR
Internal rate of return
IRRC
Investment Risk and Return Committee
ISA
International Standards on Auditing (UK and Ireland)
ISE
Irish Stock Exchange
KCML
Kinesis Capital Management Limited
KCMMSL
KCM Marketing Services Limited
KHL
Kinesis Holdings I Limited
KINESIS
The Group’s third-party capital management division encompassing
KCML, KCMMSL and the management of KHL and KRL
KPMG
KPMG LLP, a UK limited liability partnership
KRL (KINESIS RE)
Kinesis Reinsurance I Limited
LANCASHIRE COMPANIES
Refers to the Group excluding Cathedral and Kinesis
LANCASHIRE FOUNDATION OR FOUNDATION
The Lancashire Foundation is a charity registered in England
and Wales
LHFT
Lancashire Holdings Financing Trust I Limited
LISL
Lancashire Insurance Services Limited
LISTING RULES
The listing rules made by the FCA under part VI of FSMA
(as amended from time to time)
LLOYD’S
The Society of Lloyd’s
LMSCL
Lancashire Management Services (Canada) Limited
LOC
Letter of credit
LOSSES
Demand by an insured for indemnity under an insurance contract
LSE
London Stock Exchange
LUK
Lancashire Insurance Company (UK) Limited
M&A
Mergers and acquisitions
MBRT
Multi-beneficiary reinsurance trust
MBS
Mortgage backed securities
MOODY’S INVESTORS SERVICES (MOODY’S)
Moody’s Corporation is the parent company of Moody’s Investors
Service, which provides credit ratings and research covering debt
instruments and securities, and Moody’s Analytics, which offers
software, advisory services and research for credit and economic
analysis and financial risk management
MSF
Médecins Sans Frontières
NAMES
An individual member underwriting with unlimited liability.
Since 6 March 2003 no person has been admitted as a new member
to underwrite on an unlimited basis
LHL (THE COMPANY)
Lancashire Holdings Limited
LIBOR
London Interbank Offered Rate
NAMECO
Nameco (No. 801) Ltd
NAV
Net asset value
LICL
Lancashire Insurance Company Limited
NBS
New Bridge Street (a trading name of Aon Hewitt Limited)
174
158
Lancashire Holdings Limited | Annual Report & Accounts 2016
Lancashire Holdings Limited | Annual Report & Accounts 2016
GLOSSARY CONTINUED
INTERNAL AUDIT CHARTER
Is a formal written document that sets out the mission, scope,
Lancashire Insurance Holdings (UK) Limited
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
Lancashire Insurance Marketing Services Limited
LIHL
LIMSL
LISL
INTERNATIONAL ACCOUNTING STANDARD(S) (IAS)
Standards, created by the IASB, for the preparation and presentation
Lancashire Insurance Services Limited
of financial statements
INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB)
An international panel of accounting experts responsible for
developing IAS and IFRS
LISTING RULES
The listing rules made by the FCA under part VI of FSMA
(as amended from time to time)
International Standards on Auditing (UK and Ireland)
Demand by an insured for indemnity under an insurance contract
Lancashire Management Services (Canada) Limited
LLOYD’S
The Society of Lloyd’s
LMSCL
LOC
Letter of credit
LOSSES
London Stock Exchange
Lancashire Insurance Company (UK) Limited
Mergers and acquisitions
Multi-beneficiary reinsurance trust
LSE
LUK
M&A
MBRT
MBS
MSF
NAMES
NAMECO
Nameco (No. 801) Ltd
Net asset value
NAV
NBS
The Group’s third-party capital management division encompassing
KCML, KCMMSL and the management of KHL and KRL
Mortgage backed securities
KPMG LLP, a UK limited liability partnership
KRL (KINESIS RE)
Kinesis Reinsurance I Limited
LANCASHIRE COMPANIES
Refers to the Group excluding Cathedral and Kinesis
MOODY’S INVESTORS SERVICES (MOODY’S)
Moody’s Corporation is the parent company of Moody’s Investors
Service, which provides credit ratings and research covering debt
instruments and securities, and Moody’s Analytics, which offers
software, advisory services and research for credit and economic
analysis and financial risk management
LANCASHIRE FOUNDATION OR FOUNDATION
Médecins Sans Frontières
The Lancashire Foundation is a charity registered in England
Lancashire Holdings Financing Trust I Limited
to underwrite on an unlimited basis
An individual member underwriting with unlimited liability.
Since 6 March 2003 no person has been admitted as a new member
Lancashire Insurance Company Limited
New Bridge Street (a trading name of Aon Hewitt Limited)
Internal rate of return
Investment Risk and Return Committee
Irish Stock Exchange
Kinesis Capital Management Limited
KCM Marketing Services Limited
Kinesis Holdings I Limited
IRR
IRRC
ISA
ISE
KCML
KCMMSL
KHL
KINESIS
KPMG
and Wales
LHFT
LIBOR
LICL
LHL (THE COMPANY)
Lancashire Holdings Limited
London Interbank Offered Rate
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 after tax attributable to Lancashire excluding realised gains
and losses, net of impairments, foreign exchange gains and losses
and tax. Lancashire believes the reporting of net operating profit
available helps the understanding of results by highlighting the
underlying profitability of the Group’s core insurance and
reinsurance business
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
RISK FREE RATE OF RETURN (RFRoR)
Being the 13-week U.S. Treasury bill rate, unless otherwise stated
RSS
Restricted share scheme
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
S&P GLOBAL RATINGS (S&P)
S&P Global Ratings is a worldwide insurance rating and information
agency whose ratings are recognised as an ideal benchmark for
assessing the financial strength of insurance related organisations
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 Syndicate 3010
TOBA
Terms of business agreements
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
RMBS
Residential mortgage backed securities
UNL
Ultimate net loss
RMS
Risk Management Solutions
RPI
Renewal Price Index
RRC
Risk and Return Committee
RSC
Reinsurance Security Committee
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
174
Lancashire Holdings Limited | Annual Report & Accounts 2016
www.lancashiregroup.com
www.lancashiregroup.com
175
159
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
160
160
Lancashire Holdings Limited | Annual Report & Accounts 2016
Lancashire Holdings Limited | Annual Report & Accounts 2016
Visit our corporate website for more information:
http://www.lancashiregroup.com
This report is printed on Heaven 42 and Essential
Offset which have been independently certified by
the Forest Stewardship Council® and manufactured
using materials from sustainable sources.
The inks used are all vegetable oil based.
Designed and produced by Black Sun Plc.
Printed at Principal Colour Ltd. ISO 14001 certified,
Alcohol Free and FSC® Chain of Custody certified.
www.lancashiregroup.com