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8
Annual Report & Accounts 2018
This
is
who
we
are
We are a provider of global
specialty insurance and reinsurance
products operating in Bermuda
and London across three delivery
platforms: rated company, Lloyd’s
and collateralised security.
Our focus is on short-tail, specialty
(re)insurance risks within five general
segments: Property, Energy, Marine,
Aviation and Lloyd’s.
Strategic report
Overview
1
10 Chairman’s statement
Business model
12
Lancashire Group at a glance
Strategy
14 Chief Executive’s review
16
Strategy
Financial review
Key performance indicators
Performance
18
20
22 Underwriting review
Business review
26
Enterprise risk management
33
Principal risks
36
Engagement and sustainability
40
Governance
Chairman’s introduction
48
50
Board of Directors
52 Our Board’s focus
55 Corporate governance report
58 Committee reports
70 Directors’ Remuneration Report
90 Directors’ report
94
Statement of Directors’
responsibilities
Independent auditor’s report
Financial statements
95
100 Consolidated primary statements
104 Accounting policies
111 Risk disclosures
134 Notes to the accounts
Additional information
160 Shareholder information
162 Glossary
167 Alternative performance measures
168 Contact information
At Lancashire, we recognise the
value of hard work and that the
combined talents of our people are
critical to maximising risk-adjusted
returns across the cycle.
Working together and supporting
our policyholders is what ensures
that our three core businesses can
be more than the sum of their parts.
Return on equity
Combined ratio
Profit (Loss) after tax
2.4%
2017: -5.9%
92.2%
2017: 124.9%
$37.5m
2017: $-71.1m
Total investment
return
0.8%
2017: 2.5%
Dividend yield
4.5%
2017: 1.6%
Total shareholder
return
-12.7%
2017: 9.4%
1
Focused
Responsive
Nimble
2
Property
Energy
Marine
Aviation
Lloyd’s
3
Structured
to succeed
Cathedral
Cathedral gives the
Group access to Lloyd’s
through Cathedral’s
managed Syndicates
2010 and 3010.
The use of Lloyd’s
extensive network and
infrastructure offers
distribution advantages.
Long-standing client
relationships drive
good understanding
of underlying risks.
Kinesis
Kinesis focuses on
third-party funded,
fully collateralised
reinsurance across
different classes such
as property catastrophe,
aviation, marine, energy
and terror. It has the
ability to scale up
opportunistically based
on market dislocations,
delivering speed to
market advantage.
Lancashire
Traditional company
market rated (re)
insurers operating in
Bermuda and London.
Underwriting high
layers with higher
deductibles to
differentiate market
position and drive lower
attritional loss ratios.
A lower number of
large contracts and
single exposures afford
greater underwriting
control. A consistent
strategy and transparent
risk appetite make
Lancashire’s rated
(re)insurers important
underwriters for key
brokers in our area
of expertise.
4
Specialty
business lines
Gross premiums written by class
Property
33.6%
Marine
4.9%
Lloyd’s
40.2%
Lancashire covers
property catastrophe
excess of loss, terrorism,
property political risk,
property risk excess
of loss, property
retrocession and
other property.
Lancashire covers
marine hull and total
loss, marine builders’
risk, marine excess of
loss, marine P&I clubs,
marine hull war and
other marine.
Syndicates 2010 and
3010 cover property
reinsurance, property
direct and facultative,
aviation and satellite,
aviation deductible,
marine cargo, marine
hull, marine builders’
risk, power and utilities,
energy and terrorism.
Energy
16.1%
Aviation
5.2%
Lancashire covers AV52,
aviation deductible,
aviation satellite and
other aviation.
Lancashire covers
worldwide offshore
energy, Gulf of Mexico
offshore energy,
onshore energy,
energy liabilities,
construction energy
and other energy.
5
A single approach
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 profitability and risk selection. 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. Providing protection against
losses is the lifeblood of our business and the very reason our clients purchase
(re)insurance coverage to manage their own risk profile and protect their lives
and livelihoods, property and commercial interests.
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 risks 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.
Operate nimbly through the cycle
Our speed and agility in the way we manage volatility helps 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.
6
Dedicated team
One Group
We are one Group with three distinct (re)insurance platforms
working together to maximise potential in the world of specialist risk.
Our three platforms give the Lancashire Group more relevance in
the market place, more broker relationships, more cross-selling and
referral opportunities and more reinsurance purchasing power. Our collective
strengths enable us to seek out and drive better performance for our clients,
our employees and our investors.
Good communication
As one Group we value and nurture personal strengths but believe
we are better together than we are alone. We look to build lasting
relationships by listening and working with clients and colleagues to
deliver meaningful results. We believe in open and honest communication
whilst retaining the highest standards of professionalism and integrity.
Focused on quality
As one Group we seek to lead, not follow, on business and in day-to-day
interactions. In volatile and harsh conditions, we operate nimbly to maximise
returns for our shareholders. As new opportunities emerge in the future, our
focused books will give us the ability to capitalise on opportunities and deliver
our cross-cycle strategic goal of maximising risk-adjusted returns.
7
Diversified…
…across business sectors
A well-diversified portfolio across five core business segments as a base to trade across
the cycle.
Gross premiums written by class
Segments
Property
Energy
Marine
Aviation
Lloyd’s
33.6%
16.1%
4.9%
5.2%
40.2%
…across geographical regions
We write a geographically diverse portfolio in order to manage overall risk exposures.
Gross premiums written by region
Geo zones
U.S. and Canada
Worldwide, including the U.S. and Canada
Worldwide offshore
Europe
Far East
Worldwide, excluding the U.S. and Canada
Middle East
Rest of world
29.5%
20.3%
18.6%
8.0%
4.5%
2.1%
1.3%
15.7%
…asset allocation
We hedge our interest rate risk and aim to minimise the downside on our
investment portfolio.
Investment asset allocation
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
4.8%
12.9%
0.7%
14.4%
5.1%
4.9%
8.6%
29.9%
6.3%
2.6%
1.3%
8.5%
Total managed portfolio at 31 December 2018 $1,742.7m. Credit quality A+.
Duration
1.5 years
8
Returns across the cycle…
…producing a solid 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
over time.
Proven record of active capital management
)
m
$
(
500
400
300
200
100
0
2009
2010
Share repurchases
2011
2012
Special dividend
2013
2014
2015
Ordinary dividends
300
250
200
150
)
%
(
100
50
2016
Percentage of IPO capital returned
2018
2017
0
This
is
what
we
do
…maximising risk-adjusted returns
Our strategy is designed to cope with hard and soft markets, managing capital and
exposures to maximise risk-adjusted returns across the cycle.
Return on equity – our record over ten years
)
%
(
y
t
i
u
q
e
n
o
n
r
u
t
e
R
30
25
20
15
10
5
0
-5
-10
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
…with experienced underwriters producing higher returns
Group management and our underwriters have decades of experience in rated
companies, Lloyd’s and collateralised markets.
Combined ratio – our record over ten years
)
%
(
o
i
t
a
r
d
e
n
i
b
m
o
C
140
120
100
80
60
40
20
0
2009
2010
2011
2012
2013
2014
2015
Lancashire
Lancashire – 10-year average1
Sector2 average
2016
2017
Sector average – 10-year average1
2018
1. Ten-year average based on 2009 to 2018 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, Axis, Beazley, Everest, Hanover and Renaissance Re. The 2018 results
for Greenlight, Hiscox and Third Point Re is not available at the time of the report.
3. Source: Company Reports
9
www.lancashiregroup.com
Chairman’s statement
Peter Clarke
Non-Executive Chairman
How did the business perform
during 2018?
Lancashire has generated a return on
equity of 2.4 per cent for 2018, which, in
view of the challenging loss environment
for the second year in succession, reflects
the Group’s underwriting expertise and
effective capital and risk management.
The understanding and management
of risk are central to Lancashire’s nimble
business strategy. Lancashire’s longer-term
investors will appreciate that over the last
few years the (re)insurance sector had
witnessed an accumulation of capital
and (until 2017) a relative lull in major
catastrophe loss activity, which had tended
to depress pricing across many of the
Group’s catastrophe-exposed and specialty
product lines. In the face of this challenge,
the business had sought to de-risk, cutting
back on poorly priced business and
increasing its reinsurance protections.
2018 witnessed a steadying of market
conditions. In the Group’s specialty
and catastrophe lines it was reassuring to
see evidence of modest improvements in
premium rates and a return to underlying
top line growth, once premiums are
adjusted for the effects of multi-year
contracts and the inwards reinstatement
premiums resulting from the catastrophe
losses in 2017. However, 2018 was another
year marked by a relatively high frequency
of market loss events, the details of which
are addressed by Alex Maloney (see page
14) and Paul Gregory (see page 22). Once
again, Lancashire was able to meet the
(re)insurance needs of its clients within
a robust framework of risk tolerances.
From the perspective of the Board, we
were pleased that, within the context of a
still challenging (albeit improved) pricing
environment, and another year of notable
losses to the market, the Group was able
to generate a positive return and a
respectable combined ratio of 92.2 per
cent. Once again I would like to thank
Alex, his management team and all our
staff for their contributions and in showing
the required discipline and expertise
necessary for the achievement of a
solid result in 2018 in what has been
a challenging loss environment.
Please see my introduction to the
Governance section of this report on page
48 for an account of the work of the Board
and our governance arrangements for
the 2018 year.
How do you expect strategy
to develop in 2019?
I do not expect Lancashire’s strategic
priorities to change significantly in 2019.
We will continue to focus on underwriting
expertise and discipline, to effectively
balance the equation of risk and return,
and to operate nimbly through the cycle.
However, we do hope to see continued
improvement in general pricing and
conditions, in particular in the specialty
insurance lines which we underwrite, and
we are cautiously hopeful of achieving
managed organic growth in our specialty
lines during 2019. Alex discusses these
dynamics in greater detail in his review
on page 14. We will continue to monitor
the capital and human resources, the
management and culture necessary for the
business to develop these opportunities,
Lancashire Holdings Limited
Annual Report & Accounts 2018
10
Managing risk and opportunity across the cycle all within an appropriate framework of
risk management and tolerances. In his
comments on page 14, Alex notes the
Brexit planning, which has been carried
out in 2018, and the Board will monitor
developments during the coming year.
The Board has also decided to re-establish
the Group’s supervisory and tax domicile
in Bermuda, and there is more discussion
of this decision and the strategic
opportunities it presents on page 48.
For this reason the Company’s 2019
AGM will be held in Bermuda, with a live
shareholder video link from our London
office. Details are set out in the Notice of
the AGM.
What are the reasonable
cross-cycle return expectations
for Lancashire’s investors?
As a Board we have debated how best
to articulate the cross-cycle return target
in a way that is helpful to investors and
realistic, given the combination in recent
years of the general trend towards lower
investment returns and the low ebb in the
insurance market pricing cycle in which we
have found ourselves. Because conditions
change over time, the Board does not
consider that an absolute cross-cycle target
is appropriate. Accordingly, you will see
in this Annual Report and Accounts that
we have stated our strategic aim as being
to maximise risk-adjusted total return
to shareholders over the long term. We do
not rule out the prospect of a return to the
higher returns seen in previous years, but
we do consider that the revised strategic
aim provides a more useful guide
for investors.
Has Lancashire’s dividend and capital
management strategy changed?
Our dividend and capital management
strategy has not changed, and although
returns for 2018 were modest, we were
pleased to be able to declare and pay a
special dividend of $0.20 per common
share in the final quarter of 2018 following
the wind season. When taken together
with the standard ordinary dividends,
the aggregate of all dividends for the 2018
year amounts to $0.35 per common share.
Lancashire’s nimble capital management
and dividend strategy is well understood by
our shareholders and the dividend policy
is set out on page 90 of this Annual Report
and Accounts.
As a business we carefully consider
the balance of risk and return when
setting our capital levels, using capital
for underwriting when the opportunity
presents itself and returning capital when
it is not needed. As we enter 2019, we
believe that our capital resources are
appropriate for the current market
opportunity, but the Board will continue
to adopt a flexible approach to capital
management. An important tool within
Lancashire’s active capital management
strategy is the flexibility afforded to us by
shareholders during the last seven years
to issue up to 15 per cent of Lancashire’s
shares on a non pre-emptive basis. As
I have noted in previous years, the best
opportunities in the insurance and
reinsurance sectors typically arise following
major loss events, and the flexibility to
issue shares and raise capital quickly is
a central pillar of our business strategy
and will help the Group maximise
underwriting opportunities for the
business. Once again, the Company
is seeking shareholder support for
resolutions at the 2019 AGM allowing
this capital management flexibility, and
I would encourage all shareholders to
vote in favour.
Peter Clarke
Non-Executive Chairman
“Lancashire offers its
clients protection
against damage
arising from
catastrophic or
severe loss events.
Our strategy is to
monitor our risk
exposures so as
to maximise risk-
adjusted returns
across the
insurance cycle.”
Return on equity
2.4%
Dividend yield
4.5%
11
www.lancashiregroup.com
Overview Business model
Three platforms
provide options
We are one Group with three distinct (re)insurance platforms working together to maximise potential in the world
of specialist risk. Three platforms give the Lancashire Group more relevance in the market place, more broker
relationships, more cross-selling and referral opportunities and more reinsurance purchasing power. Our collective
strengths enable us to seek out and drive better performance for our clients, our employees and our investors.
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
Responsibility
s
t
n
e
i
l
C
Lancashire
Underwriting
and capital
management
R
e
t
u
r
n
M
a
r
k
e
t
s
Cathedral
Kinesis
Risk
12
Lancashire Holdings Limited
Annual Report & Accounts 2018
Our responsibilityWe recognise that our responsibility as a company and as individuals reaches wider than our shareholders and our clients. We strive to be a good employer, a good corporate citizen and a responsible preserver of resources. Through the Lancashire Foundation, we make financial contributions and provide human support to a number of good causes in the places we operate around the world (for further details see pages 45 to 47).
Key strengths
• Strong brand with clients and brokers
• Recognised for significant capacity
and leadership ability in well-defined
business sectors
• Proven track record of supplying
capacity across the cycle with
consistently high performance
• A lean business operation allows
us to remain nimble and make
decisions efficiently
• A stable core book of business and
disciplined underwriting
• Strong record of capital management
actions to optimise and adjust capital
and navigate market cycles
• Experienced management team
with proven ability
Goals
• Manages two active syndicates
• Strong relationships with clients
and brokers
• Recognised for long-term consistency
of relationships
• Worldwide licensing maintained
by Lloyd’s allows Cathedral to write
business worldwide with limited
regulatory overheads
• Use of the world’s oldest insurance
third-party capital, the Names,
who provide support and capacity
to Syndicate 2010
• Proven track record with more
than five years as part of the
Lancashire Group
• Experienced, fully dedicated
management with strong
relationships with clients,
brokers and investors
• Ability to leverage Group
infrastructure, relationships and
reputation with investors and clients
• Highly specialised multi-class product
with barriers to entry in terms of data
and modelling expertise
• Ability to raise and deploy
capital quickly
• Strong investor base since 2014
• Proven track record over five years
• Maintain key client, broker and
• Maintain core portfolios in
the syndicates
• Continue to look for new
opportunities for bolt-on
business lines
• Leverage the Group’s balance
sheet and cross-sell where
opportunities arise
reinsurer relationships to ensure
the continued flow of high
quality business
• Continue the use of reinsurance
solutions to sustain the right
risk-adjusted balance across the
insurance market cycle
• Retain ‘underwriting comes first’
culture and discipline without
being tempted into innovation
or diversification for its own sake
• Provide profitable growth in
areas experiencing an improved
rating environment
Risks
• Influx of new capacity and further
• Pressure on signings and
development of broker facilities with
less robust underwriting controls
• Pressure on insurance rates across
the market cycle
• Widening terms and conditions
being accepted by the insurance
market without adequate pricing
or exclusions
participation given relatively small
line sizes
• Expanded burden of regulatory
oversight or overlapping regulation
from Lloyd’s, the PRA and the FCA
• 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 modelled ranges
given market losses and pricing
• Continue to increase number
of investors
• Provide bespoke and flexible
products to match investor and
client appetite
• Increased competition from
traditional and collateralised
markets, with attempts to replicate
the Kinesis product
• Possible waning of investor interest in
insurance allocations should interest
rates begin to increase and yields
return to capital markets
• Resistance to complex
reinsurance products amongst
clients, given cheap availability
of traditional products
13
www.lancashiregroup.com
Overview Chief Executive’s review
Committed to underwriting
excellence
Alex Maloney
Group Chief Executive Officer
Did Lancashire’s performance in 2018
meet your expectations?
We have generated a return on equity
of 2.4 per cent and a combined ratio of
92.2 per cent in what was another year of
significant loss activity. The third quarter
witnessed another active wind season in
both the U.S. and Pacific regions and the
fourth quarter saw the occurrence of
another series of wildfires in California.
As well as causing tragic injury and loss of
life, these catastrophic events also caused
significant property damage and economic
loss, which impacted the Group’s property
insurance and reinsurance books. There
was also a series of devastating losses in the
specialty markets, notably the occurrence
of two of the largest historical losses in
both the marine and construction markets.
Paul Gregory discusses these events in
more detail in his underwriting review
on page 22. Such loss events are the
lifeblood of our business and the very
reason our clients purchase insurance and
reinsurance coverage in order to manage
their own risk profile and protect their
lives and livelihoods, property and
commercial interests. Fundamental to
our strategy is our role as a responsible
long-term business partner to our clients.
We develop and retain underwriting
expertise which is capable of appraising
and pricing risk so as to provide the
long-term support and assurance our
clients require. In so doing, our aim is
to maximise risk-adjusted returns to our
investors across the insurance cycle.
So, in another challenging year, I am
pleased to have served the needs of our
clients whilst delivering a positive return to
our shareholders. Our combined ratio for
the year is testament to the professionalism
and discipline of our underwriters and
will, I believe, compare favourably to many
other participants in the Lloyd’s, London
and international insurance markets.
Most importantly, having navigated
the challenges of another testing year
Lancashire has the expertise, the capital,
the commercial long-term relationships
and the nimble business culture to succeed
wherever we might find ourselves in the
insurance pricing cycle.
Has the growth of the third-party
reinsurance capital sector changed
the nature of the insurance pricing
cycle for good?
After the major catastrophe loss events of
2017, we watched the reinsurance markets
with interest during the January 2018
renewal season, in particular to see
whether the third-party capital, which has
increasingly supported the reinsurance
markets over recent years, would re-
commit. In the event, this third-party
capital did recommit and the pricing of
property catastrophe and retrocessional
reinsurance products improved
marginally, but not materially. This last
year we have seen another round of
above-average loss activity, the effect
of which has been to trap some of the
collateral that supports third-party capital
reinsurance products. Investors can only
sustain losses and low returns for a limited
period of time, so it was no surprise to
me that the round of 1 January 2019
reinsurance renewals seems to have
resulted in more limited availability
of reinsurance capacity to the markets
and a corresponding improvement in
reinsurance pricing. So, whilst the wheel
may turn slowly on occasions, I firmly
believe that the (re)insurance business
remains fundamentally cyclical in its
nature. In 2018, in most lines of business,
we saw a halt in pricing falls and some
encouraging areas of stronger pricing.
On balance, I think that the insurance
and reinsurance markets have now moved
Lancashire Holdings Limited
Annual Report & Accounts 2018
14
“Fundamental to our strategy is our role as a responsible long-term business partner to our clients. We develop and retain underwriting expertise which is capable of appraising and pricing risk so as to provide the long-term support and assurance our clients require.” off the bottom of the pricing cycle. Boards
and regulators, in particular Lloyd’s, are
at last focusing on the need for each line
of business to be underwritten on a
sustainable basis. That is good for the
markets and good for Lancashire, which
is well positioned to provide relevant,
properly priced underwriting capacity
in the lines we underwrite.
The Board has also obtained regulatory
approval for a change in the Group’s
supervisory and tax domicile and has
re-established both back in Bermuda with
effect from 1 January 2019. There is more
discussion of this decision and the strategic
opportunities it presents on page 48.
In which classes of business do
you expect to see the
greatest opportunity?
In last year’s Annual Report and Accounts,
I expressed the hope that in the specialty
lines which we underwrite we might see
a return in the wider market to the
fundamentals of good underwriting. It
was one of our priorities during 2018 to
strengthen our specialty offering in a way
that is complementary to those specialty
classes in which we have specialised for
many years. As Paul Gregory discusses in
detail on page 22 we have been able to
recruit new underwriting teams in the
areas of downstream energy, power and
aviation deductible insurance. This is
part of our strategy that seeks to achieve
incremental growth to our portfolio in
lines that, whilst requiring specialist
underwriting expertise, fit intuitively
with what we already underwrite. In our
property catastrophe lines, whilst we have
seen some limited rating improvement,
we do not yet see a significant growth
opportunity for 2019 and we expect our
exposures to be similar to 2018 and
premium levels to improve marginally.
So, looking to 2019, I would expect to
see some top line premium growth, but
built on a combination of an improved
pricing environment in our specialty lines
in both renewal and new business and a
continuing commitment to our property
catastrophe reinsurance lines at similar
levels of risk exposure, unless the loss
environment should present well-priced
new opportunities. In what we hope will be
a more realistically and sustainably-priced
market during 2019, we will continue to
explore opportunities to recruit sector
leading underwriters whose expertise
might complement the specialty insurance
and reinsurance lines in which the Group
already participates.
What has changed in the risk
environment during 2018?
Our first and foremost risk is our
underwriting risk and the associated risk
of exposure to fortuitous loss events, which
we continue to monitor and control on a
daily basis. Risk transfer is the product
which we sell. Broadly speaking, our risks,
risk tolerances and risk levels remained
materially unchanged during 2018. On
pages 33 to 39 Louise Wells, Group CRO,
sets out in greater detail how the
management and Board identify,
monitor and control our risk universe
so as to ensure the longer-term success
and viability of our business. I would
however make specific comment on
two areas of risk.
During 2018 we have faced the challenge
of Brexit in what has been an evolving and,
at times, uncertain political and regulatory
environment. As a Group we have
benefited from the access afforded by
Lloyd’s Brussels as well as the ability of our
principal Bermuda operating subsidiary,
LICL, to underwrite reinsurance of most
European risks due to the ‘equivalent’
status of Bermuda under the EU’s
Solvency II regime. These mechanisms
have helped us protect the substantial
majority of our income originating from
EU-located risks. In this regard it should
also be noted that such risks account for
a relatively small amount of our total
portfolio of business. We will continue
to monitor developments and we see this
as an area of both risk and opportunity.
Another area of increasing debate in
the press has been that of climate change
risk. For Lancashire, climate change can
influence the assumptions which we make
when underwriting any risk regarding the
frequency, severity and location of loss
events, and we think of it predominantly
in terms of the management of our
underwriting risk. Underwriting risk is
the principal risk, and opportunity, for our
business. This is not to downplay climate
change as a potentially disruptive and
systemic global risk in the medium to
long-term, but it is to recognise climate
change as a factor which can influence
certain risks to, and opportunities for, our
business, which we do have the expertise
to assess and manage. Other factors which
influence our principal underwriting risk
include seismic or volcanic activity,
political unrest and instability, secular
changes in technology and oil price
fluctuations, to name a few. We have the
great benefit of employing experienced
underwriters who are experts in risk
appraisal and whose decisions are
informed by powerful models and
actuarial tools, which factor in thousands
of assumptions including some that may be
influenced by climate change projections.
Climate change risk can also influence
asset values within our investment
portfolio or present reputational risk
to our business in its management. Our
conservative investment strategy factors in
the exposure of the Group’s investment
portfolio to a whole range of risk scenarios
which might impair the value of assets,
and our management and Board remain
committed to the prudent day-to-day
management of the whole universe of
risks which both challenge and present
opportunities to our business. Lancashire
has also for many years chosen to offset its
own greenhouse gas emissions. Please see
pages 43 and 44 of our engagement and
sustainability report for further details.
Anything else?
I would like to thank all our staff
across all our businesses in London and
Bermuda, for having contributed to a solid
performance delivering positive returns to
our shareholders in what has been another
challenging year. The skill and dedication
of our people remain fundamental to our
strategy and its successful delivery. As we
start to navigate 2019, I look forward to
leading our excellent team in meeting the
challenges and developing the exciting
opportunities which lie ahead in the
coming year.
Alex Maloney
Group Chief Executive Officer
15
www.lancashiregroup.com
Strategy Strategy
Our strategy
Our strategy
The Group executes its strategy by
concentrating on three strategic priorities
that enable the Group to meet its goal
of maximising risk-adjusted returns
for shareholders: underwriting comes
first; effectively balance risk and return;
and operate nimbly through the cycle.
These strategic priorities enable the Group
to serve clients and brokers with significant
capacity across the cycle, not just in the
core business the Group aims to renew
every year, but also in times or in areas
where capacity is scarce: the opportunistic
part of the Group’s portfolio. The Group
maintains a lean structure and keeps
overheads under strict control so
that resources may be refocused quickly.
The Group tests its assumptions and
performance constantly through its
structures, using its daily underwriting call
or exception reporting to management,
its fortnightly RRC meeting with all
disciplines within the Group represented,
and a series of supporting committees at
management, Board and subsidiary board
levels. The Group’s risk function and
internal audit team supply challenge
and provide assurance to management
and those boards through a continuous
reporting process.
Our culture –
the bedrock of our strategy
Lancashire encourages a culture of
co-operation and respect based on open
challenge. This can be seen clearly in the
Lancashire companies’ 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, and through
post-underwriting reviews at Cathedral.
It also characterises the Group-wide
RRC which brings together underwriting,
actuarial, modelling, finance, treasury,
risk and operations to challenge the
assumptions used in all areas of
our business. The boards at both
subsidiary and Group level oversee
and monitor the culture of the business
within the regular cycle of reporting
and governance.
Underwriting
comes first
Effectively
balance risk
and return
Operate
nimbly through
the cycle
Profitable
4 years out of 5
Peak-zone PML
limits of 25%
of capital
Maximise
risk-adjusted
returns
Shareholder
return
Lancashire Holdings Limited
Annual Report & Accounts 2018
16
Underwriting
comes first
Description
We focus on maintaining our portfolio
structure and our core clients, with the
bulk of our exposures balanced towards
significant events. We will grow in existing
and new classes where favourable and
improving market conditions exist. We
use the principle of peer review throughout
the Group, usually prior to underwriting
business for LICL, LUK and Kinesis, the
platforms that accept larger net exposures,
and post-underwriting at Cathedral, with
its smaller net exposures.
Achievements
Successfully recruited new underwriting
teams in downstream energy, power & utilities
and aviation deductible during 2018. We have
grown the funds raised and capital deployed
from Kinesis investors and grown our client
base for the second consecutive year.
Performance
Combined ratio
92.2%
A respectable combined ratio, even in a
year where the global insurance industry
sustained a significant level of natural
catastrophe and risk losses, evidencing the
continued focus on underwriting, superior
risk selection and portfolio construction.
Gross premiums written
$638.5m
With an improving rating environment in
the majority of our classes, plus three new
lines of business, premiums have grown
year on year. We maintain the discipline to
decline or restructure our participation on
underpriced or poorly performing business
but are willing to accept more risk if the
market opportunity dictates.
Associated strategic risk
The key risk in the current market phase is
the loss of relevance to brokers and clients.
With so much surplus capacity, insurers
need to have a unique selling point. For
the Group, that is found in its mixture of
underwriting capacity, leadership capability,
claims service and multiple balance
sheet options.
Effectively balance
risk and return
Operate nimbly
through the cycle
By bringing together all our disciplines
– underwriting, actuarial, modelling, 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.
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.
We have increased our underwriting
footprint and optimised our portfolios
in areas where rating has improved whilst
adding new complementary classes of
business as the market conditions are
now improving.
Return on equity
2.4%
A good result in the light of a challenging
market and the incidence of natural
catastrophe and risk losses in our major
portfolios of business, helped by our
improved outwards reinsurance programme.
Probable maximum loss
$123.1m*
We continued to match our exposure
to key catastrophe perils to the market
opportunity, demonstrating our discipline
and nimbleness.
* 1 in 100 year Gulf of Mexico Hurricane
expected net loss at 1 January 2019.
The key issue for Lancashire is to continue
to serve our clients and brokers with
significant capacity, whilst ensuring that the
portfolio is balanced. This means constantly
reassessing our business mix, and testing key
risk assumptions.
17
Lancashire renewed its 15 per cent
disapplication of pre-emption rights at
the 2018 AGM to assist potential future
capital raises.
Percentage of comprehensive
income returned to shareholders
284.2%
Lancashire continues to exercise the
discipline of maintaining sufficient capital
headroom to support underwriting
operations and take advantage of new
opportunities as they emerge or returning
capital to shareholders it cannot
profitably use.
Dividend yield
4.5%
Current opportunities exist in the short-tail
specialty insurance classes that, in general,
require less capital than catastrophe
exposed classes, so we grow in these areas
but still provide modest capital returns.
If opportunities exist in capital intensive
product lines then capital will be retained
to take advantage of these opportunities.
Lancashire has developed an expectation
among its shareholders that it will produce a
consistent return and pay ordinary dividends
with special dividends only when it makes
sense to do so. We believe our shareholders
understand that in harder markets
Lancashire will retain, and potentially
even raise, capital to take full advantage
of underwriting opportunities.
www.lancashiregroup.com
Strategy Financial review
Maintained
performance despite
sizeable risk losses
Elaine Whelan
Group Chief Financial Officer
Lancashire Holdings Limited
Annual Report & Accounts 2018
18
What are your thoughts on the
Company’s performance in 2018?
2018 potentially had in excess of $80
billion of estimated global insured losses.
While that’s less than the $140 billion+
estimated last year, it’s still significantly
higher than average. It was again a year
of accumulation, with no one, individually
significant event driving the magnitude
of the total insured loss. There were also
a few sizeable risk losses in 2018 which
contributed to the aggregate losses picked
up by the industry. The types of losses that
occurred are exactly the types of risks that
Lancashire underwrites. We have therefore
picked up losses across these events,
recording a total net loss after reinsurance
recoveries and reinstatement premiums
of $119.3 million, with our equity pick up
from our investment in Kinesis included in
that number. Given the nature of our book
and the loss events, we have performed
as we would expect and have once again
benefited from the additional reinsurance
we have been buying. There is, however,
a significant impact on our profitability
for the year from these events. We have
produced an RoE of 2.4 per cent – we are
back in the black after 2017 and our RoE
has improved by 8.3 per cent, however,
pricing is still not where it needs to be to
sustain the level of loss activity the industry
is experiencing. We remain hopeful that
the market reacts appropriately after two
years of heavy losses.
Have you been affected by
‘loss creep’ on the 2017
catastrophe events?
Reserving for the 2017 loss events was
complicated. With such frequency of
events there are amplifying effects that you
don’t see in an individual event – there
can be more impacts from demand surge
and the limited pool of resources available
to adjust the losses, for example. We were
aware of those potential effects while we
were assessing our initial reserves, but
I think it would be fair to say there was
a bigger impact than perhaps we have
seen historically. Assessing reinsurance
recoveries is also more complicated with
numerous events as compared to one
event. However, we are generally fairly
“Given the nature of our book and the loss events, we have performed as we would expect and have once again benefited from the additional reinsurance we have been buying. There is, however, a significant impact on our profitability for the year from these events.” thorough and prudent in our initial
reserving approach when there is a lack
of cedant information. Our net loss after
reinsurance recoveries and reinstatement
premium, and including our equity pick
up from our investment in Kinesis in
relation to hurricanes Harvey, Irma,
Maria, the two Mexican earthquakes plus
the California wildfires, was $176.1 million
at 31 December 2018, versus the initial
$189.2 million at 31 December 2017.
While there’s still some way to go
before the losses are fully settled, we’re
comfortable with the level of reserves
which we are carrying across those events.
Did you make any changes in your
reserving process for the 2018
catastrophe events?
Not really. While there are always lessons
to be learned following loss events, our
experience with the 2017 catastrophes
proved our approach to be robust. There
is a rigorous internal review process where
we go through individual accounts to
assess the potential loss and derive
preliminary expectations from that.
We would also have a view of the
overall industry loss that would inform
that expectation. Then the individual
subsidiaries all have their own Reserve
Committees who challenge the
underlying estimates.
After two years of well above
average loss levels, what does
that mean for Lancashire’s
capital position?
We’re very comfortable with the level
of capital we are carrying. We always work
out the business we want to write and then
calculate the capital that would be needed
to support that. We then add a buffer on
top of that to ensure we have flexibility.
We have carried excess buffers in recent
years given the market conditions and that
has served us well. We’ve also been buying
more reinsurance in recent years and that
helped us to better manage volatility, as
well as our expected capital requirement.
That means we have enough capital to
underwrite the book that we want but
also have some capital available to take
advantage of any opportunities that
may materialise.
Elaine Whelan
Group Chief Financial Officer
Financial highlights
Gross premiums written
Net premiums written
Net premiums earned
Net insurance losses
Net underwriting profit (loss)
Net investment income
Net realised (losses) gains and impairments
Profit (loss) after tax1
Net change in unrealised gains/losses on investments
Comprehensive income (loss)1
Dividends2
Diluted earnings (loss) 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 investments3
1. Amounts are attributable to Lancashire and exclude non-controlling interest.
2. Dividends are included in the financial statement year in which they were recorded.
3. Net return on investments includes internal foreign exchange hedging.
2018
$m
638.5
417.7
413.5
165.4
121.7
34.7
(5.1)
37.5
(12.8)
24.7
70.2
$0.19
$5.26
2.4%
2.4%
40.0%
30.6%
21.6%
92.2%
70.0%
0.8%
2017
$m
591.6
398.0
427.9
335.4
(23.1)
30.5
9.1
(71.1)
4.9
(66.2)
29.9
($0.36)
$5.48
(5.9%)
(5.9%)
78.4%
27.0%
19.5%
124.9%
94.2%
2.5%
2016
$m
633.9
458.7
488.1
142.5
213.5
29.8
(2.4)
153.8
4.1
157.9
178.9
$0.76
$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)
181.1
(11.3)
169.8
317.5
$0.91
$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)
229.3
(2.1)
227.2
321.0
$1.16
$6.96
13.9%
14.7%
31.7%
21.4%
15.6%
68.7%
35.9%
1.0%
19
www.lancashiregroup.com
Performance
Key performance indicators
Return on equity
Combined ratio
Total investment return
Measurement
The return on equity is measured by
management as the internal rate of return of
the change in fully converted book value per
share in the period, adjusted for dividends.
Aim
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.
The Group’s aim is to maximise risk-adjusted
returns for our shareholders across the cycle.
The Group aims to price its business to
ensure that the combined ratio across the
cycle 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 return.
Performance
2.4%
Given the significant catastrophe events of
2018 we were pleased to generate a positive
RoE for the year.
14.7*
13.5*
13.5
92.2%
The combined ratio reflects the impact of a
number of 2018 catastrophe events including
hurricanes Michael and Florence, typhoons
Jebi, Mangkhut and Trami and the California
wildfires, as well as risk losses in our marine
portfolio. Despite these events our focus
on high quality underwriting allowed us to
generate an underwriting profit for the year.
2.4
68.7
72.1
76.5
-5.9
124.9
92.2
0.8%
In 2018, the Group continued to manage its
most significant investment risk, interest rate
risk, via floating rate assets and risk assets.
This helped to manage the risk on/risk off
volatility and minimise losses in the rising
rate environment.
2.5
2.1
e
g
a
r
e
v
a
r
a
e
y
5
1.0
0.7
0.8
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
Risk management
The stated aim is a long-term goal,
acknowledging that management expects
both high and low 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 70 for further details.
* RoE including the impact of warrants was
10.9% in 2015 and 13.9% in 2014. The
five-year average was 7.0%.
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 relatively 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.
Lancashire Holdings Limited
Annual Report & Accounts 2018
20
Total shareholder return
Comprehensive income
returned to shareholders
Dividend yield
Measurement
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.
Aim
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 RoE in the immediate term.
Performance
-12.7%
In line with the broader FTSE 250, our share
price suffered through the year as investors
shunned UK listed equities due to Brexit
uncertainty. In part this was offset in TSR by
our regular and special dividends through
the year.
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.
The Group aims to carry the right level
of capital to match attractive underwriting
opportunities, utilising an optimal mix of
capital tools. Over time, through proactive
and flexible capital management across the
cycle, we aim to maximise risk-adjusted
returns for shareholders.
284.2%
We paid a small special dividend of
$0.20 per share reflecting the capital
benefits of enhancements to our reinsurance
programme that enabled us to return more
capital than we generated for 2018.
Dividend yield is measured by dividing the
annual dividends per share by the share
price on the last day of the given year.
The Group aims to maintain a strong
balance sheet whilst maximising risk-adjusted
return for shareholders across the cycle.
Lancashire’s dividend yield demonstrates our
ability to operate nimbly through the cycle
through the active capital management that
underpins our business model. We aim to
pay annual ordinary dividends, and when we
decide not to retain our profits as additional
underwriting capital we return them to
shareholders by way of special dividends.
4.5%
During 2018, we paid annual ordinary
dividends of $0.15 per share and a special
dividend of $0.20 per share.
25.9
e
g
a
r
e
v
a
r
a
e
y
5
-24.2
2.4
9.4
187.0
152.3
-12.7
113.3
2014
2015
2016
2017
2018
2014
2015
2016
284.2
17.8
17.3
10.5
n/a*
2017
2018
2014
2015
2016
2017
2018
1.6
4.5
Risk management
The Lancashire remuneration structure and
RSS ensure that staff are highly motivated
and closely aligned to the Group’s goals, and
therefore with shareholders. Permanent staff
are all eligible to receive RSS awards. The
participation of employees in the RSS
ensures that there is a strong focus on
sustainable long-term shareholder value.
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 2018, Lancashire maintained its A rating.
* The Group made a comprehensive loss of
$66.2 million during 2017. We paid annual
ordinary dividends of $0.15 per share. Due
to 2017 being n/a, the average is calculated
over four years.
As capital continues to accumulate in the
(re)insurance market, the need to be nimble
is more important than ever. This means
being ready to deploy capital quickly when it
is needed and having the discipline to return
it when it is not. The Group has to ensure
that all shareholders understand that in
harder markets the Group will want to retain,
and potentially even raise, capital to take full
advantage of underwriting opportunities.
KPI linked to Executive Directors’ remuneration. For more information see pages 70 to 89.
Alternative Performance Measures (APM). For more information see page 167.
21
www.lancashiregroup.com
Performance
Underwriting review
Maintaining
our discipline
Paul Gregory
Group Chief Underwriting Officer
Lancashire Holdings Limited
Annual Report & Accounts 2018
22
Following the record loss events of 2017
the direction of premium rate change,
for the first time in five years, has moved
positively. The RPIs for our portfolio
for 2018 can be seen on page 26, which
demonstrate this. It would be fair to argue
that, given the size of losses incurred
during 2017, a more positive rating
environment could have been expected.
However, our industry is driven by the
basic principles of supply and demand and
there was not enough of an imbalance to
create a more dislocated market; albeit
that the rating environment did improve.
The vast majority of losses in 2017
were natural catastrophe related. What
these losses did was shine a light on the
unprofitability of other product lines
in the market, specifically the short-tail
specialty insurance classes written in
London. This unprofitability had been
masked by profits made by natural
catastrophe classes in a benign period
for natural catastrophes losses. This
ended in 2017.
This created an interesting dynamic
as 2018 progressed. Whilst the RPIs for
catastrophe business through the year
were positive, the rate of increase
slowed, whereas the opposite is true of
the non-catastrophe lines, such as marine,
aviation and to a lesser extent energy,
which all gradually improved as the
year elapsed.
Much of this improvement in the specialty
insurance rating environment has been
helped by Lloyd’s conducting a thorough
review of its performance and taking
hard-line action with underperforming
classes of business and syndicates for the
2019 business planning season. Put simply,
Lloyd’s wants to improve its underwriting
profitability and is willing to cut back in
underperforming areas to achieve this
goal. Syndicates are cutting back or exiting
unprofitable classes in order to gain
business plan approval. This is an action
we fully support as it fits our mantra of
underwriting discipline and ultimately
leads to a healthier and more robust
market. This has meant that lines of
business in which we operate are now
seeing positive rate movement as there
is less capacity and more focus on
underwriting returns.
“Given that pricing has finally started to move in a positive direction, it should come as no surprise that we have chosen now as the time to expand our footprint.” Fortunately, our approach over the past
few years has meant that our specialty
insurance lines have continued to deliver
underwriting profits, even in a soft rating
environment, as we had already made
the hard decisions and exited classes of
unprofitable business or trimmed back
our exposure in classes we remain in.
Therefore, any pricing improvement
in these lines is beneficial to us as we
come from a baseline of underwriting
profitability. We have also been successful
in securing business plan approval for
both our syndicates in line with our
expectations and this is a testament to
the underwriting discipline we have
shown in prior years.
insurance lines. Importantly, each of these
product lines is now seeing positive rating
environments so we believe that we are
entering these lines at the right time
and we will hopefully benefit as market
conditions improve.
We have always been very clear that
when the underwriting opportunity starts
to improve we will be willing to underwrite
more risk.
Entering these new classes at a time when
market conditions are improving fits our
underwriting philosophy exactly and the
fact we can do this now is a result of our
disciplined approach in the softer part
of the cycle.
Given that pricing has finally started to
move in a positive direction, it should
come as no surprise that we have chosen
now as the time to expand our underwriting
footprint. During 2018, we entered three
new product lines, adding downstream
energy, power and aviation deductible
to our suite of product offerings.
Whilst 2018 did not see the record
losses of 2017, which turned out to be
the costliest on record, it has once again
been a very active year with loss quantum
being significantly above historical
averages, with a high frequency of losses
from both natural catastrophe and
man-made events.
All of these product lines are
complementary to our existing offerings
and fit our appetite for short-tail specialty
We have seen tragic events such as
wildfires in California, typhoons in Japan,
the Philippines and China and hurricanes
in the U.S.. These events have a devastating
impact on the people in these areas with
millions of people’s lives terribly affected.
Weather related events have deep and
lasting impacts on local economies which
further impacts these communities. For
us and our industry, these events create
insured losses. Whilst the claims we
pay obviously impact underwriting
profitability, we provide policies that
allow those affected to help restore
themselves after these events.
In addition to a continuation of natural
catastrophe losses, 2018 has also seen a
sharp increase in man-made losses, with
significant loss activity on classes such as
power, downstream energy and marine.
Whilst rates have improved during 2018,
all lines of business are coming from a
relatively low point given numerous years
of rate reductions so any frequency or
severity of loss greatly challenges
underwriting margins.
With this in mind we are very pleased that
we have managed to deliver a combined
ratio of 92.2 per cent in what has been a
very challenging year given the amount
of losses within our areas of specialism.
Gross premiums by sector
Property
other
4%
Property cat
16%
Property
reinsurance
13%
Terrorism
5%
Political risk
4%
Retrocession
2%
Energy other
4%
Offshore
WW energy
10%
Lloyd’s 41%1
Marine 5%
Aviation 8%
Energy 15%
Property 31%
GoM
energy
1%
Aviation
deductible
5%
AV52
3%
Marine
hull
2%
Marine
other
3%
Other
Lloyd’s
5%
Property
D&F
10%
Marine
cargo
6%
Aviation and
satellite
7%
23
“We have always been
very clear that when
the underwriting
opportunity starts to
improve we will be
willing to underwrite
more risk.”
1. Based on 2019 forecast of gross premiums
written as of November 2018. Estimates could
change without notice in response to several
factors, including trading conditions.
www.lancashiregroup.com
Performance Underwriting review: continued
Property reinsurance
2018 has once again been a very
challenging year for this class of business.
The loss events in Japan, the Philippines
and the U.S. have not been as significant
in terms of insured loss as 2017. However,
they have been as frequent and of a level
significant enough to impact underwriting
profitability. Rating across the portfolio
improved year on year, with 2018 RPIs
shown on page 26, albeit with rate
increases reducing as the renewal season
progressed. Supply of capacity did not
shrink and therefore the rate increases
were dampened as market participants
protected market share.
There was increased demand in some
territories which allowed the Group
to expand relationships with existing
core clients and also develop new client
relationships in an improved market.
In particular, we were able to grow our
footprint with our Japanese reinsurance
clients and some of our U.S. reinsurance
clients. So there remain opportunities in
this market to grow prudently with rate
increases on the existing portfolio
and developing existing and new
client relationships.
Looking ahead, the loss events of this
year will most likely mean that property
reinsurance pricing should remain at least
stable through 2019. If there is dislocation
in the market for retrocession capacity
then this could impact the demand and
supply dynamic and push rates further
forward. The relatively immature ILS
market faces a second year of losses that
will trap and erode capital and produce
another test of the product and the capital.
The Group, via our rated carriers,
Lloyd’s and Kinesis platforms, is uniquely
placed to maximise any opportunity that
manifests itself with the ability to offer
clients and brokers a choice of platforms
and products and additional capacity
should the risk and return metrics allow.
Property direct & facultative (D&F)
Property D&F was another area of the
business impacted by the loss events of
2017 and therefore was also challenged
again during 2018 as natural catastrophe
losses continued.
The rating environment improved
during 2018, albeit the rate change across
the portfolio was not uniform. Certain
territories, such as the Caribbean, saw
significant rate increases following the
losses in 2017 and we took the opportunity
to grow our exposure in these territories
as the risk-adjusted pricing warranted
additional exposure. In other areas of
the portfolio, where rating marginally
improved, we maintained risk appetite
and renewed the core portfolio.
Having the flexibility to upscale risk in
areas where the pricing improvement
so justifies is a core strength of our
underwriting. Equally, having the
discipline to not force growth if the
pricing does not warrant it is also a
core underwriting principle.
With more loss events in 2018 impacting
this market, plus a number of London
market participants either exiting or
reducing their exposure to the class,
we anticipate continued modest pricing
improvement through 2019 and have
the platforms and people to access
these opportunities wherever they
present themselves.
Energy
In 2018, we saw the first green shoots of
recovery in both the energy industry and
the upstream energy insurance market.
The higher and more stable oil price
combined with our clients now being set
up to run more efficiently in a lower oil
price environment has meant that demand
has stabilised and there are signs that
demand may slowly improve as upstream
energy clients look to gradually increase
their operations. Alongside this, the
pricing environment improved slightly
with rates rising across the portfolio.
The last few years have been very
challenging with rate reductions and a
significant reduction in demand causing
premiums in the upstream energy market
to more than halve. Therefore, these
positive signs during 2018 are very
welcome. Fortunately, our energy book
has remained profitable during this
difficult period, albeit helped by the fact
there has been less activity and therefore
fewer claims; but we welcome the change
in outlook and remain aware that an
Lancashire Holdings Limited
Annual Report & Accounts 2018
24
increase in client activity can also lead
to an increase in loss activity.
We added two new product lines under
the energy umbrella during 2018, namely
downstream energy and power.
Downstream energy dovetails nicely with
our current upstream offering as many
of the clients are the same. We have
been able to utilise our strong client
relationships to access downstream
business and prudently build out a
portfolio during the year. The downstream
market has succumbed to many large
losses in 2018, most of which we have
been able to avoid, allowing us to make
an underwriting profit in the first year of
operation, so this has helped push forward
rate increases across this market and we
expect this to continue into 2019.
Our power team joined in the middle of
the year, so 2019 will be our first full year
of underwriting. This class is another that
has experienced a difficult few years with
a number of losses and is a class under
review at Lloyd’s, meaning that some of
our London market competitors are either
withdrawing or cutting back. This has led
to a positive rating movement which, as a
new entrant, we can take advantage of.
“Having the flexibility
to upscale risk in areas
where the pricing
improvement so justifies
is a core strength of our
underwriting. Equally,
having the discipline
to not force growth
if the pricing does not
warrant it is also a core
underwriting principle.”
“The Group, via our
rated carrier, Lloyd’s
and Kinesis platforms,
is uniquely placed to
maximise any opportunity
that manifests itself with
the ability to offer clients
and brokers a choice of
platforms and products
and additional capacity
should the risk and
return metrics allow.”
Marine
There have been many moving parts
within the marine market during 2018.
The cargo market was already in a state
of flux at the start of the year following a
number of capacity withdrawals during
2017 which has led to improving rates.
This trend continued during 2018, aided
by the Lloyd’s review of the class of
business, leading to further withdrawals.
Given we have cut back our cargo book
during the years of softening we have
now been growing our book as the rating
environment has improved. For the first
time in several years we are writing new
business as it starts to pay more and the
risk-reward balance makes more sense.
Given further withdrawals from the
class we anticipate the upward pricing
movement to continue during 2019.
The hull market has historically been
a very difficult line of business in which
to make an underwriting profit. This was
made even harder during 2018 which saw
possibly the largest ever marine builders’
risk loss in history. This loss impacted
our marine portfolio given that we had a
significant share of the risk. Whilst these
losses are not good for underwriting
profitability they are exactly the type
of risks that we underwrite and why our
clients buy our products. A loss of this size
inevitably creates an underwriting loss for
the class in 2018 albeit, even with this loss
and other large losses in the past, our
marine portfolio remains profitable
since inception, which for marine
underwriters is the exception rather than
the rule. Much like cargo, marine hull has
also been reviewed by Lloyd’s and we have
seen a number of markets withdraw from
this class, so there is likely to be less
capacity available in 2019. There remains
global capacity for the product but like
any market a reduction in capacity can
only help stabilise and possibly improve
market conditions for 2019.
Aviation
The aviation market is another market that
has improved during the year with pricing
slowly rising. We underwrite both direct
and reinsurance product lines and both
have seen small positive rate movements.
Our reinsurance portfolio continues to
generate good underwriting margins and,
whilst significantly smaller than it has been
historically, is a recognised leader in the
sphere, and is well positioned to expand
as market conditions improve. As a result,
we have been able to grow the portfolio
gradually this year.
Our direct aviation portfolio covers war,
hull and liability, AV52 and, more recently,
aviation deductible. All these classes have
been either in a stable or improving
pricing environment during 2018. The
decision to enter aviation deductible was a
function of this improving market but also,
because a large number of our existing
aviation clients already buy this cover, it
simply adds another aviation product to
the range which we offer to our client
base, further strengthening our
relationships in this class.
Aviation has also seen a number of market
participants withdraw during 2018, which
we believe will help maintain positive rate
movement through 2019 and we are very
well placed to benefit from this continued
better market.
Terrorism, political violence &
political risk
The world continued to be a politically
volatile place during 2018 with political
issues such as Brexit and U.S. trade wars,
as well as violence and civil unrest in
areas such as Nigeria, Pakistan, Yemen
and Afghanistan.
This global political and socio-economic
climate certainly creates challenges for
underwriting these classes of business, and
risk selection remains absolutely crucial as
years of softening rates mean that there is
little margin to cater for any type of
attritional losses.
We are fortunate to have a core portfolio
of risks that have historically avoided
attrition and therefore continue to deliver
healthy underwriting profits. The rating
environment has stabilised during the
year. This is welcome following continued
rate reductions in the terrorism class
since we started writing it in 2006. There
remains an abundance of capacity in this
market given its historic profitability, so
our aim will be to maintain our core
portfolio in 2019 and grow in any areas
that match our risk appetite. Over the
past few years we have successfully grown
in areas such as UK terrorism which goes
some way towards replacing income lost
to broker facilities, which has been a
trend in this market for the past few years.
To date we have refused to give up our
underwriting pen as we continue to believe
that underwriters selecting risks generates
a superior underwriting return.
We are cautiously optimistic about 2019.
We have a history of providing market
leading returns in specialty insurance
lines, even in softer market conditions,
and now see markets that are slowly
improving as we are expanding our
footprint in these niche areas. Property
catastrophe rates should remain stable
following positive rate movement this
year and any imbalance in the supply
and demand dynamic of this market
could help push rates further. With the
rating environment looking more positive
we feel that now is exactly the right time
to grow. As ever we will only do this if the
opportunity is there to do so but if it is we
are uniquely placed with our platforms
and people to maximise this opportunity.
25
www.lancashiregroup.com
Performance Business review
Discipline in a
challenging market
Hayley Johnston
Chief Underwriting Officer, LUK
James Irvine
Chief Underwriting Officer, LICL
Jon Barnes
Active Underwriter,
Syndicate 2010
John Spence
Active Underwriter,
Syndicate 3010
Renewal price index (RPI)
The Group’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 the Group’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, 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 Group 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 the Group’s portfolio. The
future profitability of the portfolio of
contracts within the RPI is dependent
upon many factors besides the trends in
premium rates. The following RPIs are
expressed as an approximate percentage
of pricing achieved on similar contracts written in the corresponding year, with our
Lloyd’s segment shown separately in order to aid comparability.
The following table summarises the RPI figures for the main business classes:
RPI Lancashire (excluding Lloyd’s segment)
Class
Aviation (AV52)
Gulf of Mexico offshore energy
Worldwide offshore energy
Marine
Property retrocession and reinsurance
Terrorism
Lancashire (excluding Lloyd’s segment)1
2018
99
101
103
98
107
99
103
2017
91
93
97
90
95
96
94
2016
90
94
87
88
88
88
89
2015
94
94
89
90
89
90
90
2014
90
92
94
102
87
93
94
1. The table above summarises the RPI figures for the main business classes, with the total incorporating all
business classes.
RPI Lloyd’s segment
Class
Aviation
Energy
Marine
Property retrocession and reinsurance
Terrorism
Lloyd’s segment1
2018
104
103
105
108
100
106
2017
100
97
98
96
92
97
2016
96
89
95
94
96
94
2015
96
87
99
91
90
93
2014
97
–
100
89
95
94
1. The table above summarises the RPI figures for the main business classes, with the total incorporating all
business classes.
Lancashire Holdings Limited
Annual Report & Accounts 2018
26
Underwriting results
Gross premiums written
Net premiums earned
Net loss ratio
Net acquisition cost ratio
Expense ratio
Combined ratio
2018
2017
Property
Energy
Marine
$m
$m
$m
214.6
103.0
31.1
21.5
75.9
131.9
34.0% (27.1%) 102.3%
55.8%
44.3%
23.9%
–
–
–
17.2% 158.1%
57.9%
Aviation
$m
33.0
17.8
2.2%
47.2%
–
49.4%
Lloyd’s
$m
256.8
166.4
71.4%
24.6%
–
96.0%
Energy
$m
101.8
70.4
Property
$m
198.0
146.5
Marine
Total
Total
$m
$m
$m
638.5
67.6
591.6
413.5
427.9
50.7
40.0% 114.4% 15.8% 32.9% (19.0%) 95.6% 78.4%
30.6%
18.8% 44.0% 36.3% 27.6% 23.8% 27.0%
21.6%
19.5%
–
92.2% 133.2% 59.8% 69.2%
8.6% 119.4% 124.9%
Aviation
$m
16.9
11.6
Lloyd’s
$m
207.3
148.7
–
–
–
–
Premiums
Gross premiums written increased by 7.9
per cent in 2018 compared to 2017. The
Group’s five principal segments, and the
key market factors impacting them, are
discussed below.
Property
Property gross premiums written
increased by 8.4 per cent for the year
ended 31 December 2018 compared to
the year ended 31 December 2017. The
property segment experienced growth
from new business and rate increases
across most classes. However, that growth
was significantly offset by reductions due
to multi-year contracts not yet due to
renew in the political risk and property
catastrophe classes. In addition 2017 also
included $7.0 million of reinstatement
premiums in connection with hurricanes
Harvey, Irma and Maria.
Energy
Energy gross premiums written
increased by 1.2 per cent for the year
ended 31 December 2018 compared to
the year ended 31 December 2017. The
increase for the year was due to some new
business written in the onshore energy
class, offset by multi-year contracts written
in the Gulf of Mexico and offshore energy
classes in 2017 that were not yet due
to renew, plus the restructuring of an
existing Gulf of Mexico multi-year deal.
Marine
Marine gross premiums written
decreased by 54.0 per cent for the year
ended 31 December 2018 compared
to the year ended 31 December 2017.
The decrease was due to a reduction
in exposure on prior underwriting year
risk-attaching business in the other marine
class in addition to less pro-rata business
written compared to the prior periods.
The decrease for the year was further
compounded by the timing of
non-annual contract renewals.
Aviation
Aviation gross premiums written
increased by 95.3 per cent for the year
ended 31 December 2018 compared to
the year ended 31 December 2017. The
increase was mainly due to new business
in the aviation deductible class due to the
addition of a new underwriting team and
the resulting new business introduced.
There was also increased exposure on
prior underwriting year risk-attaching
business during the year.
Lloyd’s
In the Lloyd’s segment, gross premiums
written increased by 23.9 per cent for the
year ended 31 December 2018 compared
to the year ended 31 December 2017. The
increase was mainly due to new business in
the aviation and energy classes due to the
addition of new underwriting teams and
the resulting new business introduced.
There was also an increase in the property
direct and facultative and marine classes,
primarily due to improved rates, new
business and negative adjustments made
to prior underwriting year risk-attaching
business in 2017. The increases were
partially offset by reduced reinstatement
premiums in the property reinsurance
class.
Ceded
Ceded premiums increased by $27.2
million, or 14.0 per cent, for the year
ended 31 December 2018 compared to
the year ended 31 December 2017. The
increase was due to a combination of
additional cover purchased and rate
increases, partially offset by the timing
of some renewals.
Earned
Net premiums earned as a proportion of
net premiums written were 99.0 per cent
for the year ended 31 December 2018,
compared to 107.5 per cent for the year
ended 31 December 2017. The lower
earnings ratio in 2018 compared to
2017 was impacted by the timing of
gross premiums written in the year, with
a higher proportion being written in
the latter half of 2018 compared to
the corresponding period in 2017.
27
www.lancashiregroup.com
Performance
Business review: continued
Excluding the impact of foreign exchange evaluations, the table below shows the impact
of current accident year catastrophe events on the Group’s loss ratio for the year ended
31 December 2018:
Reported loss ratio at 31 December 2018
Absent natural catastrophe events
Absent large marine losses
Absent all catastrophe events
Losses
$m
165.4
78.6
147.3
60.5
Loss ratio
%
40.0
19.2
34.7
14.4
Note: the table does not sum to a total due to the impact of reinstatement premiums.
As reported in the Group’s results for the year ended 31 December 2017, excluding the
impact of foreign exchange evaluations, the following table shows the impact of prior year
catastrophe events on the Group’s loss ratio:
Reported loss ratio at 31 December 2017
Absent hurricane Harvey
Absent hurricane Irma
Absent hurricane Maria
Absent Mexico earthquakes
Absent California wildfires
Absent all catastrophe events
Losses
$m
335.4
287.6
281.6
300.0
325.1
300.9
153.6
Loss ratio
%
78.4
67.7
66.1
70.5
76.0
70.4
36.6
Note: the table does not sum to a total due to the impact of reinstatement premiums.
Prior year favourable development was $126.9 million for the year ended 31 December
2018 compared to $65.1 million for the year ended 31 December 2017. The favourable
development in both 2018 and 2017 was primarily due to general IBNR releases across
most lines of business due to a lack of reported claims. 2018 also included reductions on
some prior accident year property and energy reserves. In 2017, the Group experienced
some adverse development on prior accident year property and energy claims.
The table below provides further detail of the prior years’ loss development by class,
excluding the impact of foreign exchange revaluations:
Property
Energy
Marine
Aviation
Lloyd’s
Total
2018
$m
46.5
55.0
12.1
1.4
11.9
126.9
2017
$m
14.4
21.1
15.2
3.0
11.4
65.1
2016
$m
36.6
17.3
1.9
3.9
26.1
85.8
2015
$m
26.4
35.2
13.8
2.9
29.4
107.7
2014
$m
19.8
5.4
(9.7)
0.9
18.0
34.4
Note: Positive numbers denote favourable development.
Losses
2018 was characterised by an accumulation
of losses as a result of exposures to a
number of natural catastrophe events,
including hurricanes Florence and
Michael, typhoons Jebi, Mangkhut and
Trami and the California wildfires. In
addition, the Group also had exposure to
loss events within its marine portfolio. As a
result, the Group’s net loss ratio was 40.0
per cent for the year ended 31 December
2018 compared to 78.4 per cent for the
year ended 31 December 2017. The 2018
accident year loss ratio, including the
impact of foreign exchange revaluations,
was 70.0 per cent compared to 94.2 per cent
for the year ended 31 December 2017.
Our net losses recorded for the year ended
31 December 2018 in relation to the loss
events noted above was $104.9 million,
excluding the impact of inwards and
outwards reinstatement premiums and
our share of losses from Kinesis. In the
prior year, the total estimated net loss,
excluding the impact of inwards and
outwards reinstatement premiums and our
share of losses from Kinesis, for the 2017
catastrophe losses on hurricanes Harvey,
Irma and Maria, the two earthquakes in
Mexico plus the California wildfires, was
$181.8 million as at 31 December 2017
compared to $164.7 million as at
31 December 2018.
While reserves have been recorded,
uncertainty exists on the eventual
ultimate losses in relation to the
hurricanes, typhoons, earthquakes and
wildfires as loss information after these
types of events can take some time to
obtain. The Group’s reserve estimates were
derived from a combination of market
data and assumptions, a limited number
of provisional loss advices, limited client
loss data and modelled loss projections.
As additional information emerges, the
Group’s actual ultimate loss may vary,
perhaps materially, from the current
reported reserves. The final settlement
of all claims is likely to take place over
a considerable period of time.
There were no other significant net losses
in either year.
Lancashire Holdings Limited
Annual Report & Accounts 2018
28
Excluding the impact of foreign exchange revaluations, previous accident years’ ultimate
losses developed as follows during 2018 and 2017:
Ultimate loss development by accident year
2008 accident year and prior
2009 accident year
2010 accident year
2011 accident year
2012 accident year
2013 accident year
2014 accident year
2015 accident year
2016 accident year
2017 accident year
Total
2018
$m
3.1
23.9
1.6
4.7
8.8
3.5
3.4
6.6
33.3
38.0
126.9
2017
$m
0.1
0.1
1.8
8.8
5.0
3.5
9.2
20.3
16.3
–
65.1
Note: Positive numbers denote favourable development.
The ratio of IBNR to total net loss reserves was 39.3 per cent as at 31 December 2018
compared to 44.8 per cent as at 31 December 2017.
Accident year loss ratios
Accident year loss ratio
Initial accident year loss ratio
Change in loss ratio
post-accident year
2018
%
70.0
n/a
2017
%
84.8
94.2
2016
%
36.4
46.2
2015
%
31.1
46.0
2014
%
25.4
35.9
n/a
9.4
9.8
14.9
10.5
Note: Adjusted for revaluation of foreign currencies at the exchange rate as at 31 December 2018.
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
Total
2018
%
4.8
12.9
0.7
14.4
5.1
4.9
8.6
29.9
6.3
2.6
1.3
8.5
100.0
2017
%
10.2
6.0
1.7
17.0
3.8
7.7
8.5
28.2
5.8
1.4
1.3
8.4
100.0
2016
%
10.4
0.3
0.8
20.3
4.4
6.4
7.3
32.5
6.6
2.8
1.2
7.0
100.0
2015
%
9.6
1.1
0.6
23.6
0.2
7.3
8.4
33.2
5.9
1.3
0.8
8.0
100.0
2014
%
10.6
1.4
0.7
21.4
0.8
7.7
11.0
31.7
5.8
1.4
0.7
6.8
100.0
Acquisition costs
The acquisition cost ratio was 30.6 per
cent for the year ended 31 December 2018
compared to 27.0 per cent for the year
ended 31 December 2017. The increase
was largely due to higher outwards
reinstatement premiums in 2018
compared to 2017, in addition to higher
profit commissions on some of our
property and energy classes.
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 2018, our focus
has been on managing our interest rate
risk, the largest risk to our predominantly
fixed maturity portfolio. We continue to
maintain a short duration fixed maturity
portfolio and have been using our risk
budget to add products to our portfolio
to help mitigate a rise in rates.
Our portfolio mix illustrates our
conservative philosophy, as shown in
the table adjacent. With the composition
regulated by the Group’s investment
guidelines, we have three investment
portfolio categories: ‘core’, ‘core plus’
and ‘surplus’. The core and core plus
portfolios contain 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 and core plus
portfolios may be held in any of the three
categories, which are discussed further on
page 120.
29
www.lancashiregroup.com
Performance
Business review: continued
The investment portfolio returned 0.8 per
cent in 2018 driven by positive returns
on the Group’s standard fixed maturity
portfolios as coupon returns more than
offset the increase in treasury yields and
widening of credit spreads that took place
in 2018. Returns on the fixed maturity
mandates outweighed the small losses on
the equities, hedge funds and bank loans
during the year. Despite the increase in
treasury yields in 2017, the investment
portfolio produced a return of 2.5 per cent
due to the narrowing of credit spreads,
coupon income and strong returns in the
Group’s equities, hedge funds, bank loans
and principal protected notes.
Our average annual total investment
return since inception is 2.7 per cent, and
we have made a positive investment return
in every year since inception, including
2008.
Liquidity
The Group is a short-tail insurance
and reinsurance group. As such, the
investment portfolio must be liquid,
short duration, and highly creditworthy.
As noted earlier, the Group’s investment
strategy places an emphasis on the
preservation of invested assets and
provision of sufficient liquidity for
the prompt payment of claims in
conjunction with providing a
reasonably stable income stream.
Liquid securities will be maintained at
an adequate level to more than meet
expenses, including unanticipated claims
payments. Only once safety, liquidity and
investment income requirements are
satisfied may additional growth in the
investment portfolio be pursued.
Cash flow
The Group’s cash inflows are primarily
derived from net premiums received, from
losses recovered from reinsurers, from net
investment income, including dividends
and other returns from its associates, and
any capital raising activities performed in
a given year including the issuance of
debt. Excess funds are invested in the
investment portfolio, which primarily
consists of high-quality, highly liquid
fixed 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.
2018
1.5 years
A+
3.1 %
2.7 %
2017
1.7 years
AA-
2.1 %
2.0 %
2016
1.8 years
A+
1.9 %
1.8 %
2015
1.5 years
AA-
1.9 %
1.6 %
2014
1.5 years
AA-
1.5 %
1.5 %
The composition, duration and asset
allocation of the investment portfolio
are reviewed on a regular basis in order
to respond to changes in interest rates
and other market conditions. If certain
asset classes are anticipated to produce
a higher return within management’s
risk tolerance, an adjustment in asset
allocation may be made. Conversely, if the
risk profile is expected to move outside of
tolerance levels, adjustments may be made
to reduce the risk in the portfolio. We try
to be nimble in our investment strategy
while putting our objective of capital
preservation first and foremost.
We believe in the application of
common sense, and do not place much
reliance on ‘black box’ approaches to
investment selection.
Investments are, however, inherently
unpredictable and there are risks
associated with any investment strategy
decisions. Recent market history has been
tumultuous and we remain ever watchful.
We will continue to monitor the economic
environment closely.
Investment performance
Net investment income excluding
realised and unrealised gains and losses
was $34.7 million for the year ended
31 December 2018, an increase of 13.8 per
cent compared to 2017. Total investment
return, including net investment income,
net realised gains and losses, impairments
and net change in unrealised gains and
losses, was a gain of $12.5 million for the
year ended 31 December 2018 compared
to a gain of $45.7 million for 2017.
Key investment portfolio statistics
Duration
Credit quality
Market yield
Book yield
Lancashire Holdings Limited
Annual Report & Accounts 2018
30
Lancashire third-party
capital management
The total contribution from third-party
capital activities consists of the
following items:
Kinesis underwriting fees
Kinesis profit commission
Lloyd’s managing agency
fees & profit commission
Total other income
Share of loss of associate
Total third-party capital
managed income
2018
$m
6.6
–
2017
$m
5.8
5.9
5.8
12.4
(7.1)
5.5
17.2
(9.4)
5.3
7.8
The Kinesis profit commission is driven by
the timing of loss experience, settlement
of claims and collateral release and
therefore varies from period to period.
Following the significant catastrophe
activity during the second half of 2017,
and resulting loss experience, there was
no recognition during 2018 of any profit
commission for the 2017 underwriting
cycles. The higher Kinesis underwriting
fees in 2018 reflect the higher level of
premiums under management compared
to 2017. The share of loss of associate
reflects Lancashire’s ten per cent equity
interest in the Kinesis vehicle. The losses
for both 2018 and 2017 were driven by the
catastrophe activity in each respective year.
The Lloyd’s fees and profit commission is
driven by the relative profitability of the
underwriting years impacting each period.
Other operating expenses
Employee
remuneration costs
Other operating expenses
Total
2018
$m
2017
$m
49.0
40.2
89.2
40.2
43.4
83.6
Employee remuneration costs for the
year ended 31 December 2018 were $8.8
million higher than the same period in
2017. The increase was primarily due
to increased headcount following the
recruitment of new underwriters and
underwriting teams and an increase in
the variable compensation element of
employee remuneration costs compared
to 2017, given the relative performance.
Other operating expenses were
$3.2 million lower for the year ended
31 December 2018 compared to the same
period in 2017 primarily due to lower
consulting fees incurred in the
Lloyd’s segment.
Equity based compensation expenses
were $7.9 million for the year ended
31 December 2018 compared to a credit
of $0.4 million for the year ended
31 December 2017. The equity based
compensation charge was driven by
anticipated vesting levels of active
awards based on current performance
expectations. Lower equity based
compensation charges were recorded
during 2017 due to incorporating losses
incurred during the second half of 2017
into the performance estimates combined
with the lapsing of awards of former
Cathedral employees on 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 proactive and
flexible capital management is crucial
in helping to generate a superior risk-
adjusted return over time. With our focus
on maximising risk-adjusted shareholder
return across the cycle we will return
capital where this offers the best returns
for our shareholders. We have returned
109.9 per cent of comprehensive income
(loss) generated via dividends or share
repurchases since inception.
The Group actively reviews the level and
composition of capital on an ongoing
basis. Internal methods have been
developed to review the profitability of
classes of business and their estimated
capital requirements plus the capital
requirements of the combination of a wide
range of other risk categories. The key aim
of the capital management process is to
maintain a strong balance sheet, whilst:
• maintaining sufficient capital for
underwriting opportunities and to
meet obligations to policyholders;
• maximising the risk-adjusted return
to shareholders within predetermined
risk tolerances;
• maintaining adequate financial strength
ratings; and
• meeting internal, regulatory and rating
agency requirements.
31
www.lancashiregroup.com
Performance
Business review: continued
The subsidiary operating entities
also conduct capital requirement
assessments under internal measures
and in compliance with local regulatory
and Lloyd’s requirements.
Capital raising can include debt or
equity, and returns of capital may be made
through dividends, share repurchases, a
redemption of debt or any combination
thereof. All capital actions require
approval by the Board of Directors.
The retention of earnings generated
also leads to an increase in capital.
The composition of capital is driven
by management’s appetite for leverage,
amongst other factors, including the cost
and availability of different types of capital.
Maintaining a strong balance sheet will be
the overriding factor in all capital
management decisions.
Capital
As at 31 December 2018, total capital
available to the Group was $1.391 billion,
comprising shareholders’ equity of $1.067
billion and $324.3 million of long-term
debt. Tangible capital was $1.238 billion.
Leverage was 23.3 per cent on total capital
and 26.2 per cent on total tangible capital.
Total capital and total tangible capital as at
31 December 2017 were $1.433 billion and
$1.279 billion respectively.
Dividends
During 2018, the Lancashire Board
declared a final dividend of $0.10 per
common share in respect of the 2017
financial year and an interim dividend of
$0.05 and a special dividend of $0.20 per
common share in respect of 2018. With
the final dividend in respect of 2018 of
$0.10 per common share, total capital
returns since inception amount to $2.8
billion, or 285.0 per cent of initial capital
raised. The final dividend of $0.10 per
common share will be paid on 27 March
2019 to the shareholders of record on
22 February 2019.
Non pre-emptive issue of shares
As part of the Group’s flexible approach
to capital management the Board has in
recent years requested and received from
shareholders authority to issue up to 15
per cent of its shares on a non pre-emptive
basis. Lancashire believes that this ability
to raise capital quickly is important in
securing first mover advantage in the
catastrophe insurance and reinsurance
business which it underwrites. The Board
proposes to put a similar request for
authority to shareholders in a resolution
at the 2019 AGM to be held on 1 May 2019.
Letters of credit
Lancashire has a standard syndicated LOC
facility which in total amounts to $300.0
million, with a $75.0 million loan sub-limit
available for general corporate purposes.
Syndicate 2010 has a catastrophe facility
in place to assist in paying claims and the
gross funding of catastrophes. Up to $80.0
million can be utilised by way of an LOC
or an RCF to assist Syndicate 2010’s gross
funding requirements.
There was no outstanding debt under
the above facilities at any reporting date.
There are no off-balance sheet forms
of capital.
Lancashire Holdings Limited
Annual Report & Accounts 2018
32
Enterprise risk management
Working together
operational risk and strategic risk. The
primary risk to the Group is insurance
risk, which can be subdivided into the
core risk of underwriting and non-core
risk of reserving and includes the Group’s
risk exposures to natural catastrophes
including wind storms, wildfires and
other loss events linked to climate
change trends.
The Group has formulated, and keeps
under review, a risk appetite which is set
by the Board of Directors. The Group’s
appetite for risk will vary marginally from
time to time to reflect the potential risks
and returns that present themselves.
However, protecting the Group’s capital
and maximising risk-adjusted returns for
investors over the long term are constants.
The risk appetite of the Group is central
to how the business is run and permeates
into the risk appetites that the individual
operating entity boards of directors have
adopted. These risk appetites are expressed
through detailed risk tolerances at both
a Group and an operating entity level.
Risk tolerances represent the maximum
amount of capital, generally on a modelled
basis, that the Group and its entities are
prepared to expose to certain risks.
The Board of Directors is responsible
for setting and monitoring the Group’s
risk appetite and tolerances, whereas the
individual entity boards of directors are
responsible for setting and monitoring
entity-level risk tolerances. All risk
tolerances are subject to at least an annual
review and consideration by the respective
boards of directors. The Board and
individual entity boards of directors
review actual risk levels versus tolerances,
emerging risks and any risk learning events
at least quarterly. In addition, on at least a
monthly basis, management assesses our
modelled potential losses against risk
tolerances to ensure that risk levels
are managed in accordance with them.
33
ERM framework
The Group subscribes to a ‘three lines
of defence’ model, the front line being
risk ownership by business managers.
Responsibility for the management of
individual risks has been assigned to,
and may form part of the performance
objectives of, the risk owners within the
business. Risk owners ensure that these
risks and controls are consistent with their
day-to-day processes and the entries made
in the respective risk registers, which are
a direct input into the subsidiary capital
models. The second line comprises the risk
management team, which is responsible
for risk oversight. Within this, the Group
CRO provides regular reports to the
business outlining the status of the
Group’s ERM activities and strategy, as
well as formal reports to the Board and the
boards of the individual operating entities.
The Group CRO ultimately has the right
to report directly to the Group and entity
regulators if she feels that management
is not appropriately addressing areas of
concern. Cathedral’s CRO provides formal
reports to the CUL Board and its RCCC.
The third line of defence is the internal
audit function, which works very closely
with the business and the risk management
team in providing risk assurance.
We continue to perform a quarterly
risk and controls affirmation process
whereby the operation of all key controls is
affirmed by the control operators and then
reviewed and signed off by the risk owners.
In addition, the risk owners are required
to affirm their risks remain appropriately
documented and scored. The output from
this process is reported to the RRC and the
Group and operating subsidiary audit and
risk committees or boards of directors
as appropriate.
As at 31 December 2018, all Group
entities were operating within their
board-approved risk tolerances. No
significant new risks have been identified
and there have not been any material
changes in our existing risks.
www.lancashiregroup.com
Louise Wells
Group Chief Risk Officer
As a short-tail, specialty (re)insurer
risk management is key to our success;
balancing the risk we take on with the
return we receive for that risk is critical.
Understanding the risks to the business
and the current, and potential, impact
on our business model gives us the ability
to adapt as necessary to deliver on our
strategic priorities. Ensuring we have
continuous and consistent risk management
embedded across the Group through the
RMF is a key focus.
Risk strategy
Our risk strategy is the starting point for
the development and evolution of our
RMF and is therefore refreshed on an
annual basis in line with the regular
development of our framework and the
annual review of the business and capital
strategy. Our risk strategy must be aligned
with our business and capital strategy to
ensure the capital resources held are
matched to the risk profile of the Group
and that the balance between risk and
return is considered as part of all key
business decisions.
The Group is exposed to risks from several
sources. These include insurance risk,
market risk, liquidity risk, credit risk,
Performance Enterprise risk management: continued
ERM & ORSA
• Group CRO report
to Board and Executive
Management Committee
• Production of ORSA report
and review and approval
by the Board
• Capital and liquidity
management frameworks
• Review of BLAST
policies, capital and
solvency appetites
• Full/proxy
capital assessments
• Rating agency
capital assessments
• Stress and
scenario testing
Key activities
• Review of business strategy with challenge from the Board
• Annual approval of a business strategy paper by the Board
STRATEGY REVIEW
& CHALLENGE
RISK SOLVENCY &
ASSESSMENT
CAPITAL
MANAGEMENT
C U LTURE &
BOARD
RRCRRC
RRC
OVERN A N C E
G
RISK IDENTIFICATION
& ASSESSMENT
RISK APPETITE &
TOLERANCES
RISK & BUSINESS
MANAGEMENT
BUSINESS
PLANNING
• Risk identification and assessment
• Quarterly risk and control affirmations
• Quarterly internal audit reports to
the Audit Committee per a three-
and four-year rolling programme
• External audit reports to the
Audit Committee
• Audit Committee annual review of
the effectiveness of financial controls
• Review of risk strategy and ‘attitude
to risk’
• Review of risk appetite and limits
• Review of Group risk tolerances
• Management, Board and subsidiary
board approval of risk tolerances
• Review of risk
management policies
• Assessment of risk management
• Review and approval of
business plan by the Board
• Stress and scenario testing
framework maturity
(business plan)
• Integrated assurance assessment
• Emerging risk assessment
• Assessment of management actions
Key elements of ORSA
Board sign-off and embedding
Business strategy
Risks
Capital and solvency
Stress and scenario testing
Our quarterly ORSA reports prepared by
the Group CRO to the main Board provide
a timely analysis of current and potential
risks, compared against risk tolerances,
along with their associated capital
requirements. Key areas of focus in 2018
included Brexit, climate change and the
continued soft market conditions.
The 2019 annual ORSA report will
be presented to the Board for review,
challenge and approval during the first
quarter of 2019. This will be a transitional
ORSA as we move from the PRA’s group
supervision to the BMA’s, which was
effective 1 January 2019.
As a Lloyd’s managing agent, CUL falls
within the Society of Lloyd’s for Solvency II
reporting, preparing ORSA reports for
each syndicate. Cathedral has its own ERM
framework to ensure adherence to Lloyd’s
minimum standards.
In November 2018, the Group CRO
reported to the Remuneration Committee
regarding risk and remuneration,
recognising the importance of the design
of the remuneration structure in driving
desired behaviours over both the short-term
and the longer-term business planning
periods. In addition, the Group Solvency II
Staff policy underwent its annual review by
the Remuneration Committee.
The diagram above illustrates how we
balance our ERM and ORSA activities.
Our risk culture is driven from the
top down via the Board and executive
management to the business, with the RRC
central to these processes. The primary
role of the Group CRO is to facilitate the
effective operation of ERM and the ORSA
process throughout the Group at all levels.
The role includes, but is not limited to, the
following responsibilities:
Lancashire Holdings Limited
Annual Report & Accounts 2018
34
• overall management of the risk
management system;
• to drive ERM culture, ownership
and execution on three levels: Board,
executive management and operational
within the business;
• to facilitate the identification, assessment,
evaluation and management of existing
and emerging risks by management and
the Board including the articulation of
risk preferences and the adoption of
formal risk tolerances;
• to ensure that these risks are given due
consideration and are embedded within
management’s and the Board’s oversight
and decision-making process; and
• to be consulted, and opine, on policy
in areas such as, but not limited to,
underwriting, claims, investments,
operations and capital management;
and to provide timely, accurate,
reliable, factual, objective and accessible
information and analysis to guide,
coach and support decision making.
RRC
The RRC, under the chairmanship of
the Group CEO, is the key management
tool for monitoring and challenging the
assessment of risk on a regular basis. It
seeks to optimise risk-adjusted returns and
facilitate the appropriate use of BLAST,
including considering its effectiveness.
It ensures that all key areas of risk are
discussed according to a schedule that
covers fortnightly, monthly, quarterly,
semi-annual and annual reviews. The
RRC meets fortnightly and is responsible
for co-ordinating and overseeing ERM
activities within the risk profile, appetites
and tolerances set by the Group and
individual entity boards of directors. The
RRC includes the Group CEO, members
from the finance, actuarial, modelling,
operations, treasury and underwriting
functions and both the Group CRO and
Cathedral CRO. The Group CRO reports
on the RRC’s activities to the Group and
individual entity boards of directors and,
via the Cathedral CRO, the RCCC of
Cathedral. Through the Group CRO
Risk universe
Type
Category
Description
the RRC considers recommendations to
the Board and its Committees with regard
to the adoption of formal risk tolerances.
Capital models
We continue to challenge the assumptions
used in the individual capital models and
make changes where appropriate.
Emerging risk
The identification and assessment of
emerging risk occurs throughout the
Group from individual departments to
management and executive committees
to the boards of directors and sub-
committees of the boards. The risk
department maintains an emerging risk
register, which is provided to the Board
and entity boards of directors each
quarter, and is therefore subject to an
iterative process of review and oversight.
Emerging risks, by their nature, are
difficult to quantify, however during 2018
the Group strove to foresee potential areas
of new risk, or developments in existing
risks and to assess how those risks could
impact the Group. In addition, during
2018 CUL implemented an emerging
risk working group, the output from which
is included in the CUL CRO’s report to
the Cathedral RCCC and the Group’s
emerging risk register. Emerging risks
considered in 2018 included Brexit,
geo-political instability and U.S. tax reform.
Risk universe
We continue to classify risks in three
broad classes: (a) Intrinsic Risk: ‘Risk that
stems from the inherent randomness and
uncertainty that exists in the universe in
which we operate and that is therefore
fundamental to how we manage our
business’. This can be core or non-core;
(b) Operational Risk: which can be
independent or correlated; and (c) Other
Risk: the non-financial category of risks
which cannot necessarily be mitigated by
holding capital since such risks may not
have direct balance sheet implications.
The Board evaluated the risks disclosed,
alongside other factors, in the assessment
of the Group’s viability and prospects as
set out in the going concern and viability
statement in the Directors’ Report
at page 93.
Underwriting
Investment
e
r
o
C
c
i
s
n
i
r
t
n
I
c
i
s
n
i
r
t
n
I
e Reserving
r
o
c
-
n
o
N
(Re)Insurance
counterparty
Liquidity
Intrinsic risks representing the potential to generate a return as well as a loss.
In these areas, the Group promotes informed risk-taking that considers the risk and return equation in all major
decisions, with the intention of maximising risk-adjusted return on equity.
We recognise that by insuring fortuitous events we can suffer losses, and that within our investment portfolio
we can see the value of investments fall. We cannot avoid these risks so we focus on the correlated operational
risks and seek to mitigate them. For example, we know that by insuring the risk of earthquake we are exposed
to the risk that losses exceed our plan. We model our portfolio using stochastic modelling to review actual and
planned exposures to ensure they remain within tolerances. The correlated risks are that we might fail to design
or maintain effective tolerances and limits, and fail to maintain exposures within such limits; or that we fail to
keep accurate and timely records of our exposures. We then devise systems and processes to mitigate these risks,
such as PML reconciliations, and RDS sign-offs, with review by the RRC and regular ORSA reports to the Board,
which also considers and approves formal risk tolerances.
Intrinsic risks to which we are inevitably exposed as a result of conducting our day-to-day business operations yet
offer no direct potential for return.
They are quantified insofar as practicable for the purposes of capital and risk management and avoided or
minimised insofar as is economically justifiable.
l
a
n
o
i
t
a
r
e
p
O
Operational
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, for example increased reinsurer
default losses arising through the use of non-approved counterparties; or to crystallise separately in their own
right, for example losses arising through the imposition of fines as a result of a regulatory breach, so unrelated
to our core functions.
r Strategic
e
h
t
O
Group
Emerging
These are risks for which quantitative assessment is difficult but for which a structured approach is still required
to ensure that their potential impact is considered and mitigated insofar as is practicable. These are included
within the risk register and are assessed and mitigated through scenario and stress testing.
35
www.lancashiregroup.com
Performance
Principal risks
Balancing our risks and opportunities
As described under our review of the risk universe on page 35, 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 111 to 133. Within the capital models, insurance risk accounts for over 80 per cent of the allocated risk capital, so this
is clearly the principal area where we stringently apply controls and reviews. For example, we place a large number of controls around
monitoring risk levels across the business. However, we understand that even risks that do not generate a capital charge under an
economic capital model can pose serious threats to the execution of the business plan and strategy, and therefore need to be monitored
and tested. For example, we spend a lot of time looking at the implications of emerging capital and the evolution of the market cycle.
In addition, the Group continues to consider and adapt to the risks and opportunities arising from climate change through the analysis
of the associated physical, transitional and liability risks. As part of our overall risk mitigation strategy we perform detailed stress and
scenario testing to stress the financial stability of the Group. This process is aligned to our business planning and ORSA processes and
time horizons. The selected tests are aligned to our key risk areas and include capital (rating agency and regulatory), underwriting and
investment related stress tests at a minimum.
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. We
recognise that through climate change trends, and other influencing
factors, weather-related incidences or other actual catastrophe loss
events these may increase losses in frequency, severity and clustering
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.
Trend: Stable.
Investment: We need to hold sufficient assets in readiness to pay
claims, but the markets and products in which we invest can suffer
volatility and losses. As a short-tail insurer, we are able to hold the
majority of assets in low-duration securities such as fixed maturities.
However, this creates an additional source of risk in the current
environment, where there is a considerable risk from changes in the
Federal Reserve policy where rates may increase further or start to
reduce as the preferred term and interest rate is achieved. In addition,
there is increased credit risk in the U.S. economy as it reaches the
later stages of the credit cycle. We model our investment portfolios
and use various stress scenarios to see what kinds of losses we could
expect under a range of outcomes.
Trend: Stable.
Mitigation
Modelling: We apply loads to, and stress test, stochastic models
and develop alternative views of losses using exposure damage
ratios. We review our assumptions periodically to ensure they
remain appropriate. We also back test our portfolio against
historic events to assess potential losses.
RRC: The RRC considers accumulations, clashes and
parameterisation of losses and models.
Capital: We set our internal capital requirements at a level
that allows for buffers above accumulations of extreme events
and the Board approves risk tolerances at least annually and
considers capital requirements on at least a quarterly basis.
Reinsurance: We buy reinsurance to manage our exposure and
protect our balance sheet. The structure of our programme was
reviewed for 2019 to ensure it remained aligned to our strategy
and risk profile.
Investment strategy: Our strategy is that investment income
is not expected to be a significant driver of our returns. Our
primary focus remains on underwriting as the engine of profits.
Investment strategy, including investment risk tolerances, is
approved annually and monitored on a quarterly basis by the
Investment Committee and Board. A detailed strategic asset
allocation study is performed biannually.
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.
Lancashire Holdings Limited
Annual Report & Accounts 2018
36
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 reserve reviews by external
actuaries 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.
Trend: Stable. Our processes and controls remain the same as in
previous periods.
Type
(Re)Insurance and intermediary counterparty: Almost all the
insurance policies which we write are brought to us by brokers,
who act as intermediaries between us and the client, and handle
the transaction of payments of claims and premiums on our behalf.
This exposes us to the risk of mishandling by, or failure of, the broker
concerned. In order to make our portfolio as efficient as possible,
we buy reinsurance to protect against severity, frequency and
accumulation of losses. Again, this exposes us to the risk that our
counterparties may have the inability or unwillingness to pay us
in the event of a loss.
Trend: Stable.
Liquidity: In order to satisfy claims payments we need to ensure that
sufficient assets are held in a readily realisable form. This includes
holding liquid assets for the modelled payout of loss reserves, as
well as ensuring that we can meet claims payments in relatively
extreme events.
Trend: Stable.
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
review by external actuaries 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 external auditors, KPMG, also carry out an actuarial
review of reserve adequacy. The Audit Committee of the Board,
with the benefit of management and the actuarial and audit
reports, reviews reserve adequacy at its quarterly meetings.
Mitigation
Counterparty credit limits: The Broker Vetting Committee
is responsible for the broker vetting approval process and
monitoring credit risk in relation to brokers. In addition, the
Group conducts broker business using non-risk transfer TOBAs.
This mitigates the risk due to non-payment by brokers and
intermediaries as monies are held in separated client accounts.
We use counterparty credit limits, seek to deal with reputable
reinsurers that meet our minimum rating standards, and use
collateral agreements where appropriate. The operating entities
of the Group that contract for reinsurance separately maintain
and report their own counterparty credit limits at the entity
level. The RSC is responsible for approving counterparties
and monitoring aggregate limits.
Portfolio management: The Group maintains liquidity in excess
of the Board-agreed tolerances. This is achieved through the
maintenance of a highly liquid portfolio with short duration
and high creditworthiness. We monitor this through the use
of stress tests and mitigate risks through the quality of the
investments themselves.
37
www.lancashiregroup.com
Performance Principal risks continued
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 exposures. If correlated with an
insurance loss this could cause us to breach insurance risk tolerances.
It could also encompass IT integrity, where an unauthorised intruder
could alter data in our systems, or introduce a bug that would corrupt
the system.
Trend: Stable compared to prior period but elevated through the
project to develop our systems to enable us to further improve the
functionality of Group IT finance systems, to enhance management of
financial reporting risk and to ensure future compliance with IFRS 17.
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, and in addition the Group CRO reports annually
to the Remuneration Committee on risk and remuneration
including Solvency II remuneration requirements.
Lancashire Holdings Limited
Annual Report & Accounts 2018
38
Mitigation
Qualitative approach: These risks require a qualitative
approach, engaging staff in appropriate discussions about
sources of risk, and then thinking about possible outcomes.
The Group Executive Management Committee and the RRC
consider these issues, and the quarterly ORSA reports made by
the Group CRO to the Board include standing items on these
risk areas. A Brexit update including proposed solutions and
the status of such was included each quarter during the year.
Other – Brexit
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, Regulatory
and Emerging Risks. A key focus during 2018 has been on the
uncertainties arising as a result of Brexit and the lack of clarity
on the political direction of the Brexit negotiations.
Trend: On balance risk levels remain stable. The impact of Brexit is
not considered to be a significant risk to the Group given the Group’s
current operations, trading profile and the solutions that have been
put in place. The Group has developed a clear strategy as a result
of the UK’s proposed withdrawal from the EU, which is currently
scheduled to take effect on 29 March 2019. In the event that the UK
and the EU27 conclude a withdrawal agreement prior to 29 March
2019 then there will be a 21 month period wherein access to the
single market will continue seamlessly until 31 December 2020
for UK insurers. After that date it is anticipated that a free trade
agreement will be implemented.
Notwithstanding this, the Group has actively sought a solution in the
event of no agreement as at 29 March 2019, a so called ‘hard’ Brexit,
and to that end it is proposed that a significant proportion of LUK’s
existing EU27 business could be written via Lloyd’s Brussels, utilising
CUL, which has Lloyd’s approval for this arrangement, subject to
ongoing approval by Lloyd’s and any additional approvals of the
Belgian regulatory authorities that may be required in relation to
the operation of Lloyd’s Brussels. The Group may also consider
additional contingency planning depending on the likely level of
continuing market access as the political situation develops, including
transferring new and renewal EU27 business to LICL, a Bermuda
domiciled company. Bermuda is a Solvency II equivalent jurisdiction
to the EU and as a result a significant amount of EU27 (re)insurance
business could be written by LICL. Moreover, it is the Group’s
understanding that even under the World Trade Organization’s
General Agreement on Trade and Services (GATS) rules (depending
on each individual EU member state’s commitment to grant access
to third-party countries) there is likely to be an ability for LUK to
continue underwriting certain classes of business in the EU27. The
Group also notes the moves by France, Germany, the Republic of
Ireland and several other EU countries to ensure contract certainty in
relation to legacy business in the event of a ‘hard’ Brexit scenario; and
expects that these moves are likely to be replicated across the EU27.
39
www.lancashiregroup.com
Performance
Engagement and sustainability
Working to support
our stakeholders
Our stakeholders
Lancashire
Foundation
Service Providers,
including Suppliers
and Contractors
Brokers
Government and
Regulators
Shareholders
Policyholders
Lenders
Our People
Environment
Rating
Agencies
Communities
and Society
Lancashire Holdings Limited
Annual Report & Accounts 2018
40
Our approach to
stakeholder engagement
Since its foundation in 2005, the Lancashire
Group has focused on fostering relations
with a broad range of stakeholders, in
particular our shareholders and our
people, who support our business and
our policyholders who rely on the
(re)insurance products we sell. These
‘core’ stakeholders are shown at the
heart of the diagram but at any one time
the Group’s relationship with certain of
its other stakeholders can come to the
forefront and be of key importance.
Therefore, our stakeholder diagram
is fluid in nature.
Responding to the debate
There has been recent debate around
the importance of such stakeholder
engagement in relation to UK listed
companies. Although the Company is
incorporated in Bermuda and therefore
not subject to UK Companies Act
requirements, the Board has paid, and
continues to pay, close attention to the
latest developments in English law and
governance expectations, specifically,
the duties falling upon boards of UK
incorporated companies under section
172 of the Companies Act 2006 and the
changes introduced to the UK Corporate
Governance Code in 2018, which place
a greater focus on businesses to
demonstrably pay regard to the interests of
a broad group of stakeholders. Our
engagement with our stakeholders is
essential to the formation and delivery
The Group values its relations with, and works to support, its stakeholders to ensure the success of the business. “Our employees are
the lifeblood of the
organisation and the
Group therefore strives to
attract and retain excellent
individuals who share our
drive and appetite to
outperform.”
of Lancashire’s business strategy. The
Board and the business have for many
years prioritised underwriting excellence
and a nimble culture of capital
management to serve the best interests
of our core stakeholders and ultimately
benefit a broader group of stakeholders.
Our people
Culture
Our employees are the lifeblood of the
organisation and the Group therefore
strives to attract and retain excellent
individuals who share our drive and
appetite to outperform. Matching the
skills, aspirations and values of new
recruits to those of the business remains
a key priority. We believe the talents of
our people and our distinctive culture
continue to set us apart from
our competitors.
Lancashire offers a rewarding environment
within which to work, both in terms of
the support and opportunities given to
employees to enable them to excel in
their role and the competitive and
attractive compensation and reward
structures. To further enhance the link
between our people and the performance
of the business, all of our permanent
employees are eligible to receive RSS
awards, therefore giving them the
opportunity to share in the growth and
success of the Group and ultimately
become shareholders.
We expect our staff to conduct themselves
in a professional manner which is
reflective of the Group’s core values.
All new employees are required to
attend our ‘Respect in the Workplace/
Communications Etiquette’ training
sessions as part of their induction.
The training sessions aim to highlight
employees’ responsibilities in ensuring
that there is no discrimination in the
workplace and in fostering a positive
and productive working environment.
Lancashire respects, supports and
complies with all relevant local Bermudian
and UK legal requirements to which it
is subject, in particular with respect to
rights of freedom of association, collective
bargaining and working time regulations.
Diversity and inclusion
The Group promotes an inclusive,
collegiate and positive environment that
recognises and values diversity as key to
enhancing individual development and
maximising business effectiveness (see in
this regard the Nomination and Corporate
Governance Committee report on pages
63 and 64). As an equal opportunities
employer, we do not tolerate discrimination
of any kind in any aspect of employment.
For example, all decisions relating to
recruitment, assessment and promotion
are based on the ability of the individual to
do the job, without consideration to race,
age, gender, sexual orientation, disability,
beliefs, background (except as may be
pertinent to the requirements of a role,
such as educational qualifications or prior
employment experience) or nationality.
Our workforce is represented by
employees from 13 different nations and
the gender split of males to females (see
page 64) is 61/39 per cent respectively.
The Group is also committed to providing
a working environment that is free from
any form of bullying or harassment.
Number of employees (UK and Bermuda)
Percentage of female employees
Percentage of women on the LHL Board
Percentage of women on the Group executive committee
Percentage of women in senior management positions
Number of different nations represented by our employees
Percentage of the workforce composed of
third-party contractors
Group employee turnover (annual)
Percentage of employees who undertook training during the
year
Percentage of permanent employees eligible for RSS awards
Accredited London Living Wage employer
2018
218
39%
28.6%*
37.5%
29.4%
13
6.9%
13.8%
65.6%
100%
Yes
2017
204
40%
25%
33.3%
26.3%
12
3.8%
16.2%
67%
100%
Yes
* At the time of approval of this Annual Report and Accounts, the percentage of women on the LHL Board
stands at 37.5%.
41
www.lancashiregroup.com
Performance
Engagement and sustainability: continued
Training and development
The Group encourages continuous
personal and professional development
for all of its employees, through internal
and external training, professional
qualifications, internships and
secondments, performance coaching,
and ‘lunch and learn’ sessions. During
2018, approximately 65.6 per cent of
our employees undertook some form of
training supported by the Group. As ever,
we encourage all our employees to take
advantage of the training opportunities
offered. Individual training and personal
development needs are discussed on a
regular and ongoing basis by managers
and their team members, and are assessed
as part of the formal appraisal process,
where principally each of our employee’s
success is measured through the
attainment of personal performance
metrics as well as performance within
the Group’s values framework. We can
confirm that during 2018 3.2 per cent
of our employees were promoted within
the Group, supported by the training
and development opportunities
afforded to them.
The Group also delivers compulsory
training to all new permanent staff and
fixed-term contract staff which covers a
range of important topics, including;
Tax/Regulatory Operating Guidelines,
Disclosure (including share dealing),
Inspections, Financial Crime, ERM and
Respect in the Workplace/Communications
Etiquette. Other training may be held
on an ad hoc, one-off or refresher basis
according to an individual’s requirements.
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 role
and responsibilities within the business.
There is an expectation that all new
staff members will have completed their
compulsory training during the first six
months of joining the business. Quarterly
updates regarding attendance at these
compulsory training sessions are provided
to the Board for information purposes.
Engagement
The Group benefits from having a
relatively small headcount (218 employees
globally), which allows its staff members to
interact easily between departments and to
access members of the senior management
team including the CEOs at both Group
and subsidiary level. Lancashire also
encourages a high level of engagement
between its workforce and the Board.
There are regular opportunities for each
of the Directors and staff members to
interact at all levels across the organisation
in a particular year, and such engagement
is encouraged both at the level of the
Group’s subsidiary boards and the main
Board of the Company. This occurs at
board dinners (to which UK and Bermuda
staff members are routinely invited),
interaction with senior employees as
part of quarterly activities, semi-formal
lunches, ‘town hall’ quarterly update
meetings, periodic attendance at the daily
underwriting call and annual attendance
at the AGM. Furthermore, both Simon
Fraser and Samantha Hoe-Richardson are
Non-Executive Directors on the subsidiary
boards of CUL and LUK, respectively, and
in that capacity each has the opportunity
to meet and engage with a range of staff
members within those businesses. Please
see page 49 for the Chairman’s comments
on the Board’s plans for workforce
engagement during 2019.
Our employees also continue to
contribute towards the development
of our marketplace through their
involvement with market committees,
boards and working groups. During 2018,
our employees actively participated in
industry conferences, investor days
and symposia, and market education
programmes. As noted on page 46,
we also donate to many of the causes
supported by our industry partners
through the Lancashire Foundation.
Shareholders
As a premium-listed company on the LSE,
Lancashire understands the importance
of its obligations to shareholders. We
work hard to foster good investor relations
and pride ourselves on having an active
programme of engagement with our
diverse shareholder community
around the world.
Lancashire values the views of all of its
shareholders and maintains open and
transparent communication channels
with them and certain of the leading
shareholders advisory services. This is led
by our Group Head of Investor Relations,
in collaboration with members of the
Board and the executive team, and is
achieved through a structured programme
of meetings, presentations and periodic
consultation initiatives. These can cover
a range of topics including the Group’s
financial performance and business
strategy, the environment and the
executive remuneration policy.
The Board meets regularly with the
Group’s corporate brokers to seek their
feedback on investor priorities as well as
Lancashire’s performance and perception
amongst investors within the broader
insurance sector. To learn more about the
Board’s engagement and relationship with
its shareholders, please see page 57 of this
Annual Report and Accounts.
Policyholders
Policyholders are central to our business,
so understanding and serving their
commercial requirements is at the
forefront of everything we do. Through
our range of underwriting platforms,
we strive to offer clear, fairly-priced and
useful products that continue to meet our
policyholders’ insurance and reinsurance
needs across the cycle. In the event of a
loss occurring, we remain responsive in
order to provide our policyholders with
ongoing support and seek to pay their
claims as expeditiously as possible,
knowing the importance of providing an
excellent service. We place the highest
value on the relationships we have
built over the years with our existing
policyholders and work hard at creating a
lasting impression with new ones. To this
end, we are happy to welcome both our
policyholders and their brokers to our
offices, but we also travel to see them
and their businesses around the world.
A more detailed account of the work we do
in meeting the needs of our policyholders
can be found in the underwriting review
and business review sections of this Annual
Report and Accounts on pages 22 to 25
and pages 26 to 32, respectively.
Lancashire Holdings Limited
Annual Report & Accounts 2018
42
Brokers
We are fully committed to supporting
a ‘broker market’ and to maintaining
a strong working relationship with the
largest global broking firms, as well as
individual brokers. The Group depends
on brokers to distribute its products and
actively assesses these relationships to
ensure that it continues to be viewed as a
trusted partner and provider of solutions
for their clients’ (re)insurance needs.
Communities and society, including
the Lancashire Foundation
Lancashire is strongly committed to
giving back to the communities within
which it operates, both locally in the UK
and Bermuda and also further afield.
The business seeks to help those who are
in distress or at a disadvantage, through
continued support of local initiatives and
activities, volunteering days, mentoring
opportunities and fundraising events,
to name a few. We utilise the talent and
energy of our staff in helping others,
positively impacting society and creating
a more sustainable environment. In turn,
this stimulates a positive culture amongst
staff and promotes Lancashire as an ethical
and compassionate employer. These goals
are primarily achieved through the work
of the Lancashire Foundation. To learn
more about the Lancashire Foundation
and the charities it supports, refer to
pages 45 to 47.
The Group and the Foundation have jointly
sponsored an internship programme for
Bermuda resident college graduates since
2014. These graduates are afforded the
opportunity to work and learn about
insurance in the Group’s London office.
The Board keeps itself informed of the
activities of the Lancashire Foundation
through regular reporting and meetings
with the Foundation’s Trustees. A staff
survey completed in 2018 confirmed that
across all our platforms the Foundation’s
work was seen as a vitally important part of
the Group. The Board also sets the policy
for donations to the Lancashire Foundation.
Environment
The Group is committed to managing the
environmental impact of its business. We
continue to measure our carbon footprint
with a view to minimising its negative
impact through mitigation strategies
and by offsetting 100 per cent of our
greenhouse gas (GHG) emissions, as
reported in the table below, to remain
carbon neutral. The Group also recognises
the challenges posed by climate change
and considers its impact as part of the
risk management and strategic planning
process (please refer to the Chief
Executive’s review on page 15 and
the section on principal risks from
page 36 to 39 for further details).
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.
Emissions are collated over a 12-month
period from 1 January 2018 to 31
December 2018 and are calculated by
converting consumption data into tonnes
of carbon equivalent (tCO2e) using
the DEFRA 2018 GHG reporting
conversion factors.
Using an operational control approach,
Lancashire has assessed its boundaries to
identify all the activities and facilities for
which it is responsible. Subsequently, we
have reported 100 per cent of our Scope 1
and 2 footprint, along with areas of our
Scope 3 footprint with high levels of
operational control, as detailed below.
Calculations performed follow the
ISO 14064-1:2006 standard, giving absolute
and intensity factors for the Group’s
emissions. Lancashire uses the number of
full-time employees (FTE) as its intensity
metric. Where data was not available for
2018, values have been extrapolated by
using available data or calculated using
industry benchmarks.
The following table sets out the Group’s
carbon footprint for the current and prior
reporting period, broken down by
emission source.
The Group’s UK operations have
been awarded BREEAM excellence
for their London offices at 20 Fenchurch
Street, which has supported an overall
improvement in environmental performance.
Total emissions for 2018 have decreased
by 13.2 per cent compared to 2017, with
emissions per FTE falling by 18.8 per cent
compared to 2017.
Activity
Gas (measured in kWh)
Refrigerant (measured in kg)
Electricity (measured in kWh)
Business Travel (measured in miles
and spend)
Additional Upstream Activities2
(measured in kWh, litres, miles and spend)
Water (measured in m3)
Waste (measured in kg)
Paper (measured in reams)
Hotels (measured in hotel nights)
Types of Emissions
Direct (Scope 1)
Indirect Energy (Scope 2)
Indirect Other (Scope 3)
Gross Emissions (tCO2e)
Gross Emissions per FTE
(tCO2e/FTE)
Carbon Credits
Total Net Emissions after
offset (tCO2e)
20181
tCO2e
60.1
0.0
319.9
20171
tCO2e
70.9
0.0
418.0
1,457.2 1,619.5
246.4
12.9
3.7
5.6
24.0
299.7
7.2
4.4
6.9
26.7
2,129.8 2,453.3
9.8
2,130
12.0
2,454
0.0
0.0
1. Please note: all numbers quoted have been rounded to one decimal place.
2. Additional Upstream Activities include Well-to-Tank and Transmission & Distribution emissions.
These are emissions associated with the upstream processes of extracting, refining and transporting
raw fuel and the emissions associated with the electrical energy lost during transmission to our business.
43
www.lancashiregroup.com
Performance
Engagement and sustainability: continued
Rating agencies
Lancashire maintains a positive
relationship with three major rating
agencies: A.M. Best, S&P and Moody’s.
These rating agencies assess and rate the
creditworthiness and claims-paying ability
of the Group’s insurance subsidiaries,
LICL and LUK, based upon established
criteria. The syndicates benefit from
Lloyd’s current ratings. We are proud of
the ratings which we have been assigned
by each of these rating agencies and we
engage with them on the following bases:
annually, for our rating review; quarterly,
to discuss our results for the period;
and on an ad hoc basis as events dictate
including after significant industry loss
events or a series of loss events. These
ratings allow the Group to write business
successfully in all major global insurance
markets and to comply with reinsurance
contracts under which the Group is
reinsured, as well as its credit facilities
which support underwriting obligations.
Service providers, including suppliers
and contractors
The Group contracts with a number of
third parties for the provision of important
services to help run its business. Having
developed excellent relationships with its
service providers, Lancashire is able to
work collaboratively with them. This helps
us to respond to technological advances
and to develop internal systems and
infrastructure to operate efficiently.
For all employers within the ancillary
services and limited supply chains used
by the Group, Lancashire seeks to receive
assurance that its service providers pay a
living wage. In particular, the Group’s UK
operation is an accredited Living Wage
employer by the Living Wage Foundation.
“In an industry that is
subject to strict regulatory
supervision and oversight,
we recognise the need
to work closely and
openly with all relevant
regulatory bodies.”
The Group operates a policy of paying its
service providers in accordance with the
individual payment terms agreed. The
Group’s UK subsidiary, LUK, complies
with its statutory reporting duty for
payment practices and performance
in relation to qualifying contracts on
a half-yearly basis.
As a service provider in our own right,
Lancashire has its own responsibilities to
those within its limited supply chain. Any
concerns arising over the human rights
records of insureds and potential clients
would be considered as part of the
underwriting process.
Lenders
The Group has in place a number
of long-term debt and financing
arrangements with lenders which help
to support and fund its underwriting
operations and to comply with regulatory
capital requirements. The Group’s solid
relationships with its lenders allow it the
flexibility to respond to changing business
and economic conditions and to raise
capital, when required, to execute its
strategy. We routinely publish financial
information for the benefit of all our
capital providers, including our lenders.
Further details of our long-term debt and
financing arrangements are set out in note
18 to the consolidated financial statements
from page 153 to 155.
Results show that GHG emissions in the
year were 2,129.8 tCO2e, comprised of
direct emissions (Scope 1) amounting
to 60.1 tCO2e, and indirect emissions
(Scope 2) amounting to 319.9 tCO2e.
The source of other indirect emissions
(Scope 3) comprised 1,749.8 tCO2e.
Scope 1 emissions have decreased by
15.3 per cent due to a decrease in natural
gas consumption. Scope 2 emissions have
decreased by 23.5 per cent compared
with 2017 due to the continuing
decarbonisation of the UK grid mix,
alongside a reduction in consumption
year on year. Scope 3 emissions have
also decreased compared with 2017 due,
primarily, to a reduction in air mileage
year on year.
The Group has fully offset its 2018
GHG emissions through an organised
programme with EcoAct by purchasing
credits in the Wind Power Generation
project in India. These offsetting
proposals were discussed and agreed
with the Group CEO.
Government and regulators
In an industry that is subject to strict
regulatory supervision and oversight, we
recognise the need to work closely and
openly with all relevant regulatory bodies.
We place great importance on the
relationships we have with our regulators
and engage actively with them, whether
that is through meetings, reporting or
routine regulatory reviews. In particular
and to provide an example, members of
senior management and the Chairman of
the Board held regular dialogue with the
PRA during 2018 as part of the discussions
relating to the relocation of the Group’s
regulatory supervision to Bermuda.
The Board is also kept apprised of
communications with regulators
and supervisors and, together with
management, monitors changes in
regulatory and supervisory
requirements closely.
In addition, the Group maintains proactive
relationships with relevant tax authorities,
including HMRC, in order to achieve
compliance with all its tax obligations.
This requires us to keep abreast of
developments in tax legislation and to
work with the tax authorities to manage
our tax risk.
Lancashire Holdings Limited
Annual Report & Accounts 2018
44
The Lancashire Foundation
The Foundation is a key component not
just of our community activity, but also of
our corporate persona.
The Foundation is funded by regular
donations from the Company and retains
a shareholding in the Company and
therefore benefits from any dividends
paid. This creates a direct link between the
success of the Company and the resources
available to the Foundation, serving as an
additional motivation for our people, as
the Foundation is able to support more
of the causes that are suggested by
employees. In this way we have aligned the
Foundation to the Lancashire Group and
can share in its success, and leverage that
success to causes and communities that do
not often receive such material rewards.
Major donations, such as those made to
MSF, which operates in crisis relief around
the world, and ICM, which works with
the poorest of poor in the Philippines,
complement Lancashire’s own insurance
and reinsurance business by seeking to
provide support to those afflicted by
unexpected events and extreme poverty
in areas where there is no insurance to
protect people and their property.
Other charities supported during
2018 include:
• Action on Addiction
• Cancer Research UK
• Child Bereavement UK
• Kiva Microfunds
• Knowledge Quest
• Medical Detection Dogs
• Rise2Shine
• St Giles Trust
• The Family Centre
• Tomorrow’s Voices
• Victor Scott (Fruit for Schools)
• Warwick Academy
• Windreach Bermuda
• Women 4 Women
“The Lancashire Foundation
started working with
Médecins Sans Frontières
in 2008. In the past ten
years, the Foundation has
provided funding totalling
an incredible £3,207,497.
Thanks to this long-term
partnership we have been
able to provide humanitarian
support and emergency
medical aid in some of the
hardest to reach areas in
the world, saving the lives
of victims of war, epidemics
and those affected by
deliberate exclusion from
healthcare and neglect.
On behalf of MSF staff
working around the world,
we are so grateful for the
Foundation’s commitment
to our work.”
Vickie Hawkins, Executive Director, MSF UK
45
www.lancashiregroup.com
The Lancashire Foundation, our charitable grant-making body, is the cornerstone of our community 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.Performance Engagement and sustainability: continued
What tangible evidence is there of
the impact of the Foundation?
From an internal perspective we were
very pleased that the 2018 staff survey
confirmed that across all our platforms
the Foundation’s work was seen as a key
indicator of Lancashire operating at
its best.
The Foundation looks to support charities
around the world but with an emphasis on
charities where we can see a demonstrable
positive impact on the communities they
serve and which operate in effective,
transparent and sustainable ways to deliver
the programmes they provide. Annually,
where we have multi-year relationships,
the advocates are expected to review
and reflect on the performance of the
charity they advocate with the Donations
Committee to ensure that the Committee
is happy to recommend a renewal of the
grant for the next year to the Trustees.
Both quantitative and qualitative data will
be reviewed as part of this process. The
advocate system allows us to get close to
our charities and foster the deep, multi-
year relationships we hope to develop
with most of the charities we support.
Through our flagship or cornerstone
relationships we can see this: for example,
the work of MSF really needs little
introduction but they have an ability to
react nimbly to multiple international
humanitarian crises and to continue to
shine a light on issues once the news
cycle has moved on. More locally, the
Family Centre in Bermuda provides early
intervention services for children on
the island suffering from family-based
problems such as abuse and neglect,
and St Giles Trust in the UK looks to
break the bleak cycle of re-offending
through a variety of means, one of which
is its model of using ex-offenders trained
to act as peer advisers to support those
released from prison.
fields of poverty relief, removing barriers
to social exclusion, supporting medical
research and humanitarian relief.
The majority of charities we supported in
2018 were as a result of staff suggestions
and support. In addition, the Foundation
also supported charities suggested by
clients and brokers which, for 2018,
included The Lord Mayor’s Appeal,
Great Britain Wheelchair Rugby
and Brooks Development Trust.
Taking the second aspect of staff giving,
we actively encourage support by staff.
This takes a number of forms, for example:
carrying out volunteering work that
directly benefits the charity, like our
annual volunteering trip to the Philippines
to support the work of ICM with the
ultra-poor; providing mentoring support
to staff at St Giles Trust, many of whom
are ex-offenders; or participating in
fundraising events, such as marathons.
What is the Foundation’s link
to staff?
We are lucky with the quality and
commitment of the people involved in the
Foundation as all the work is carried out
on a voluntary basis by the existing staff
of the Lancashire Group. As mentioned
earlier, a key aspect is ensuring that the
Foundation reflects what engages our staff,
so funding applications received from
charities are analysed and challenged by
the Foundation’s Donations Committee,
which is comprised of staff from across
the UK and Bermuda platforms.
The Trustees of the Foundation review
the recommendations for funding received
from the Donations Committee and release
funds as appropriate. The Trustees also set
the strategic direction of the Foundation
and ensure it is meeting all of its governance
and compliance requirements.
However, it does not stop there. We have
a wider pool of advocates to draw upon,
namely staff members who act as the
Foundation’s ‘eyes and ears’ in relation
to specific charities. This really allows
both the Donations Committee and the
Trustees to obtain comfort that we have
close liaison with our charity partners and
that questions and issues can typically be
resolved quickly.
Michael Connor
Chairman of the Trustees of
the Lancashire Foundation
What is the Lancashire Foundation?
The Foundation is a registered charity
in England and Wales (number 1149184)
and its purpose is to act as the focal point
for the Lancashire Group’s corporate
social responsibility activities.
These activities can be divided into two
main streams: giving money in the form of
grants to selected charities and, equally as
important, encouraging our staff to give of
themselves by supporting the Foundation’s
work through volunteering. We do this by
providing day release programmes for staff
to give back to the communities in which
they live and around the world. In addition,
staff are entitled to up to a week’s annual
charity leave on completion of three years’
permanent employment with the Group.
In 2018, 118 of our staff across the Group
participated in charity volunteer days,
mentoring opportunities or fundraising
events. The Foundation also operates
a charity matching scheme to support
individual staff members’ charitable
initiatives. During 2018, matched
funds from the Foundation amounted
to £15,747 and supported 15 charities.
What does the Foundation do?
As a charity closely linked to the
Lancashire Group, we strive to ensure
that the charities we support reflect the
issues and concerns of our staff, whether
from personal experience or through the
demonstrably positive impact that they
have on those in need. We underpin this
with a set of objectives to inform our giving
with a focus on charities operating in the
Lancashire Holdings Limited
Annual Report & Accounts 2018
46
The Foundation in action
Project Transform
“Seven members of staff from across
the Group were chosen to join the 2018
Project Transform trip. We all volunteered
after listening to the stories and feedback
from the previous year’s team and wanted
to experience for ourselves the amazing
work that Project Transform does with
ICM. Whilst we had a good idea what the
trip involved it wasn’t until we were on the
ground that we could fully appreciate the
extraordinary work that ICM does to help
the ultra-poor.
The week involved building toilets for two
families, a basic need that we all take for
granted. We visited communities for house
to house visits with the local pastor and
provided health and livelihood lessons
to help improve lives. We also visited the
family academy where local volunteers
help mothers to become their children’s
first teachers and prepare their children
for school.
The poverty we saw in the Philippines
was heart breaking. To see how these
ultra-poor communities live and survive
was devastating, but with ICM’s help
there is a hope for these people. We
thank Lancashire for giving us this
amazing opportunity – anyone can
give money to a charity but being able
to volunteer and give our time to help
was so much more rewarding. The 2018
team bonded over the shared experience,
something we’ll never forget.”
Vauxhall City Farm
“Lancashire Insurance has been a long
standing supporter of the farm, not only
through annual monetary donations,
which supports the staff at the farm to
run many of our programmes with young
people and vulnerable adults, helping us
to meet our aims and objectives, but also
in person.
For the last six years a team from
Lancashire Insurance has come to the
farm for a day each year, to get stuck
in and help out. From hedge trimming,
allotment clearing, digging out spent soil
from old enclosures and helping us shift
a tonne of woodchip (literally), to getting
creative in using donated building site
materials, to create sun and rain shelters
for our animals!
While the team changes over time, some
Lancashire staff have been coming to these
corporate volunteer days for several years
in a row and it is wonderful for us to see
their involvement in the farm, and the
enjoyment they seem to be getting from
supporting our charity but also from
actively seeing the real impact their
money and time is making.
We couldn’t do what we do without
their support!”
Relay for Life
“The Bermuda Relay for Life cancer
fundraiser took place on May 18-19 and
we had a huge team of almost 100 staff,
family and friends participating in the 24
hour event. Team Tango (the LICL team)
has currently raised $20,491! This year’s
event raised over $350,000.
The Bermuda Cancer and Health
Centre recently celebrated the one year
anniversary of the Radiation Therapy Unit.
It is a state-of-the-art-facility and allows
patients to receive their treatment (which
takes a maximum of 15 minutes) on the
island. Many patients have been able to
continue working at least part time during
their treatment which allows them to feel
less like a patient, and of course they are
able to live at home and be surrounded
by family, friends, pets, etc rather than
having to be off island. Approximately 130
patients were treated in the first year and
many of these people had full health care
that would have allowed them to travel
overseas for treatment but they have
chosen to stay on island and be treated
by Dr. Fosker and his team. This facility
also treats the uninsured and the under-
insured with no cost to the patient. This is
what our ongoing fundraising supports.”
The 2018 Project Transform team
Vauxhall City Farm
Team Tango – Bermuda
47
www.lancashiregroup.com
Performance Chairman’s introduction
Engaged governance and
a dynamic culture
Peter Clarke
Non-Executive Chairman
ensure that the formal consideration of
governance and regulatory requirements
are used as a proactive and constructive
exercise to foster the dynamic and
successful business culture which has
been a hallmark of the Group’s success
over many years.
How has the Board managed its
Group regulatory status during
the year?
In 2012, the Company established its head
office and conducted the majority of its
Board business in the UK. Prior to this it
was in Bermuda. Between 2016 and 2018,
the PRA has operated as the Group’s
supervisory regulator and the Group has
been subject to the requirements of the
UK’s Solvency II regime. During 2018, the
Board held detailed discussions about the
most suitable Group insurance supervisory
and tax domicile for the Company and
initiated engagement with the PRA, the
BMA and the UK’s HMRC, further to
which it was agreed that, with effect from
1 January 2019, the Company should
re-establish its Group supervisory and
tax domiciles in Bermuda. This will not
affect the regulation of the Group’s UK
insurance entities, which will continue
to be regulated by the PRA, and the FCA,
and in the case of CUL and Syndicates
2010 and 3010, Lloyd’s. On balance the
Board felt that the transition of Group
supervision to Bermuda and the BMA
would assist in ensuring a continuing
strategic focus on the growth and
development opportunities in the U.S.
specialty and catastrophe markets.
In my opening statement, I discussed
the way in which our business and Board
responded to the strategic challenges of
2018. The following section focuses on
the work carried out by the Board and
its Committees in providing responsive
challenge and support to the business in
the articulation and delivery of strategy
and in exercising effective oversight.
How does the Board manage
and implement the governance
arrangements for the Group?
Lancashire is a premium-listed company
on the LSE, which measures its corporate
governance compliance against the
requirements of the UK Corporate
Governance Code published by the UK
FRC. The FCA requires each company
with a premium listing to ‘comply or
explain’ against the Code (i.e. to disclose
how it has complied with Code provisions
or, if the Code provisions have not been
complied with, provide an explanation for
the non-compliance). The Group monitors
its compliance with the Code on at least a
quarterly basis.
In this corporate governance section
and throughout the Annual Report and
Accounts for the 2018 financial year, areas
of corporate governance compliance are
explained by reference to the Code. The
Company also monitors its compliance
with applicable corporate governance
requirements under both Bermuda law
and regulations and, during 2018, with
the requirements of the PRA and the
UK’s Solvency II regime.
Once again I am pleased to report
that, in the judgement of the Board, the
Company has complied with the principles
and provisions as set out in the Code
throughout the year ended 31 December
2018. The Board and business seek to
Lancashire Holdings Limited
Annual Report & Accounts 2018
48
“Lancashire’s dynamic and successful business culture is based on a common understanding of strategic goals across the Board and the business fostered by effective, direct and reciprocal communication.” Are the Board and its Committees
operating effectively?
During 2018 our Board once again carried
out a review of its effectiveness, which was
facilitated by Lintstock Ltd. A summary
report was discussed by the full Board and
we concluded that the Board, its members
and each of its Committees have a balance
of experience and talents that serves the
Group well and have the culture and
competencies necessary to meet the
strategic challenges of the business
effectively. I have throughout 2018
continued to meet regularly with the
chairs of each of our principal subsidiary
boards and our performance evaluation
also concluded that the relationship
between the main Lancashire Board and
the subsidiary boards continues to operate
effectively.
We have identified various strategic areas
of focus and enhancements to the ways we
operate and have identified certain
specific areas for training and learning
during the coming year (see page 56 for
further details). I would like to thank all of
our Directors, our management team and
all our employees for their hard work
during the year.
Peter Clarke
Non-Executive Chairman
How has Board membership and
succession planning evolved during
the year?
At the end of the first quarter of 2018,
Tom Milligan stepped down from our
Board, after having completed three years’
service, to explore other opportunities in
the insurance sector. I would like to thank
Tom for his contribution to our business
and insight as a member of our Board and
wish him well for the future. After careful
consideration of a diverse range of
candidates, I was delighted that in
July 2018 we were able to confirm
the appointment of Sally Williams as a
Non-Executive Director, who joined us in
January 2019. In the light of Sally’s recent
employment as a senior executive and
director within the Marsh Group, a global
insurance brokerage which provides
certain services to the Group, each of
our Directors met individually with Sally
prior to her appointment. The Board gave
careful consideration to the question of
Sally’s independence of character and
judgement in the light of her employment
with an organisation which has had regular
business dealings with the wider Group
and its subsidiaries and which requires
special consideration under the terms
of the UK Corporate Governance Code
(see page 55 for further details). I am
delighted to report that after a detailed
and thorough discussion the Board was
unanimous in deciding that it should
exercise its discretion to determine
that Sally Williams should be considered
independent on her appointment.
I look forward to working with Sally in
the coming years. In particular, Sally’s
experience (see page 51 for details) will
help make her a valuable new member
of our Audit Committee.
In the light of changes to the UK
Corporate Governance Code how
does the Board expect to develop
Lancashire’s stakeholder
engagement in promoting
the success of the business?
The FRC published a revised UK
Corporate Governance Code during 2018,
and our Board has been tracking these
developments principally through the
work of our Nomination and Corporate
Governance Committee (see page 63 for
the Committee report). Whilst we will be
taking steps during 2019 to track and
implement the upcoming requirements
of the revised Code, we anticipate that the
Board and business are well placed to meet
the expectations articulated in the Code
with regard to stakeholder engagement.
Indeed, it is my view that the Company
already has, and will continue to operate,
a strong culture of proactive and
constructive stakeholder engagement.
Readers will note a more detailed account
of the way in which the Company engages
with its stakeholders in the engagement
and sustainability section of this report
on pages 40 to 44.
In the area of ‘workforce’ engagement,
the Board plans to address the expectations
of the revised UK Code during 2019 by
making arrangements for the direct
involvement of one or more of our
Non-Executive Directors in current ‘town
hall’ staff meetings which, for a number
of years, Alex Maloney has held on a
quarterly basis with all our staff in the
UK and Bermuda. I will be attending
some of these sessions during 2019 and
the Board will also be exploring other
ways and means to facilitate constructive
two-way feedback between the Board
and the Group’s employees. In this
regard I would also add that we have the
great advantage of having an employee
headcount of a little over 200 people, so
all our employees are known personally by
our Group CEO or the other members of
the Group’s executive management team
and most of our Non-Executive Directors
have regular opportunities to meet
members of staff both as part of the
formal business of the Board and
informally outside Board meetings.
49
www.lancashiregroup.com
Governance Board of Directors
A balanced board
B
U
Alex Maloney
Chief Executive Officer
Date of appointment to the Board:
5 November 2010
Board meeting attendance: 5/5
Skills, experience and qualifications:
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.
Mr Maloney has also 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.
B
R
NI
Peter Clarke
Non-Executive Chairman
Date of appointment to the Board:
9 June 2014
Board meeting attendance: 5/5
Skills, experience and qualifications:
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 has previously
served as the Chairman of the
National Teaching Awards Trust.
Mr Clarke took a first in Law at
Queens’ College, Cambridge and is
a qualified solicitor, having practised
at Slaughter and May, and has
experience in the investment
banking industry, working at
Morgan Grenfell and Citibank.
I
B
Elaine Whelan
Chief Financial Officer
Date of appointment to the Board:
1 January 2013
Board meeting attendance: 5/5
Skills, experience and qualifications:
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.
B
R
U
N
Michael Dawson
Non-Executive Director
Date of appointment to the Board:
3 November 2016
Board meeting attendance: 5/5
Skills, experience and qualifications:
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.
External appointments/Other roles:
Mr Dawson is a Non-Executive
Director of Pool Re (Nuclear)
Limited and Deputy Chairman
of the management committee
of Nuclear Risk Insurers Limited.
External appointments/Other roles:
Mr Clarke is currently a Non-
Executive Director of RWC Partners
Limited, Lombard Odier Asset
Management and Sainsbury’s
Bank plc. He is a member of the
Treasury Committee of King’s
College London.
Board and Committee membership key
Chair
B
Board of
Directors
A
Audit
Committee
I
Investment
Committee
N
Nomination and
Corporate Governance
Committee
R
Remuneration
Committee
U
Underwriting and
Underwriting Risk
Committee
* Tom Milligan retired as a Non-Executive Director with effect from 31 March 2018. He attended the Board and Committee meetings for the fourth quarter 2017.
Lancashire Holdings Limited
Annual Report & Accounts 2018
50
B
R
A
Simon Fraser
Senior Independent
Non-Executive Director
Date of appointment to the
Board: 5 November 2013
Board meeting attendance: 5/5
Skills, experience and
qualifications:
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.
External appointments/
Other roles:
Mr Fraser is also a
Non-Executive Director
of Legal and General
Investment Management
(Holdings) Limited
and Senior Independent
Director of Derwent London
plc, where he sits on the
Remuneration, Audit and
Nominations Committees.
Mr Fraser also serves as a
Non-Executive Director
of CUL.
A
N
B
Samantha
Hoe-Richardson
Non-Executive Director
Date of appointment to the
Board: 20 February 2013
Board meeting attendance: 5/5
Skills, experience and
qualifications:
Samantha Hoe-Richardson
has been Chairman of the
Audit Committee since 2014.
She was Head of Environment
& Sustainability for Network
Rail and prior to that Head
of Environment for Anglo
American plc, one of the
world’s leading mining
and natural resources
companies. She was also a
director and founder of
Anglo American Zimele
Green Fund (Pty) Ltd,
which supports
entrepreneurs in South
Africa. Prior to her role
with Anglo American,
Ms Hoe-Richardson worked
in investment banking and
audit and she holds a
masters degree in Nuclear
and Electrical Engineering
from the University of
Cambridge. She also has
a Chartered Accountancy
qualification.
External appointments/
Other roles:
Ms Hoe-Richardson is a
Non-Executive Director
of Unum Ltd and Unum
European Holding
Company Ltd. Unum is
one of the UK’s leading
employee benefits providers
through the workplace.
Ms Hoe-Richardson is also
a Non-Executive Director
of LUK.
I
B
R
A
Robert
Lusardi
Non-Executive Director
Date of appointment to the
Board: 8 July 2016
Board meeting attendance: 5/5
Skills, experience and
qualifications:
Robert Lusardi spent the
first phase of his career as
a senior investment banker
specialising in the insurance
and asset management
industries. From 1998 until
2005 he was a member of
the Executive Management
Board of XL Group plc, first
as Group CFO then as a
segment CEO; from 2005
until 2010 he was an EVP
of White Mountains (an
insurance merchant bank)
and CEO of certain
subsidiaries; and from
2010 to 2015 he was CEO
of PremieRe Holdings LLC
(a private insurance entity).
He has been a director
of ten insurance-related
entities. He received his
BA and MA degrees in
Engineering and Economics
from Oxford University
and his MBA from
Harvard University.
External appointments/
Other roles:
Mr Lusardi is currently a
private investor and has
spent his career as a senior
executive in the financial
services industry. He is also
on the boards of Symetra
Financial Holdings, Inc.,
a life insurer, and Oxford
University’s 501(c)3
charitable organisation.
Christopher Head
Company Secretary
Board meeting attendance: N/A
Skills, experience and
qualifications:
Christopher Head joined
Lancashire in September
2010. He was appointed
Company Secretary of LHL
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 qualified solicitor having
worked until 1998 at
Barlow Lyde & Gilbert
in the Reinsurance and
International Risk Team.
Mr Head has a History
MA and legal qualification
from Cambridge University.
B
A
N
Sally Williams
Non-Executive Director
Date of appointment to the
Board: 14 January 2019
Board meeting attendance: N/A
Skills, experience and
qualifications:
Sally Williams joined the
Marsh Group in 2015 where
she served on the board of
Marsh Ltd as a director with
responsibility for Risk and
Governance acting as the
main business interface for
Marsh Ltd with the FCA.
She resigned from her
directorships at Marsh with
effect from 21 December
2018 and assumed her
Non-Executive Directorship
of LHL on 14 January 2019.
Ms Williams joined Marsh
from National Australia
Bank and previously held
senior risk positions with
Aviva. Ms Williams is a
chartered accountant and
spent the first 15 years
of her career with
PricewaterhouseCoopers
(PwC), where she was a
director specialising in
financial services risk
management and regulatory
relationships. She also
undertook a two year
secondment from PwC to
the Supervision and
Surveillance Department at
the Bank of England.
External appointments/
Other roles:
Ms Williams is a Non-
Executive Director of
OneFamily, where she
is a member of the Audit
Committee, Risk Committee
and Nominations
Committee.
51
www.lancashiregroup.com
Governance Our Board’s focus
Our focus during 2018
Case Study – Focus on strategy
The objective of the 2018 strategy sessions held in May 2018 was to consider the key decisions to be made in the preparation of the
Group’s three-year strategic plan. The issues discussed included:
• review of the current strategy;
• consideration of its continued relevance and the views of shareholders;
• review of the Group’s underwriting lines of business and potential options and opportunities;
• consideration of areas of opportunity in particular in international and specialty markets;
• analysis of the structures and tools used within the third-party reinsurance capital sector and related strategic opportunities;
• review of the Group’s investment strategy and options;
• consideration of the Group’s regulatory domicile and its interaction with strategic initiatives; and
• review of the business’s resourcing and training needs.
At its July 2018 meetings the Board approved the Group’s three-year strategic plan including the Group’s risk appetites and capital
and solvency appetites.
Lancashire Holdings Limited
Annual Report & Accounts 2018
52
Strategy and Capital ManagementFebruary 2018 •Discussion of strategic underwriter recruitment and development initiatives which during the year resulted in the addition of a power team, an onshore energy underwriter and aviation deductible business (see page 23); •Discussion and approval of the Group’s 2018 business plan that had been updated in light of the 1 January 2018 renewals and market conditions; and •Capital management review and declaration of a final ordinary dividend of $0.10 per common share in respect of the year ended 31 December 2017.May 2018 •Review and approval of the Group’s UK tax strategy for the year ended 31 December 2018; •Review and approval of modifications to the Group’s investment strategy for 2018/2019; •Review and discussion of the Group’s capital support structures and options; and •Dedicated strategy sessions (see case study – focus on strategy).July 2018 •Consideration and approval of the Group’s three-year (2018-2021) strategic plan (see case study – focus on strategy); •Consideration and approval of the Group’s 2018 reforecast business plan in light of actual experience to 30 June 2018; •Consideration and approval of a modification to the description of the Group’s strategic RoE target key performance indicator (see page 11); and •Capital management review and declaration of an interim dividend of $0.05 per common share.October 2018 •Consideration and approval of the Group’s 2019 business plan; and •Capital management review and declaration of a special dividend of $0.20 per common share. Risk
February 2018
• Review and approval of the revised anti-money laundering and financial crime, whistleblowing and conflicts of interest policies
and procedures;
• Approval of the updated UK and U.S. regulatory and tax operating guidelines for the Group;
• Review and approval of the revised underwriting exposure risk tolerances (see page 33); and
• Consideration of risk reports from the Group CRO.
May 2018
• Review and approval of the Solvency II submissions as at 31 December 2017 for submission to the PRA;
• Review and approval of the revised sanctions policy and procedures; and
• Consideration of risk reports from the Group CRO.
July 2018
• Consideration of risk reports from the Group CRO; and
• Review and approval of the Group’s risk, capital and solvency appetites as part of strategic planning.
October 2018
• Consideration of risk reports from the Group CRO including special focus on Brexit planning and climate change risk management.
Succession and Remuneration
February 2018
• Consideration and approval of a range of changes and appointments to the boards and management teams of the operating
businesses within the Group;
• Review and approval of the Group’s 2018 framework for executive remuneration; and
• Approval of the Directors’ Remuneration Report within the 2017 Annual Report and Accounts, for approval by shareholders at
the 2018 AGM.
May 2018
• Review and approval of the Group’s succession plan and talent management and development programme for 2018/2019; and
• Consideration and approval of a range of changes and appointments to the boards and management teams of the operating
businesses within the Group.
July 2018
• Consideration and approval in principle of the appointment of Sally Williams as a Non-Executive Director of LHL to take effect
during January 2019 further to a determination that she should be considered to be independent in character and judgement
(see page 55); and
• Consideration and approval of a range of changes and appointments to the boards and management teams of the operating
businesses within the Group.
October 2018
• Consideration and approval of a modified Group Solvency II Identified Staff Remuneration policy;
• Consideration and approval of a resolution to issue up to 600,000 common shares in satisfaction of obligations under the RSS; and
• Consideration and approval of a range of changes and appointments to the boards and management teams of the operating
businesses within the Group.
53
www.lancashiregroup.com
Governance Our Board’s focus: continued
Financial Reporting and Controls
February 2018
• Review and approval of the fourth quarter 2017 financial supplement; and
• Approval of the 2017 Annual Report and Accounts further to the report from the Audit Committee.
May 2018
• Review and approval of the first quarter 2018 financial supplement; and
• Discussion of the 2017 audit process and review of KPMG’s 2018 audit plan.
July 2018
• Review and approval upon recommendation by the Audit Committee of the interim consolidated financial statements; and
• Review and approval of the second quarter 2018 financial supplement.
October 2018
• Approval of a press release in respect of the Group’s preliminary loss estimates from marine account losses and the U.S. and Pacific
windstorm losses; and
• Review and approval of the third quarter 2018 financial supplement.
Stakeholder Engagement and Corporate Governance Matters
February 2018
• Review and approval of the Group’s disclosure procedures;
• Review and approval of an updated diversity policy statement, further to a recommendation from the Nomination and
Corporate Governance Committee;
• Review and approval of an updated policy statement on anti-slavery and human trafficking;
• Formal consideration of the independence of all Non-Executive Directors prior to the 2018 AGM;
• Discussion of the 2017 year end Board and Committee performance appraisal feedback and recommendations; and
• Consideration and approval of the draft 2018 AGM notice and the matters to be put to shareholders.
May 2018
• Review and approval of a modification to the Investment Committee Terms of Reference;
• Discussion of a presentation from the Group’s corporate brokers;
• Approval of the appointment of a new Trustee to the Lancashire Foundation; and
• The Company’s 2018 AGM was held at its London office on 2 May 2018. All resolutions were duly passed and approved
by shareholders.
July 2018
• Discussion of the PRA’s ‘Dear CEO’ letter concerning a request to all boards operating within the insurance industry to explain
the management of “soft market” risks;
• Review and discussion of the Group’s regulatory supervision options; and
• Review and approval of an updated diversity policy statement, further to a recommendation from the Nomination and
Corporate Governance Committee.
October 2018
• Consideration and approval of the process for the annual performance evaluation of the Board and its Committees and individual
Directors, to be facilitated by Lintstock; and
• Consideration and approval of a special purpose committee to facilitate the migration of Group insurance supervision and tax
domicile to Bermuda to take effect on 1 January 2019.
December 2018
• Review and approval by the migration special purpose committee of revised UK and U.S. tax and regulatory operating guidelines to
be used by the Group with effect from 1 January 2019.
Lancashire Holdings Limited
Annual Report & Accounts 2018
54
Corporate governance report
Board Committees
Board and Committee administration
The Board of Directors is responsible
for the leadership and control and the
long-term success of Lancashire’s business.
The Board has reserved a number of
matters for its decision, including
responsibility for setting the Group’s
values and standards, and approval of
the Group’s strategic aims and objectives.
The Board has delegated certain matters
to Committees of the Board, as described
below. Copies of the Schedule of Board-
Reserved Matters and Terms of Reference
of the Board Committees are available
on the Company’s website at
www.lancashiregroup.com.
The Board has approved and adopted
a formal division of responsibilities
between the Chairman and the CEO. The
Chairman is responsible for the leadership
and management of the Board and for
providing appropriate support and advice
to the CEO. The CEO is responsible for
the management of the Group’s business
and for the development of the Group’s
strategy and commercial objectives.
The CEO is responsible, along with
the executive team, for implementing
the Board’s decisions.
The Board and its Committees meet on
at least a quarterly basis. At the regular
quarterly Board meetings, the Directors
review all areas of the Group’s business
and receive reports from management
on underwriting, reserving, finance,
investments, capital management,
internal audit, risk, legal and regulatory
developments, compliance and other
matters affecting the Group. Management
provides the Board with the information
necessary for it to fulfil its responsibilities.
In addition, presentations are made by
external advisers such as the independent
actuary, the investment managers, the
external auditors, the remuneration
consultants and the corporate brokers.
The Board Committees are authorised
to seek independent professional advice
at the Company’s expense.
The Board also meets to discuss strategic
planning matters in addition to the
customary schedule of quarterly meetings.
A dedicated Board strategic planning day
was held in May 2018.
The Chairman holds regular meetings
with the Non-Executive Directors, without
the Executive Directors present, to discuss
a broad range of matters affecting
the Group.
The Directors
Appointments to the Board are made
on merit, against objective criteria and
with due regard for the benefits of diversity
on the Board, including gender. The
Board considers all of the Non-Executive
Directors to be independent within the
meaning of the Code.
Michael Dawson, Simon Fraser,
Samantha Hoe-Richardson and Robert
Lusardi 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.
In relation to the determination of
independence of Sally Williams, in a
Board meeting held on 10 July 2018, the
Directors considered that, by virtue of her
directorships of Marsh Limited and certain
other subsidiaries within the Marsh
Group and her employment as a senior
executive of the Marsh Group, these were
circumstances which for purposes of the
Code should be considered to be a
‘material business relationship’ requiring
special consideration within the context
of the determination of a Director’s
independence. The Board concluded that
it was appropriate for the Directors to use
their discretion in the light of these facts
to determine whether Sally Williams was
indeed independent in character and
judgement. After lengthy and detailed
discussion of these matters the Directors
concluded that there was no question
in their minds but that, subject to the
service of her notice of resignation from
the Marsh Group, which was confirmed
on 19 July 2018, Sally Williams was to be
considered as and would continue to be
independent in character and judgement
in her role as a Director of the Company.
Sally Williams assumed her role as
a Director of the Company on
14 January 2019.
At the Board meeting held on 13 February
2019, 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’s
composition complies with the Code
requirement that at least half the Board,
excluding the Chairman, should comprise
Non-Executive Directors determined by
the Board to be independent.
In accordance with the provisions of the
Company’s Bye-laws and the Code, all
the Directors are subject to re-election
annually at each AGM.
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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 listing, legal and
regulatory obligations and on the Group’s
compliance with the requirements of the
Code is also provided on a regular basis.
An analysis of the Group’s compliance
with the Code is collated and summarised
in quarterly reports together with a more
general summary of corporate governance
developments, which are prepared by the
Group’s legal and compliance department
for consideration by the Nomination and
Corporate Governance Committee. The
Directors have access to the Company
Secretary who is responsible for advising
the Board on all legal and governance
matters. The Directors also have access
to the Group General Counsel and
independent professional advice as
required. Regular sessions are held
between the Board and management
as part of the Company’s quarterly
Board meetings, during which in-depth
presentations covering areas of the
Group’s business are made. During
these presentations the Directors have
the opportunity to consider, challenge
and help shape the Group’s commercial
strategy. The Directors are also encouraged
to seek supplementary know-how training
suitable to their roles offered by the many
external providers of training pertinent to
governance and in particular the roles of
non-executive directors and to consider
their training needs and priorities as part
of the year end performance evaluation
for the Board and Committees.
Board performance evaluation
A formal performance evaluation of the
Board, its Committees and individual
Directors is undertaken on an annual
basis and the process is initiated by the
Nomination and Corporate Governance
Committee. The aim of this work is to
assess the effectiveness of the Board and
its Committees in terms of performance
and risk oversight, strategic development,
composition, supporting processes and
management of the Group. The evaluation
is forward-looking in terms of identifying
the strategic priorities as well as considering
performance, training and development
needs for the Directors within the context
of the work of each Committee and that
of the Board. The 2017 evaluation was
conducted internally and facilitated by the
Company Secretary and the Chairman and
the 2018 performance evaluation process
was facilitated by Lintstock Limited, a
London-based corporate advisory firm
with no other connection to the Group.
The 2018 evaluation process involved each
Director as well as the Company Secretary,
the Group CRO, Group General Counsel
and other members of senior management
completing a questionnaire designed, in
consultation with Lintstock, by the LHL
Chairman and the Company Secretary
with input from the Chairs of each of the
relevant Committees. Responses to the
completed questionnaires were collated
by Lintstock, which then held a series
of individual interviews with each of the
Directors, the Company Secretary, the
Group General Counsel and the Group
CRO to explore emerging themes.
Lintstock then prepared a suite of
anonymised summary reports that
were discussed in draft with the Board
Chairman and Committee Chairs before
being distributed to each of the Directors.
In February 2019, the performance
evaluation reports were discussed
at meetings of the Nomination and
Corporate Governance Committee and the
Board, and each of the other Committees
discussed the report pertinent to its own
operation and performance. The Board
discussions were led by the Chairman
and focused on such matters as strategic
oversight, succession planning, Board
composition and training and priorities
for 2019.
In summary, in the Board’s consideration
of the 2018 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
Lancashire Holdings Limited
Annual Report & Accounts 2018
56
to making the Board and its Committees
work effectively. Attendance at Board
meetings was found to be excellent.
The Group CEO and the Group CFO,
the Company’s Executive Directors, were
also found to be operating effectively.
Appropriate infrastructure, processes and
governance mechanisms are in place to
support the effective performance of the
Board and its Committees. The Board
is considered to manage risk effectively.
The number of Directors on the Board
is considered to be appropriate.
It was noted in the evaluation process that,
in what had been another challenging year
for the (re)insurance markets, the Board
and Committee oversight of underwriting
strategy and risk tolerances had operated
effectively and within expectations.
Engagement between the Board and
the wider body of staff is considered to
be generally strong and beneficial to the
operation of the business. It was concluded
that the Board discussion around the
regulatory and tax domicile for the Group
had been well focused and effective and
had resulted in the implementation of
the decision to move Group management
and supervision to Bermuda in a timely
manner. Looking ahead, the Board and
Committees will, during the course of
2019, seek to ensure that the Group holds
sufficient capital and utilises capital tools
to ensure that the business is well-placed
to be a leading (re)insurance market. The
Board is also committed to underwriting
those specialty insurance lines in which
the business has expertise and to support
management in the identification of new
and complementary underwriting classes
with a view to achieving controlled organic
premium growth where this makes sense.
The Board also highlighted a number
of themes which will inform the business
of the Board during 2019 including the
attributes required for a future non-
executive appointment to the Board
and the ongoing need to ensure a strong
succession plan to meet the requirements
of the business. A number of practical
steps to optimise the focus of Board and
Committee meetings were also identified
for action.
tolerances, emerging risks, any lessons
learned from risk events and assurance
provided over key risks. During 2018, the
Directors participated in a number of
training sessions addressing the Board’s
obligations under Solvency II and, in
particular, with regard to the review and
approval of the Solvency II submissions
as at 31 December 2017 for submission
to the PRA. The Board considers that a
supportive ERM culture, established at
the Board and embedded throughout
the business, is of key importance. The
facilitating and embedding of ERM and
helping the Group to improve its ERM
practices are a major responsibility
assigned to the Group CRO. The Group
CRO’s remuneration is subject to annual
review by the Remuneration Committee.
The Board is satisfied that the Company’s
risk management and internal control
systems have operated effectively for
the year under review.
Committees
The Board has established Audit,
Investment, Nomination and Corporate
Governance, Remuneration, and
Underwriting and Underwriting Risk
Committees. Each of the Committees
has written Terms of Reference, which
are reviewed regularly and are available on
the Company’s website. The Committees’
Terms of Reference were reviewed by the
Board during 2018 and were considered
to be in line with current best practice.
The Committees are generally scheduled
to meet quarterly, although additional
meetings and information updates are
arranged as business requirements dictate.
Director attendance at the 2018 Board
meetings is set out on pages 50 to 51.
A report from each of the Committees,
which covers Committee attendance,
is set out from page 58 to page 69.
The Board will continue to review its
procedures, training requirements,
effectiveness and development
during 2019.
The Chairman’s performance appraisal
was conducted by the Senior Independent
Director, who consulted with the Non-
Executive Directors with input from the
Executive Directors during July 2018.
The discussion and feedback were positive
regarding the Chairman’s performance.
Particular reference was made to the
strong lines of communication which
the Chairman has fostered with the Chairs
of the subsidiary boards and the executive
team. The Chairman’s insight and strategic
and high-level leadership of the Board
were also noted.
Following the year end, the Chairman met
with the Group CEO, and the Group CEO
met with the Group CFO, to conduct a
performance appraisal in respect of 2018
and to set targets for 2019. 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 70.
Relations with shareholders
During 2018, the Group’s Head of Investor
Relations, usually accompanied by one or
more of the Group CEO, the Group CUO,
the Group CFO, the Chairman or a senior
member of the underwriting team, made
presentations to major shareholders,
analysts and the investor community.
Formal reports of these meetings were
provided to the Board on at least a
quarterly basis. During the year the
Board oversaw the transition to the
appointment of a new Head of Investor
Relations. Jelena Bjelanovic assumed that
role in October 2018 and made her first
presentation to the Board at the third
quarter 2018 Board meeting.
The Chairman of the Remuneration
Committee conducted a consultation with
the significant shareholders of the Group
with regard to remuneration policy and
practice in advance of the production of
the Directors’ Remuneration Report in
the 2017 Annual Report and Accounts and
the 2018 AGM and again during January
2019, to seek feedback on the Group’s
implementation of remuneration policy.
Conference calls with shareholders and
analysts hosted by senior management are
held quarterly following the announcement
of the Group’s quarterly financial results.
The Group CEO, Group CUO and Group
CFO are generally available to answer
questions at these presentations.
Shareholders are invited to request
meetings with the Chairman, the Senior
Independent Director and/or the other
Non-Executive Directors by contacting the
Group Head of Investor Relations. All of
the Directors are expected to be available
to meet with shareholders at the
Company’s 2019 AGM.
The Company commissions regular
independent shareholder analysis
reports together with independent
research on feedback from shareholders
and analysts following the Company’s
results’ announcements. This research,
together with the analysts’ notes, is made
available to all Directors.
Enterprise Risk Management
The Board is responsible for setting the
Group’s risk appetites, defining its risk
tolerances, and setting and monitoring the
Company’s risk management and internal
control systems including compliance with
risk tolerances. During 2018 the Board
carried out a robust assessment of the
principal risks affecting the Group’s
business model, future performance,
solvency and liquidity and the operation
of internal control systems.
Further discussion of the risks affecting the
Group and the policies in place to manage
them can be found in the ERM section of
this report on pages 33 to 39 and in the
risk disclosures section on pages 111 to 133.
Each of the Committees is responsible
for various elements of risk (see the
various Committee reports from page 58
to page 69 for further detail). The Group
CRO reports directly to the Group and
subsidiary boards and facilitates the
identification, evaluation, quantification
and control of risks at a Group and
subsidiary level. The Group CRO
provides regular reports to the Group
and subsidiary boards covering, amongst
other things, actual risk levels against
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Governance Samantha Hoe-Richardson
Chairman of the Audit Committee
Committee reports
Audit Committee
Committee membership
The Audit Committee comprises four
independent Non-Executive Directors and
is chaired by Samantha Hoe-Richardson, a
qualified accountant. The Board considers
that the four 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 Group’s website.
Meetings attended
Samantha Hoe-
Richardson (Chairman)
Simon Fraser
Robert Lusardi
Sally Williams1
4/4
4/4
4/4
n/a
1. Sally Williams was appointed as a member
of the Audit Committee with effect from
12 February 2019.
Principal responsibilities of
the Committee
• Financial reporting: monitors the
integrity of the consolidated financial
statements of the Group and any
other formal statements relating to
its financial performance, including
the annual Solvency II Group reporting
requirements. Reviews and reports to
the Board on significant financial
reporting issues and judgements
that those statements contain. Reviews
the Annual Report and Accounts and
advises the Board on whether, taken
as a whole, it is fair, balanced and
understandable;
• External audit: oversees the relationship
with the external auditors and is
responsible for the annual assessment
of their independence and objectivity.
Makes a recommendation to the Board,
to be put to shareholders for approval
at the AGM, for the appointment of
the Company’s external auditors;
• Internal audit: monitors and reviews
the effectiveness of the Group’s
internal audit function ensuring it
has unrestricted scope, the necessary
resources and access to information
to enable it to fulfil its mandate in
accordance with appropriate
professional standards; and
• Internal controls and risk management
systems: oversight of internal controls
and risk management systems. Reviews
the Group’s ‘whistleblowing’ and other
systems and controls for the prevention
of fraud, bribery and money laundering.
Lancashire Holdings Limited
Annual Report & Accounts 2018
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“During 2018, the focus of the Committee has been on the adequacy of the Group’s loss reserves, as well as monitoring the effectiveness of both the external auditors and the internal audit programme and ensuring the continued integrity of the Group’s financial reporting. In particular, the Committee has monitored the Group’s preparations for the implementation of the IFRS 17 ('Insurance Contracts’) accounting standard.”
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How the Committee discharged its responsibilities during 2018Financial reporting Committee responsibilityMonitors the integrity of the Group’s consolidated financial statements, including its annual and half-yearly reports, annual Solvency II Group Pillar 3 reports, interim management statements and any other formal statements relating to the Group’s financial performance. Reports to the Board on significant financial reporting issues and judgements contained in the consolidated financial statements.Committee activitiesAt each quarterly meeting the Committee reviews the Group’s quarterly consolidated financial statements for the purposes of recommending their approval by the Board. The Group’s annual Solvency II Pillar 3 reports were reviewed at the April 2018 Audit Committee meeting prior to recommendation of their approval at the May 2018 Board meeting. The Committee also monitors the activities of the Company’s Disclosure Committee and reviews the Group’s quarterly financial press releases, which it recommends to the Board for approval. The Committee receives quarterly reports from management on: •developments in accounting and financial reporting requirements; •any new and/or significant accounting treatments/transactions in the quarter; •the activities of LHL’s subsidiary companies, including consideration of any risk issues; •loss reserving (see page 107 for further details); •the progress of the Group’s IFRS 9 and IFRS 17 implementation project and the related enhancements to the Group’s finance IT framework and move to a common Group general ledger; and •the Committee also receives quarterly reports on the consolidated financial statements from the external auditors, including an interim review report and a year-end full audit report. These are discussed with the external auditors at the Committee meetings.Judgements and estimation in the consolidated financial statementsAn annual paper is presented by management to the Committee that details the areas of judgement and estimation in the preparation of the consolidated financial statements (see accounting policies (page 105) for the details of these areas). Of these, the most significant area of estimation and judgement considered by the Committee during 2018 was the estimation of ultimate loss reserves. The Audit Committee’s quarterly review of the adequacy of the loss reserves is explained in detail on page 62.The Group has two indefinite life intangible assets following the acquisition of Cathedral – goodwill and syndicate participation rights. Intangible assets with indefinite useful lives are subject to an impairment review at least annually, or sooner if there is an indication of impairment. Some of the key inputs in the impairment review are based on management judgement and/or estimation (see page 105 of the consolidated financial statements for further details). These inputs are reviewed by the Audit Committee annually and are considered reasonable. The Audit Committee also considers the Group’s internal stress tests and what stress scenarios would have to occur to indicate an impairment of its intangible assets. As a result of these considerations the Audit Committee agreed with management and KPMG that there was no impairment of the Group’s intangible assets.In accordance with auditing guidance, KPMG’s year-end audit report identified revenue recognition through the estimation of premium revenues as an area of significant risk. The Audit Committee considered this and concluded that, whilst some premiums are subject to estimation, revenues are unlikely to be materially different from initial estimates, particularly on a consolidated Group basis.Reviews the content of the Annual Report and Accounts and advises the Board on whether, taken as a whole, it is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy.The Chairman of the Committee reviewed the early drafts of the 2018 Annual Report and Accounts in order to keep apprised of its key themes and messages. The Committee reviewed the final draft of the Annual Report and Accounts at the February 2019 Audit Committee meeting together with the external auditor’s report. The Committee advised the Board that, in its view, the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy.Governance Committee reports: continued
Lancashire Holdings Limited
Annual Report & Accounts 2018
60
External audit Committee responsibilityOversees the relationship with the Group’s external auditors, approves their remuneration and terms of engagement, and assesses annually their independence and objectivity taking into account relevant legal, regulatory and professional requirements and the Group’s relationship with the external auditors as a whole. This includes an annual assessment of the qualifications, expertise and resources, and independence of the external auditors and the effectiveness of the external audit process.Committee activitiesThe Committee approves the annual external audit plan and receives reports from the external auditors at each quarterly Committee meeting, including an ongoing assessment of the effective performance of the audit compared to the plan. The Committee Chairman conducts informal meetings with the external auditors and the Group CFO prior to, during, and after the review of the quarterly results. The Committee meets quarterly in executive session with the external auditors to discuss any issues arising from the audit, and with management to obtain feedback on the audit process. Following the completion of KPMG’s first year of provision of external audit services for the financial year ending 31 December 2017, the Committee Chairman led a thorough and formal review process to consider the effectiveness of the external audit process. This sought constructive feedback from stakeholders across the organisation and included an assessment of the qualifications, expertise and resources, and independence of KPMG. The results of the review were discussed at the April 2018 meeting, where it was concluded that the external audit process was operating effectively both with respect to the service provided by KPMG and management’s support of the audit process. Areas of the audit process identified as benefiting from further development included the overall audit planning process and more effective communication between KPMG and the Group finance team. At its February 2019 meeting, the Committee discussed with KPMG an Audit Quality Review (AQR) report produced by the FRC on KPMG’s 2017 audit of the Group. The Committee discussed areas for process enhancements with KPMG in relation to the FRC AQR findings. It was the Committee’s view that the issues raised by the FRC were procedural rather than substantive in nature. A further review of auditor independence was conducted in February 2019 and the Committee concluded that the external auditors are independent and objective. The development and implementation of a formal policy on the provision of non-audit services by the external auditors, taking into consideration any threats to the independence and objectivity of the external auditors. The Committee has approved and adopted a formal non-audit services policy that is reviewed on an annual basis and was last reviewed and approved in October 2018. The policy, which stipulates the approvals required for various types of non-audit services that may be provided by the external auditors, is on the Group’s website. During 2018, KPMG provided non-audit services in relation to U.S. tax advisory work. Fees for non-audit services provided in 2018 totalled $15,000. The Committee gave careful consideration to the nature of the non-audit services provided and the level of fees charged, and has determined that they do not affect the independence and objectivity of KPMG as auditors.Makes a recommendation to the Board, to be put to shareholders for approval at the AGM, in relation to the appointment, re-appointment or removal of the Group’s external auditors. Following a competitive external audit tender process undertaken during 2016, the appointment of KPMG as external auditors was first approved by shareholders at the 2017 AGM. Accordingly, the 2018 financial year was the second financial year in which KPMG acted as the Company’s external auditors, following KPMG’s re-appointment at the 2018 AGM further to a recommendation from the Committee and the full Board. The lead audit partner is Rees Aronson. The Committee and the Board are recommending the re-appointment of KPMG as external auditors at the 2019 AGM. The Committee has noted the reports from the Kingman review regarding the role of the FRC and related proposals for reform, and the UK Competition and Markets Authority report concerning the market for audit services, and will continue to monitor these, and related, developments. 61
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Internal audit Committee responsibilityMonitors and reviews the effectiveness of the Group’s internal audit function in the overall context of the Group’s risk management system.Committee activitiesThe Group’s internal audit function reports directly to the Committee. Each year, the Group Head of Internal Audit presents an annual internal audit strategy and plan to the Committee for consideration and approval. In general, the most significant business risks and controls are usually considered for audit annually whilst less critical risks are audited periodically as part of a flexible multi-year programme. The findings of each audit are reported to the Committee at the quarterly meetings and the Committee reviews the actions taken by management to implement the recommendations of internal audit. The Committee meets in executive session with the Group Head of Internal Audit usually on a quarterly basis.During 2018, the Committee reviewed and approved an updated Internal Audit Charter. This can be viewed on the Group’s website. The Group CRO undertook an annual review of the implementation of the internal audit programme during 2018 to ensure its continued efficiency and appropriate standing within the Group and the effectiveness of the internal audit function. The Committee discussed the report and its findings with the Group CRO and the Group Head of Internal Audit and concluded that the internal audit function is operating effectively in the overall context of the Group’s risk management system. The Committee Chairman oversaw the process for the appointment of a new Group Head of Internal Audit and the transitional internal audit management arrangements. Samantha Churchill joined the Group as the new Group Head of Internal Audit during January 2019.Internal controls and risk management systemsCommittee responsibilityReviews the adequacy and effectiveness of the Group’s internal financial controls systems that identify, assess, manage and monitor financial risks, and other internal control and risk management systems; and reviews and approves the statements to be included in the Annual Report and Accounts concerning internal control, risk management and the viability statement.Committee activitiesThe Board has ultimate responsibility for ensuring the maintenance by the Group of a robust framework of internal control and risk management systems, and has delegated the monitoring and review of these systems to the Committee. The system of internal controls is designed to manage rather than eliminate the risk of failure to achieve business objectives, and can only provide reasonable and not absolute assurance against material misstatement or loss. The Committee receives from the Group CRO periodic reports detailing results of the quarterly risk and control affirmation review. The Committee receives from the Group Head of Internal Audit an annual assessment of the Group’s governance, risk and control framework together with an analysis of themes and trends from the internal audit work and their impact on the Group’s risk profile. In 2018, the Committee and Board were satisfied that the governance, risk and control framework remains effective and appropriate for the Lancashire Group.Reviews for adequacy and security the Group’s compliance, ‘whistleblowing’ and fraud controls.During 2018, the Committee conducted an annual review of the Group’s policies and procedures relevant to financial controls and recommended the adoption by the Board of updated policies and procedures in respect of anti-money laundering, bribery and financial crime (including fraud), conflicts of interest and whistleblowing. There were no suspicious transactions or whistleblowing reports made during the year (whether arising from suspected money laundering activity or knowledge of, suspicion or concern relating to suspected acts of bribery or any other type of financial crime, dishonesty or impropriety). The Committee also keeps under review the adequacy and effectiveness of the Group’s legal and compliance function.Governance Committee reports: continued
Priorities for 2019
The Committee’s key priorities for 2019 are:
• To ensure the continued effectiveness
of the Group’s control environment,
the operation of the business’s financial
reporting systems and the integrity of
external financial reporting; and
• To continue to monitor the preparation
by the Group for the implementation
of IFRS 9 and IFRS 17.
IFRS 17, Insurance Contracts
In 2017 the IASB issued IFRS 17
('Insurance Contracts’), which was to be
mandatorily effective for annual reporting
periods beginning on or after 1 January
2021. However, at its board meeting on
14 November 2018, the IASB tentatively
decided to propose an amendment of the
IFRS 17 effective date to reporting periods
beginning on or after 1 January 2022.
If the proposed deferral of IFRS 17 is
accepted, the implementation of IFRS 9
(‘Financial Instruments: Classification and
Measurement’), will also be deferred to
this date for companies whose prominent
activity is the issuance of insurance
contracts. During 2018, the Committee
monitored on a quarterly basis the
preparation by the Group for the
implementation of IFRS 9 and IFRS 17.
This project encompasses changes to the
Group’s finance IT framework and general
ledger, as well as the presentation of the
Group’s financial statements on an IFRS 9
and IFRS 17 basis. The prospective
deferral of the implementation date for
the standard has not had a significant
impact on the Group’s implementation
project timetable.
Significant area of judgement
or estimation
Loss reserves and expenses
As detailed on pages 117 to 118 of
the consolidated financial statements,
the estimation of ultimate loss reserves
is a complex actuarial process that
incorporates a significant amount of
judgement. The Committee considers the
adequacy of the Group’s loss reserves at
each Audit Committee meeting, for which
purpose it receives quarterly reports from
the Group’s Reserving Actuary. KPMG
conduct a high-level review of the Group’s
loss reserves as part of their first and
third quarter review procedures. The
Committee also receives estimates of the
Group’s ultimate loss reserves from an
external independent actuary and from
KPMG and compares these third-party
estimates to those of the Group at its
second and fourth quarter Audit
Committee meetings. During 2018, the
Committee focused its discussions around
the Group’s loss reserves on: the range
of reasonable actuarial estimates and
the difference between the Group’s and
the independent review from external
actuaries (these differences being viewed
by management, the external third
parties and the Committee to be within
a reasonable actuarial range); 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.
Lancashire Holdings Limited
Annual Report & Accounts 2018
62
Nomination and Corporate
Governance Committee
Peter Clarke
Chairman of the Nomination and
Corporate Governance Committee
Committee membership
A majority of the members of the
Nomination and Corporate Governance
Committee are independent Non-
Executive Directors. The Committee
Chairman is Peter Clarke, who is the
Chairman of the Board.
Peter Clarke (Chairman)
Michael Dawson
Samantha Hoe-Richardson
Tom Milligan1
Sally Williams2
Meetings attended
4/4
4/4
4/4
1/1
n/a
1. Tom Milligan retired as a member of the
Nomination and Corporate Governance
Committee with effect from 31 March 2018.
2. Sally Williams was appointed as a member of
the Nomination and Corporate Governance
Committee with effect from 12 February 2019.
Principal responsibilities of
the Committee
• Reviews the structure, size and
composition (including the skills,
knowledge, independence, experience
and diversity) of the Board;
• Considers succession planning for
Directors and other senior executives;
• Nominates candidates to fill
Board vacancies;
• Makes recommendations to the
Board concerning Non-Executive
Director independence, membership of
Committees, suitable candidates for the
role of Senior Independent Director,
and the re-election of Directors
by shareholders;
• Reviews the Company’s corporate
governance arrangements and
compliance with the Code; and
• Makes recommendations to the
Board concerning the charitable and
corporate social responsibility activities
of the Company and donations to the
Lancashire Foundation.
How the Committee discharged its
responsibilities during 2018
Board composition
The Committee reviewed the composition
of the Board to ensure that the balance
of skills, knowledge, independence,
experience and diversity continues to
be appropriate for the Group’s business
to meet its strategic objectives. The
Committee also considered whether
any additional skills and experience
were needed to complement those
already on the Board.
In this regard, the Committee engaged
the Eliot Partnership, an executive search
firm that has no other connection to the
Group. They identified a number of
potential candidates, including Sally
Williams, who in July 2018 was appointed
as a Non-Executive Director of the
Company which took effect on 14 January
2019. In this regard, please see page 55
for a discussion relating to the Board
process followed on the determination
of the independence of Sally Williams.
In accordance with the provisions of the
Code, all of the Directors are subject to
annual (re)election by shareholders.
With the exception of Tom Milligan, who
retired from the Board on 31 March 2018,
all of the Directors were re-elected by
shareholders at the 2018 AGM.
Succession planning
The Committee reviewed and
recommended the approval and
adoption by the Board of the Company’s
succession plan and talent management
and development programme 2018/2019.
The Committee also continued to focus in
its dialogue with management on training
and development initiatives for key
employees across the Group. During
2018, there were a number of planned
promotions within the risk management,
modelling and actuarial, and
underwriting teams.
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“During 2019, the Committee will keep under review the Group’s corporate governance reporting to ensure that the Company is able to discharge effectively its governance responsibilities under the 2018 Code.”Governance
Committee reports: continued
The Committee recommended approval
by the Board of an updated diversity
policy, which is posted on the Company’s
website. The Board remains of the view
that the skills and experience needed to
take the business of the Company forward
are of paramount importance in selecting
Board members and employees.
Lancashire’s approach to recruitment and
ensuring the benefits of a broad diversity
throughout the business is discussed
further on page 41 in the discussion
of the workplace culture.
During 2018, the Committee recommended
the approval by the Board of an updated
Anti-Slavery and Human Trafficking
statement, a copy of which is posted
on the Company’s website.
The Lancashire Foundation
The Committee is responsible for
monitoring and making recommendations
to the Board in relation to the Company’s
charitable giving policy and the operation
of, and reporting requirements for, the
Lancashire Foundation. During 2018,
the Committee received a report on
the Foundation, including its objectives,
governance, approach to funding for
2018 and beyond, investment strategy,
donations policy and charitable activities,
and considered the ways in which the
Foundation engages with employees
throughout the Group. The Committee
made a recommendation to the Board
that the Company make a donation to
the Foundation of $0.5 million for 2019.
The Committee recommended
the appointment by the Board of
Emma Hill (a LUK Terrorism, War &
Political Risks underwriter) as a Trustee
of the Foundation. The Committee also
recommended the approval by the Board
of some amendments to the Foundation’s
Trust Deed.
Subsidiary boards
The Committee monitored the
composition of subsidiary boards during
2018 and recommended appointments
to the boards of CUL, LICL and KCML.
The Committee also recommended the
appointment of Simon Fraser as
Chairman of the CUL Remuneration
and Nomination Committee.
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 56).
During 2018, the Committee noted the
publication by the FRC of the 2018 Code
and reviewed with management the
detailed changes made to the Code.
The Committee will review the Company’s
compliance with the 2018 Code from the
beginning of 2019 for the purpose of
reporting in the Company’s 2019
Annual Report and Accounts.
During 2018, the Company continued the
practice of the Group CEO holding ‘town
hall’ meetings with employees following
the announcement of the Company’s
quarterly results. The Committee has
discussed plans for certain of these
meetings to be attended by the Chairman
of the Board or another Non-Executive
Director during 2019 and to further
enhance arrangements for engagement
between the Directors and members of
the workforce.
During 2018, the Committee recommended
the approval and adoption by the Board of
amended and restated Terms of Reference
of the Investment Committee, a copy of
which is posted on the Company’s website.
The Committee considered statistics
relevant to the gender composition of
the Board, Group management excluding
LHL Non-Executive Directors, and overall
Group employees. These statistics are
shown opposite. The Committee also
reviewed 2018 comparative pay data by
gender within the Lancashire Group.
Lancashire Holdings Limited
Annual Report & Accounts 2018
64
Priorities for 2019
The Committee’s key priorities for 2019 are:
• To ensure that the Company is able
to discharge effectively its governance
responsibilities under the 2018 Code;
• To continue to develop the succession
plans for Directors and senior
executives, in line with the Group’s
strategic objectives, and to support
management in the development
of the talent pipeline; and
• To monitor the Company’s progress
on gender diversity and other diversities.
LHL Board members
Male: 5 (62.5%)
Female: 3 (37.5%)
Total: 8
Group management excluding
LHL Non-Executive Directors
Overall Group employees
Male: 12 (70.6%)
Female: 5 (29.4%)
Total: 17
Male: 133 (61%)
Female: 85 (39%)
Total: 218
The gender composition data reflecting LHL Board
members is reported as at the date of this Annual
Report and Accounts. The gender split of males
to females on the LHL Board as at 31 December
2018 was five males (71.4 per cent)/two females
(28.6 per cent). All other gender composition
data is shown as at 31 December 2018.
Investment Committee
Robert Lusardi
Chairman of the Investment Committee
Committee membership
During 2018, the Terms of Reference of
the Investment Committee were amended
to provide that the Committee shall
comprise at least two Non-Executive
Directors (one of whom may be the
Chairman of the Board) and the Group
CFO and/or the Group CIO. Any
Executive Director may also serve on
the Committee. The Terms of Reference
are posted on the Company’s website.
The Investment Committee comprises
one independent Non-Executive Director,
the Chairman of the Board, one Executive
Director (the Group CFO) and the Group
CIO (who is not a Director).
Robert Lusardi (Chairman)
Peter Clarke
Tom Milligan1
Elaine Whelan
Denise O’Donoghue
Meetings attended
4/4
4/4
1/1
4/4
4/4
1. Tom Milligan retired as a member of the
Investment Committee with effect from
31 March 2018.
Principal responsibilities of
the Committee
• Recommends investment strategies,
guidelines and policies to the Board
and other members of the Group to
approve annually;
• Recommends and sets risk asset
definitions and risk tolerance levels;
• Recommends to the relevant boards the
appointment of investment managers
to manage the Group’s investments;
• Monitors the performance of investment
strategies within the risk framework; and
• Establishes and monitors compliance
with investment operating guidelines
relating to the custody of investments
and the related internal controls.
How the Committee discharged
its responsibilities during 2018
The Committee regularly discussed and
kept under review macro-economic, capital
markets and global political developments
during the year, in particular fiscal and
political developments in the U.S. and
the ongoing impact of the UK’s Brexit
negotiations on investment strategy
and performance. The Committee
also considered regular reports on the
performance of the Group’s investment
portfolios, including asset allocation and
compliance with pre-defined guidelines
and tolerances; and recommended
amendments to portfolio investment
guidelines to the Board and operating
boards of LICL, LUK and CUL. During
the year the Committee received
presentations from Goldman Sachs and
PIMCO on the state of the investment
markets and the Group’s portfolio
structure and performance.
The Committee’s discussion of the
investment strategy has been framed
within the context of the Board’s objective
of ensuring appropriate connectivity with,
and support for, the Group’s underwriting
operations. The Committee continued to
prioritise the preservation of capital and
seeks to ensure an appropriate balance
between risk assets and core assets. The
Committee aims to provide sufficient
liquidity in the investment portfolio to
meet the potential payout patterns on the
Group’s insurance business, and during
the year the Committee modified the
Group’s liquidity rule to ensure that
it appropriately recognises historic
payout patterns.
The Committee also considered potential
adjustments to the investment strategy in
light of the decision to move the Company’s
group insurance regulatory supervision and
tax residence from the UK to Bermuda.
Priorities for 2019
The Committee’s key priorities for 2019 are:
• To maintain a continued focus on a
diversified portfolio, the preservation
of capital, the maintenance of liquidity
and the management of interest rate
and other investment risks; and
• To continue to review the asset
allocation strategy in light of the
decision to move the Company’s group
insurance regulatory supervision and tax
residence from the UK to Bermuda.
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“Returns on Lancashire’s investment portfolio are an integral part of the income generated for our shareholders. Our investment philosophy is designed to complement and support our underwriting strategy, reflect the current market conditions and include liquidity constraints based on PMLs and potential claim exposures. During 2018, the Group continued to maintain a defensive short duration profile during a year in which we have seen rising interest rates. We also seek to hold a diversified portfolio to manage and mitigate the effect of interest rate risk.”Governance Committee reports: continued
Underwriting and
Underwriting Risk Committee
Committee membership
During 2018, the Underwriting and
Underwriting Risk Committee comprised
one Executive Director (the Group CEO)
and one Non-Executive Director together
with the Group CUO, the CUO of LICL,
the CUO and Reinsurance Manager
of LUK, the Active Underwriters for
Syndicates 2010 and 3010, and the
Deputy Group Chief Actuary
(who are not Directors).
Alex Maloney (Chairman)
Jon Barnes
Michael Dawson
Paul Gregory
Hayley Johnston
Sylvain Perrier1
Ben Readdy
John Spence
James Irvine2
Tom Milligan3
Meetings attended
4/4
4/4
4/4
4/4
4/4
4/4
4/4
4/4
1/1
1/1
1. Sylvain Perrier retired as a member of the
Underwriting and Underwriting Risk Committee
with effect from 31 December 2018.
2. James Irvine was appointed as a member of the
Underwriting and Underwriting Risk Committee
with effect from 30 October 2018.
3. Tom Milligan retired as a member of the
Underwriting and Underwriting Risk Committee
with effect from 31 March 2018.
Principal responsibilities of
the Committee
• Reviews Group underwriting strategy
including consideration of new lines
of business;
• Oversees the development of, and
adherence to, underwriting guidelines
by operating company CUOs;
• Reviews underwriting performance;
• Reviews significant changes in
underwriting rules and policies;
• Establishes, reviews and maintains strict
underwriting criteria and limits; and
• Monitors underwriting risk and its
consistency with the Group’s risk
profile and risk appetite.
How the Committee discharged
its responsibilities during 2018
The Committee is actively engaged in the
development of strategy and the formal
underwriting risk tolerances, which are
reviewed by the Committee and approved
by the Board. Underwriting risk is the key
risk faced by the Group. Specifically, the
Committee receives quarterly risk data,
tracking movements in the Group’s
exposures to modelled PMLs and RDSs.
The Committee monitors underwriting
performance on a quarterly basis, and
seeks to ensure that good risk selection
and disciplined underwriting remain at
the heart of the Group’s underwriting
strategy. The Committee reviewed
Alex Maloney
Group Chief Executive Officer and
Chairman of the Underwriting and
Underwriting Risk Committee
“The Committee provides
a forum for discussing
the Group’s underwriting
performance and
developments in market
pricing and coverage
trends within the
insurance and reinsurance
lines in which we operate.
The Committee’s work
in engaging with our
underwriters and
managers is an important
discipline in helping
manage the Group’s
(re)insurance risk
exposures and in
identifying areas of
opportunity through
the insurance cycle.”
Lancashire Holdings Limited
Annual Report & Accounts 2018
66
Priorities for 2019
The Committee’s key priorities for 2019 are:
• To continue to monitor the
development and implementation
of a forward-looking and disciplined
underwriting strategy appropriate for
the Group’s underwriting platforms,
within a framework of appropriate
risk tolerances;
• To work actively with management in the
identification, analysis and consideration
of new underwriters and/or lines of
business, with a particular focus on the
managed development of growth in the
U.S. specialty and catastrophe lines which
are complementary to the Group’s
underwriting portfolio; and
• To continue to foster a nimble and
responsive underwriting culture,
capable of responding to the needs
of clients, investors, employees and
other stakeholders.
management reports on the structuring
and pricing of the outwards reinsurance
protections purchased across the Group.
The Committee received quarterly update
reports from the Active Underwriters of
Syndicates 2010 and 3010, the CUOs for
LUK and LICL and the CEO of KCML
during 2018. The Committee also
received quarterly reports of significant
claims and related developments.
Regarding business development
opportunities, the Committee reviewed
and approved management plans for the
recruitment of underwriters in onshore
energy, power and aviation deductible
lines of business as well as approving
underwriting parameters for participating
in transactional liability risk, underwritten
on an agency basis.
During 2018, the Committee
meetings were open to attendance by
all of the Board members and provided
a useful forum for the discussion of
underwriting performance, the approval
and management of risk tolerances and
the development of strategic underwriting
initiatives. The Committee and Board seek
to match the Company’s capital to the
underwriting requirements of the business
in all parts of the underwriting cycle.
A more detailed analysis of the Group’s
underwriting performance appears in
the business review section of this Annual
Report and Accounts on pages 26 to 32.
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Governance Committee reports: continued
Remuneration Committee
Committee membership
The Remuneration Committee comprises
three independent Non-Executive
Directors and the Chairman of the Board.
Simon Fraser (Chairman)
Peter Clarke
Michael Dawson
Robert Lusardi
Meetings attended
4/4
4/4
4/4
4/4
Principal responsibilities of
the Committee
• Sets the remuneration policy for,
and determines the total individual
remuneration packages, including
pension arrangements of, the
Company’s Chairman, the Executive
Directors, Company Secretary and other
designated senior executives, to deliver
long-term benefits to the Group;
• Agrees personal objectives for each
Executive Director and the related
performance and pay-out metrics for the
performance element of the annual bonus;
• Determines each year whether awards will
be made under the Group’s RSS and, if so,
the overall amount of such awards, the
individual awards to Executive Directors
and other designated senior executives,
and the performance targets to be used;
• Ensures that contractual terms on
termination or retirement, and
any payments made, are fair to the
individual and the Company; and
• Oversees any major changes in employee
benefit structures throughout the Group.
How the Committee discharged
its responsibilities during 2018
During 2018, the Committee reviewed the
Group incentive packages to ensure that
remuneration is structured appropriately
to promote the long-term success of the
Company. The Committee also reviewed
the RSS structure for Executive Directors
to ensure that the performance metrics
continue to align the interests of the
Company with its investors and
management. The Committee considered
the salary and bonus awards for 2018 for
Executive Directors and other designated
senior executives. The Committee also
approved the grant of awards under
the Company’s RSS.
The Committee reviewed Executive
Directors’ shareholdings in the context of
the Company’s share ownership guidelines
for senior/key executives and discussed
revisions to the guidelines to reflect more
recent changes to the composition of the
senior management team.
The Committee also reviewed the policy
for Executive Directors’ remuneration,
which has a three-year life following its
approval by shareholders at the 2017 AGM.
The Committee considers the policy fit
for purpose and does not propose any
amendments at the 2019 AGM.
During 2018, the Committee recommended
the approval and adoption by the Board
of modifications to the Group Solvency II
Identified Staff Remuneration policy
principally to reflect changes within
the staff population. The Committee
continued to monitor progress made
during the year on the alignment of
remuneration practices across the Group.
Simon Fraser
Chairman of the Remuneration Committee
“The Committee seeks to
support the recruitment
and retention of the best
people for our business.
This requires achieving a
balance between the
need to ensure attractive
and fair remuneration
outcomes, which are
linked to appropriately
challenging yet realistic
targets for Company and
personal performance,
and the need to avoid
structures which might
incentivise excessive
risk-taking or a culture
of short-termism.”
Lancashire Holdings Limited
Annual Report & Accounts 2018
68
Priorities for 2019
The Committee does not expect any change
to the implementation of its policy in 2019.
The Committee’s key priorities for 2019 are:
• To review the ongoing appropriateness
and relevance of the Group’s
remuneration structures, ensuring
that they are in line with the Group’s
business strategy, risk profile, objectives,
risk management practices and
long-term interests;
• To ensure that remuneration across the
wider Group meets the staffing needs
and staff retention requirements of
the business; and
• To conduct a full review of the 2017
Directors’ Remuneration Policy, with any
changes being put to shareholders for
consideration at the 2020 AGM. As part
of this review, the Committee will work
with its independent advisers to keep
abreast of compensation levels amongst
the Group’s Bermudian and other peers,
and the latest compensation issues and
market practices.
The Committee also recommended
changes to the companies comprising the
Company’s peer group for comparator
purposes in light of recent M&A activity,
albeit that with effect from the 2018 RSS
awards the Group has decided to move
away from a peer group approach in favour
of absolute targets for both TSR and growth
(see page 79 for further details).
The Committee considered a number of
proposals relating to the treatment of RSS
awards held by departing employees.
The Directors’ Remuneration Policy and the
Annual Report on Remuneration, for which
the Committee is responsible, can be found
on pages 70 to 89. The report contains a
summary of the debate which has been
had within the Committee and the Board on
the alignment of remuneration and Group
performance both in the current year and
over a longer timeframe. It should be noted
that following a shareholder consultation
at the beginning of 2018, the Committee
recommended a modification in the
methodology for measurement of financial
performance in the 2018 three-year RSS
awards. The Committee noted and discussed
the minority shareholder vote against the
Annual Report on Remuneration at the
2018 AGM and, following a further
consultation with shareholders at the
beginning of 2019, the Committee has
recommended to the Board the continued
use of the measurement methodology for
the 2019 three-year RSS awards (see page 79
for further details).
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Governance Directors’ Remuneration Report
Annual statement
Dear Shareholder,
I am pleased to present the 2018 Directors’ Remuneration Report
to shareholders.
Shareholder engagement
Lancashire’s Directors’ Remuneration Policy was approved by
shareholders at the May 2017 AGM. There were no changes to the
Policy proposed at the 2018 AGM. At our 2018 AGM we received
support from in excess of 80 per cent of shareholders that voted for
our Annual Report on Remuneration. On behalf of the Committee
I contacted various shareholders and proxy advisory agencies, both
before and/or after the 2018 AGM vote, to explain and discuss the
Committee’s reasoning for the changes implemented in 2018. The
Committee has debated the appropriate remuneration structures
to be used in 2019 in some detail and (as I set out below) we have
decided to follow the same structure for the remuneration of our
Executive Directors as was used in 2018.
Remuneration and strategy
The Group’s goal continues to be to reward its employees fairly
and responsibly by providing an appropriate balance between fixed
remuneration and variable remuneration linked to the achievement
of suitably challenging Group and individual performance measures.
There is a strong link between the Remuneration Policy and the
business strategy. As highlighted elsewhere in this Annual Report
and Accounts, our strategy focuses on the effective operation of the
business necessary to maximise long-term RoE and the delivery of
superior total shareholder returns on a risk-adjusted basis over the
course of the insurance cycle. Our Remuneration Policy and the
way it is implemented are closely aligned to this strategy.
The Board and management continue to believe that the insurance
industry is cyclical in its fundamental characteristics. The Board’s
priorities at the current point in the pricing cycle are to achieve
acceptable returns whilst moderating overall risk levels through
underwriting discipline and prudent reinsurance planning and
to ensure that throughout the softer part of the market cycle the
business has continued to service the needs of its core clients
and brokers.
Performance outcomes for 2018 – another challenging year
The Group has produced an RoE of 2.4 per cent (see the strategy and
performance reviews of this report on pages 16 to 21).
The Board and Committee were satisfied that in light of 2018 market
loss events this performance represents an acceptable outcome for
the year. Whilst this has been a year in which higher than average
catastrophe loss activity has been experienced, the business has
generated positive annual earnings and the Group remains vibrant
and well-capitalised. The business is well-positioned to compete in
the market as we enter 2019 in what we expect to be an improving
phase of the insurance cycle. Our strategy is to continue exploring
opportunities for organic growth, where this makes sense, whilst
ensuring a rigorous focus on the balanced management of risk
and reward.
Against the background described above there has been a decrease
in total remuneration of 26 per cent for the CEO and 20 per cent for
the CFO between 2017 and 2018 (see the comparison table for single
figure remuneration on page 80). This movement is largely driven
by an RoE of 2.4 per cent for 2018 and the negative 5.9 per cent for
2017, which taken together severely impacted the vesting levels on
the 2016 RSS awards (see below and page 83 for further details).
The Executive Directors’ annual bonus performance targets set
at the beginning of 2018 for personal and financial performance
were stretching. The financial element which made up 75 per cent
of the annual bonus opportunity resulted in no annual bonus for
that element given the Company’s 2018 low return (as a result of the
above average catastrophe loss environment). The Board did however
consider that both the Executive Directors had performed strongly
in managing risk within the business and in positioning the Group
well for what we hope will be a better rating environment in 2019,
therefore a bonus was awarded for the personal component in respect
of 2018 performance. In summary, annual bonuses for our Executive
Directors were achieved substantially below target level at 19 per cent
of maximum bonus for both the CEO and the CFO (see page 82 for
further details).
In relation to long-term incentives for Executive Directors and other
senior management, the 2016 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 2018. Our TSR performance (in U.S. dollars) over
this period ranked the Company below the median of the designated
peer group of 11 companies, resulting in 0 per cent vesting for the
TSR component.
Our average RoE performance over this three-year performance
period was 3.3 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 0 per cent
of the RoE component of the 2016 Performance RSS awards vesting.
Therefore overall, the 2016 Performance RSS awards vested at 0 per
cent. This compared with the overall 22.5 per cent vesting of the 2015
Performance RSS awards due to 30.1 per cent vesting of the RoE
portion of those awards and 0 per cent vesting of the TSR portion
of the awards, which we reported last year.
The total remuneration received by our Executive Directors in 2018
was accordingly lower than that received in 2017 (see page 80 for
the comparison data), as demonstrated by the table of Total
Remuneration History for the CEO on page 88.
The Committee believes in setting challenging performance criteria
and having a significant proportion of the overall package linked to
Company performance. However, the Committee also continues to
recognise the need to ensure that Executive Directors are
appropriately remunerated and incentivised even in the more
challenging phases of the insurance cycle, as at present.
It is also important that the Committee and the Board ensure that
Executive Director compensation is structured in such a way as to
discourage excessive risk to the business.
Lancashire Holdings Limited
Annual Report & Accounts 2018
70
Lancashire Holdings Limited | Annual Report & Accounts 2018
70
Directors’ Remuneration Report
I am pleased to present the 2018 Directors’ Remuneration Report
Annual statement
Dear Shareholder,
to shareholders.
Shareholder engagement
Lancashire’s Directors’ Remuneration Policy was approved by
shareholders at the May 2017 AGM. There were no changes to the
Policy proposed at the 2018 AGM. At our 2018 AGM we received
support from in excess of 80 per cent of shareholders that voted for
our Annual Report on Remuneration. On behalf of the Committee
I contacted various shareholders and proxy advisory agencies, both
before and/or after the 2018 AGM vote, to explain and discuss the
Committee’s reasoning for the changes implemented in 2018. The
Committee has debated the appropriate remuneration structures
to be used in 2019 in some detail and (as I set out below) we have
decided to follow the same structure for the remuneration of our
Executive Directors as was used in 2018.
Against the background described above there has been a decrease
in total remuneration of 26 per cent for the CEO and 20 per cent for
the CFO between 2017 and 2018 (see the comparison table for single
figure remuneration on page 80). This movement is largely driven
by an RoE of 2.4 per cent for 2018 and the negative 5.9 per cent for
2017, which taken together severely impacted the vesting levels on
the 2016 RSS awards (see below and page 83 for further details).
The Executive Directors’ annual bonus performance targets set
at the beginning of 2018 for personal and financial performance
were stretching. The financial element which made up 75 per cent
of the annual bonus opportunity resulted in no annual bonus for
that element given the Company’s 2018 low return (as a result of the
above average catastrophe loss environment). The Board did however
consider that both the Executive Directors had performed strongly
in managing risk within the business and in positioning the Group
well for what we hope will be a better rating environment in 2019,
therefore a bonus was awarded for the personal component in respect
of 2018 performance. In summary, annual bonuses for our Executive
Directors were achieved substantially below target level at 19 per cent
of maximum bonus for both the CEO and the CFO (see page 82 for
Remuneration and strategy
The Group’s goal continues to be to reward its employees fairly
and responsibly by providing an appropriate balance between fixed
further details).
remuneration and variable remuneration linked to the achievement
In relation to long-term incentives for Executive Directors and other
of suitably challenging Group and individual performance measures.
senior management, the 2016 Performance RSS awards were 75 per
There is a strong link between the Remuneration Policy and the
business strategy. As highlighted elsewhere in this Annual Report
and Accounts, our strategy focuses on the effective operation of the
business necessary to maximise long-term RoE and the delivery of
superior total shareholder returns on a risk-adjusted basis over the
course of the insurance cycle. Our Remuneration Policy and the
way it is implemented are closely aligned to this strategy.
The Board and management continue to believe that the insurance
industry is cyclical in its fundamental characteristics. The Board’s
priorities at the current point in the pricing cycle are to achieve
acceptable returns whilst moderating overall risk levels through
underwriting discipline and prudent reinsurance planning and
to ensure that throughout the softer part of the market cycle the
business has continued to service the needs of its core clients
and brokers.
Performance outcomes for 2018 – another challenging year
The Group has produced an RoE of 2.4 per cent (see the strategy and
performance reviews of this report on pages 16 to 21).
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 2018. Our TSR performance (in U.S. dollars) over
this period ranked the Company below the median of the designated
peer group of 11 companies, resulting in 0 per cent vesting for the
TSR component.
Our average RoE performance over this three-year performance
period was 3.3 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 0 per cent
of the RoE component of the 2016 Performance RSS awards vesting.
Therefore overall, the 2016 Performance RSS awards vested at 0 per
cent. This compared with the overall 22.5 per cent vesting of the 2015
Performance RSS awards due to 30.1 per cent vesting of the RoE
portion of those awards and 0 per cent vesting of the TSR portion
of the awards, which we reported last year.
The total remuneration received by our Executive Directors in 2018
was accordingly lower than that received in 2017 (see page 80 for
the comparison data), as demonstrated by the table of Total
The Board and Committee were satisfied that in light of 2018 market
Remuneration History for the CEO on page 88.
loss events this performance represents an acceptable outcome for
the year. Whilst this has been a year in which higher than average
catastrophe loss activity has been experienced, the business has
generated positive annual earnings and the Group remains vibrant
and well-capitalised. The business is well-positioned to compete in
the market as we enter 2019 in what we expect to be an improving
phase of the insurance cycle. Our strategy is to continue exploring
opportunities for organic growth, where this makes sense, whilst
ensuring a rigorous focus on the balanced management of risk
and reward.
The Committee believes in setting challenging performance criteria
and having a significant proportion of the overall package linked to
Company performance. However, the Committee also continues to
recognise the need to ensure that Executive Directors are
appropriately remunerated and incentivised even in the more
challenging phases of the insurance cycle, as at present.
It is also important that the Committee and the Board ensure that
Executive Director compensation is structured in such a way as to
discourage excessive risk to the business.
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, albeit that the
Group’s performance has been substantially impacted by a series of
above average catastrophe loss events to the global insurance markets,
which are beyond the power of our Executive Directors to control,
but which have been appropriately planned for. Lancashire will
continue to ensure that there remains appropriate alignment
between executive remuneration and Company performance, not
only in loss-affected years, but also in those future years when the
Group hopes to produce results more in line with its cross-cycle
return expectations.
Application of Remuneration Policy for 2019
The Remuneration Committee has reviewed the 2017 Directors’
Remuneration Policy approved by shareholders and considers it
to remain fit for purpose. The Remuneration Committee will be
conducting a full review of the Policy in 2019, with any changes being
put to shareholders for consideration at the 2020 AGM. The planned
review will take into account changes introduced as a result of the
FRC’s revised 2018 UK Corporate Governance Code.
The final section of this report is the Annual Report on
Remuneration, which provides detailed disclosure on how the Policy
will be implemented for 2019 and how Directors have been paid in
relation to 2018. The Board has decided to apply the targets for
the annual bonus on substantially the same basis as agreed for 2018.
In deciding to implement the three-year RSS awards for Executive
Directors for 2019 on the same basis as the 2018 RSS awards, I wrote
to our major shareholders and a number of the leading proxy voting
advisory services and held a number of meetings to seek comments on
our plans and the feedback given was largely supportive.
There has been some discussion within the investor community
regarding post-employment holding periods for Executive Directors,
which the Committee has discussed. The Committee does not
propose to change the current policy at present, but will further
debate this matter during the year and as part of the Remuneration
Policy review, which is to take place in advance of the shareholder
policy vote in 2020. The Committee notes that the current structure
of the RSS awards requires a two-year holding period post vesting for
awards held by Executive Directors. Should an Executive Director
leave the business on agreed terms as a ‘good leaver’ it will ordinarily
be a requirement that RSS awards vesting after the date of departure
should be held for a period of two years post vesting. Accordingly,
the Committee notes that in a managed exit for an Executive Director
there is already a degree of post-employment shareholder alignment
under the current arrangements.
The disclosures provide our shareholders with the information
necessary to form a judgement as to the link between Company
performance and how the Executive Directors are paid. This Annual
Statement together with the Annual Report on Remuneration will
be subject to an advisory vote and I hope that you will be able to
support the resolution at the forthcoming AGM. The Committee is
committed to maintaining an open and constructive dialogue with
our shareholders on remuneration matters and I welcome any
feedback you may have.
Simon Fraser
Chairman of the Remuneration Committee
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Governance
Directors’ Remuneration Report: continued
Directors’ Remuneration Policy section
As a company incorporated in Bermuda, Lancashire is not bound
by UK law or regulation in the area of Directors’ remuneration
to the same extent that it applies to UK incorporated companies.
However, by virtue of the Company’s premium listing on the
LSE, and for the purposes of explaining its compliance against
the requirements of the Code, the Board is committed to providing
full information on Directors’ remuneration to shareholders. In
particular, the Committee has discussed the changes to the Code
during 2018 for implementation during 2019, in particular with
regard to the responsibilities of the Remuneration Committee
and Board concerning the review and cognisance of workforce
remuneration structures and the mechanisms for employees’
engagement and feedback.
The Company’s Remuneration Policy was approved by shareholders
at the 2017 AGM and is effective for a period of three years from the
2017 AGM until the AGM in 2020 (or until amended by a decision of
shareholders). The 2017 Remuneration Policy was developed taking
into account the principles of the Code and the views of our major
shareholders. As noted earlier, the Committee will be conducting a
full review of the Remuneration Policy in 2019, with any changes
put to shareholders for consideration at the 2020 AGM.
The 2017 Remuneration Policy contains details of the Company’s
policy to govern future payments that will be made to Directors.
The Annual Report on Remuneration also details the remuneration
paid to Directors in respect of the 2018 financial year in accordance
with the shareholder approved Policy.
Governance and approach
The Company’s Remuneration Policy is geared towards providing a
level of remuneration which attracts, retains and motivates Executive
Directors of the highest calibre to further the Company’s interests
and to optimise long-term shareholder value creation, within
appropriate risk parameters. The Remuneration Policy also seeks
to ensure that Executive Directors are provided with appropriate
incentives to drive individual performance and to reward them fairly
for their contribution to the successful performance of the Company.
The Remuneration Committee and the Board have again considered
whether any element of the Remuneration Policy could conceivably
encourage Executive Directors to take inappropriate risks and have
concluded that this is not the case, given the following:
• 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. In January 2019
the Committee Chairman conducted a consultation on behalf of the
Committee with various shareholders and proxy advisory agencies
to seek feedback on the Committee’s plans to implement the
Remuneration Policy for the Executive Directors for 2019 without
any material changes to the approach adopted in 2018. Feedback
received was supportive of that approach.
How the views of employees are taken into account
The Remuneration Committee takes into account levels of
pay elsewhere in the Group when determining the pay levels for
Executive Directors. The Remuneration Policy for all staff is, in
principle, broadly the same as that for Executive Directors in that
any of the Group’s employees may be offered similarly structured
packages, with participation in annual bonus and long-term incentive
plans, although award types (restricted cash, restricted stock or
performance shares) and size may vary between different categories
of staff. For Executive Directors, with higher remuneration levels,
a higher proportion of the compensation package is subject to
performance pay, share-based remuneration and deferral. This
ensures that there is a strong link between remuneration,
Company performance and the interests of shareholders.
Reflecting good practice in this area, Executive Directors’ pension
provision is no more generous than the pension contributions made
to employees in the Group (in percentage of salary terms).
The 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. The Committee
also reviews and approves the size of any annual bonus pot to be
distributed amongst the staff population and the allocation of RSS
awards, and its practice in this regard is well aligned with the
expectations introduced within the revised Code.
Lancashire Holdings Limited
Annual Report & Accounts 2018
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Directors’ Remuneration Report: continued
Directors’ Remuneration Policy section
As a company incorporated in Bermuda, Lancashire is not bound
by UK law or regulation in the area of Directors’ remuneration
to the same extent that it applies to UK incorporated companies.
However, by virtue of the Company’s premium listing on the
LSE, and for the purposes of explaining its compliance against
the requirements of the Code, the Board is committed to providing
full information on Directors’ remuneration to shareholders. In
particular, the Committee has discussed the changes to the Code
during 2018 for implementation during 2019, in particular with
regard to the responsibilities of the Remuneration Committee
and Board concerning the review and cognisance of workforce
remuneration structures and the mechanisms for employees’
engagement and feedback.
The Company’s Remuneration Policy was approved by shareholders
at the 2017 AGM and is effective for a period of three years from the
2017 AGM until the AGM in 2020 (or until amended by a decision of
shareholders). The 2017 Remuneration Policy was developed taking
into account the principles of the Code and the views of our major
shareholders. As noted earlier, the Committee will be conducting a
full review of the Remuneration Policy in 2019, with any changes
put to shareholders for consideration at the 2020 AGM.
The 2017 Remuneration Policy contains details of the Company’s
policy to govern future payments that will be made to Directors.
The Annual Report on Remuneration also details the remuneration
paid to Directors in respect of the 2018 financial year in accordance
with the shareholder approved Policy.
Governance and approach
The Company’s Remuneration Policy is geared towards providing a
level of remuneration which attracts, retains and motivates Executive
Directors of the highest calibre to further the Company’s interests
and to optimise long-term shareholder value creation, within
appropriate risk parameters. The Remuneration Policy also seeks
to ensure that Executive Directors are provided with appropriate
• 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. In January 2019
the Committee Chairman conducted a consultation on behalf of the
Committee with various shareholders and proxy advisory agencies
to seek feedback on the Committee’s plans to implement the
Remuneration Policy for the Executive Directors for 2019 without
any material changes to the approach adopted in 2018. Feedback
received was supportive of that approach.
How the views of employees are taken into account
The Remuneration Committee takes into account levels of
pay elsewhere in the Group when determining the pay levels for
Executive Directors. The Remuneration Policy for all staff is, in
principle, broadly the same as that for Executive Directors in that
any of the Group’s employees may be offered similarly structured
packages, with participation in annual bonus and long-term incentive
plans, although award types (restricted cash, restricted stock or
performance shares) and size may vary between different categories
of staff. For Executive Directors, with higher remuneration levels,
a higher proportion of the compensation package is subject to
performance pay, share-based remuneration and deferral. This
ensures that there is a strong link between remuneration,
Company performance and the interests of shareholders.
Reflecting good practice in this area, Executive Directors’ pension
incentives to drive individual performance and to reward them fairly
provision is no more generous than the pension contributions made
for their contribution to the successful performance of the Company.
to employees in the Group (in percentage of salary terms).
The Remuneration Committee and the Board have again considered
The Company does not consult with employees on Executive
whether any element of the Remuneration Policy could conceivably
Directors’ remuneration. However, as noted above, the Committee
encourage Executive Directors to take inappropriate risks and have
is made aware of pay structures across the wider Group when setting
the Remuneration Policy for Executive Directors. The Committee
also reviews and approves the size of any annual bonus pot to be
distributed amongst the staff population and the allocation of RSS
awards, and its practice in this regard is well aligned with the
expectations introduced within the revised Code.
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
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
Operation
Contribution towards funding post-retirement lifestyle.
The Company operates a defined contribution pension scheme (via outsourced pension providers)
or cash-in-lieu of pension.
There is a salary sacrifice structure in the UK.
There is the opportunity for additional voluntary contributions to be made by individuals, if elected.
Opportunity
Company contribution is currently 10 per cent of base salary.
Annual bonus1,2
Purpose and link to strategy
Operation
Rewards the achievement of financial and personal targets.
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 equivalence provision operates enabling dividends to be accrued (in cash or shares) on unvested
deferred bonus shares in the form of nil-cost options up to the point of exercise.
The bonus is subject to clawback if the financial statements of the Company were materially misstated or an
error occurred in assessing the performance conditions on bonus and/or if the Executive ceased to be a
Director or employee due to gross misconduct.
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Governance
Directors’ Remuneration Report: continued
Opportunity
Performance metrics
The maximum bonus for Executive Directors for achieving target level of performance as a percentage of salary is
200 per cent of salary. Maximum opportunity is two times target.
Note: The Committee may set bonus opportunities less than the amounts set out above – see Implementation of
Policy section of the Annual Report on Remuneration.
The weightings that apply to the bonus measures and the degree of stretch in objectives may vary each year
depending on the business aims and the broader economic or industry environment at the start of the relevant
year. For Executive Directors, the financial component will be at least 75 per cent of the overall opportunity,
and no more than 25 per cent will be based on personal or strategic objectives.
Financial performance
The financial component is based on the Company’s key financial measures of performance. For any year, these
may include RoE, growth in BVS, profit, comprehensive income, combined ratio, investment return or any other
financial KPI3.
Typically, a sliding scale of targets applies for financial performance targets. Bonus is earned on an incremental
basis once a predetermined threshold level is achieved. Up to 25 per cent of the total bonus opportunity is
payable for achieving threshold/median, rising to maximum bonus for stretch/upper quartile performance.
The degree of stretch in targets may vary each year depending on the business aims and the broader economic
or industry environment at the start of the relevant year.
Personal performance
Personal performance is based upon achievement of clearly articulated objectives. A performance rating is
attributed to participating Executive Directors, which determines the payout for this part of the bonus.
Long Term Incentives (LTI)
Purpose and link
to strategy
Operation2,3
Opportunity
Performance metrics
Rewards Executive Directors for achieving superior returns for shareholders over a longer time frame.
Enables Executive Directors to build a meaningful shareholding over time and align goals with shareholders.
RSS awards are normally made annually in the form of nil-cost options (or conditional awards) with vesting
dependent on the achievement of performance conditions over at least three financial years, commencing with
the year of grant. This three-year period is longer than the typical pattern of loss reserve development on the
Group’s insurance business, which is approximately two years.
The number of awards will normally be determined by reference to the share price around the time of grant
unless the Committee, at its discretion, determines otherwise.
The Committee considers carefully the quantum of awards each year to ensure that they are competitive in light
of peer practice and the targets set.
Awards are subject to clawback if there is a material misstatement in the Company’s 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 equivalence 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.
Lancashire Holdings Limited
Annual Report & Accounts 2018
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Directors’ Remuneration Report: continued
Purpose and link
Rewards Executive Directors for achieving superior returns for shareholders over a longer time frame.
Long Term Incentives (LTI)
to strategy
Operation2,3
Financial performance
financial KPI3.
Typically, a sliding scale of targets applies for financial performance targets. Bonus is earned on an incremental
basis once a predetermined threshold level is achieved. Up to 25 per cent of the total bonus opportunity is
payable for achieving threshold/median, rising to maximum bonus for stretch/upper quartile performance.
The degree of stretch in targets may vary each year depending on the business aims and the broader economic
or industry environment at the start of the relevant year.
Personal performance
Personal performance is based upon achievement of clearly articulated objectives. A performance rating is
attributed to participating Executive Directors, which determines the payout for this part of the bonus.
Enables Executive Directors to build a meaningful shareholding over time and align goals with shareholders.
RSS awards are normally made annually in the form of nil-cost options (or conditional awards) with vesting
dependent on the achievement of performance conditions over at least three financial years, commencing with
the year of grant. This three-year period is longer than the typical pattern of loss reserve development on the
Group’s insurance business, which is approximately two years.
The number of awards will normally be determined by reference to the share price around the time of grant
unless the Committee, at its discretion, determines otherwise.
The Committee considers carefully the quantum of awards each year to ensure that they are competitive in light
of peer practice and the targets set.
Awards are subject to clawback if there is a material misstatement in the Company’s financial statements, an error
in the calculation of any performance conditions or if the Executive Director ceases to be a Director or employee
A dividend equivalence 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
due to gross misconduct.
to the point of exercise.
in cash.
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.
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.
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.
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.
Remuneration Policy table continued
Share ownership guidelines4
Under the guidelines, Executive Directors are expected to maintain an interest equivalent in value to no less than two times salary over time.
Until such time as the guideline threshold is achieved Executive Directors are required to retain no less than 50 per cent of the net of tax value
of awards that vest under the RSS.
Chairman and Non-Executive Directors’ fees
Purpose and link to strategy Helps recruit, motivate and retain a Chairman and Non-Executive Directors of a high calibre by offering
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
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 historical 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 162 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 2019 at different levels of performance
under the Directors’ Remuneration Policy.
8
7
6
5
4
3
2
1
0
)
m
$
(
n
o
i
t
a
s
n
e
p
m
o
c
l
a
t
o
T
7.50
17%
35%
6.20
42%
42%
35%
16%
13%
0.89
100%
4.32
38%
5.14
16%
32%
41%
35%
21%
17%
2.61
32%
34%
34%
3.59
36%
36%
28%
0.98
100%
Fixed pay
On-target
Maximum Maximum +50%
growth in shares
CEO
Fixed pay
On-target
Maximum
CFO
Maximum +50%
growth in shares
Performance metrics
Awards vest at the end of a three-year performance period based on performance measures reflecting the
Fixed pay
Annual bonus
LTI Awards (RSS)
LTI Awards (RSS) + 50% SP Growth
Fixed pay = 2019 Salary + Actual Value of 2018 Benefits + 2019 Pension Contribution.
On-target = Fixed Pay + Target Bonus (being half the Maximum Bonus Opportunity) + Target Value of 2019 RSS grant
(assuming 50 per cent vesting with face values of grant).
Maximum = Fixed Pay + Maximum Bonus Opportunity + Maximum Value of 2019 RSS grant (assuming 100 per cent vesting
with the face values of grant).
Maximum + 50% growth over performance period = Fixed Pay + Maximum Bonus Opportunity + Maximum Value of 2019 RSS grant + 50%
share price appreciation (assuming 100 per cent vesting with the face values of grant).
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Governance
Directors’ Remuneration Report: continued
Approach to recruitment remuneration
The remuneration package for a new Executive Director would be set in accordance with the terms of the Company’s prevailing approved
Remuneration Policy at the time of appointment and take into account the skills and experience of the individual, the market rate for a
candidate of that experience and the importance of securing the relevant individual.
Salary would be provided at such a level as is required to attract the most appropriate candidate. The Committee retains the flexibility to set
base salary for a newly appointed Executive Director below the mid-market level and allow them to progress quickly to or around mid-market
level once expertise and performance have been proven. This decision would take into account all relevant factors noted above.
The annual bonus and LTI potential would be in line with the Policy. Depending on the timing of the appointment, the Committee may deem
it appropriate to set different bonus performance measures for the performance year during which he or she became an Executive Director.
The Committee may grant an LTI award to an executive shortly after joining, up to the plan limits set out in the Remuneration Policy table
(assuming the Company is not in a closed period).
In addition, the Committee may offer additional cash and/or share-based elements to replace deferred or incentive pay forfeited by an
Executive leaving a previous employer. It would seek to ensure, where possible, that these awards would be consistent with awards forfeited in
terms of vesting periods (which may be less than three years), expected value and performance conditions.
For an internal Executive Director appointment, any variable pay element awarded in respect of the prior role may be allowed to pay out
according to its terms, adjusted as relevant to take into account the appointment. In addition, any other ongoing remuneration obligations
existing prior to appointment may continue.
The Committee may agree that the Company will meet certain relocation expenses as appropriate and is able to provide expatriate benefits
including housing, a relocation allowance, assignment-related costs or tax equalisation.
Service contracts and loss of office payment policy for Executive Directors
Executive Directors have service contracts with six-month notice periods. In the event of termination, the Executive Directors’ contracts provide
for compensation up to a maximum of base salary plus the value of benefits to which the Executive Directors are contractually entitled for the
unexpired portion of the notice period. The Company may pay statutory claims. No Executive Director has a contractual right to a bonus for
any period of notice not worked.
The service contract for a new appointment will be on similar terms as existing Executive Directors, with the facility to include a notice period
of no more than 12 months from either party.
The Company seeks to apply the principle of mitigation in the payment of compensation on the termination of the service contract of any
Executive Director. There are no special provisions in the service contracts for payments to Executive Directors on a change of control of
the Company.
In the event of an exit of an Executive Director, the overriding principle will be to honour contractual remuneration entitlements and
determine, on an equitable basis, the appropriate treatment of deferred and performance-linked elements of the package, taking account of
the circumstances. Failure will not be rewarded.
Depending on the leaver classification, an Executive Director may be eligible for certain payments or benefits continuation after cessation
of employment.
If an Executive Director resigns or is summarily dismissed, salary, pension and benefits will cease on the last day of employment and there will
be no further payments.
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Directors’ Remuneration Report: continued
Approach to recruitment remuneration
The remuneration package for a new Executive Director would be set in accordance with the terms of the Company’s prevailing approved
Remuneration Policy at the time of appointment and take into account the skills and experience of the individual, the market rate for a
candidate of that experience and the importance of securing the relevant individual.
Salary would be provided at such a level as is required to attract the most appropriate candidate. The Committee retains the flexibility to set
base salary for a newly appointed Executive Director below the mid-market level and allow them to progress quickly to or around mid-market
level once expertise and performance have been proven. This decision would take into account all relevant factors noted above.
The annual bonus and LTI potential would be in line with the Policy. Depending on the timing of the appointment, the Committee may deem
it appropriate to set different bonus performance measures for the performance year during which he or she became an Executive Director.
The Committee may grant an LTI award to an executive 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.
Leaver on arranged terms or good leaver
If an Executive Director leaves on agreed terms, including compassionate circumstances, there may be payments after cessation of employment.
Salary, pension and benefits will be paid up to the length of the agreed notice period or agreed period of gardening leave.
Subject to performance, a bonus may be payable at the discretion of the Committee pro-rata for the portion of the financial year worked.
Vested but unexercised deferred bonus RSS awards will remain exercisable. Unvested deferred bonus RSS awards will ordinarily vest in full,
relative to the normal vesting period. All such vested awards must be exercised within 12 months of the vesting date.
Vested but unexercised RSS awards may remain exercisable for 12 months. Unvested awards may vest on the normal vesting date unless
the Committee determines that such awards shall instead vest at the time of cessation. Unvested awards will only vest to the extent that the
performance conditions have been satisfied (over the full or curtailed period as relevant). A pro-rata reduction in the size of awards may apply,
based upon the period of time after the grant date and ending on the date of cessation of employment relative to the three-year or other
relevant vesting period.
The Committee has discretion to permit unvested RSS awards to vest early rather than continue on the normal vesting timetable and also
retains discretion as to whether or not to apply (or to apply to a lesser extent) the pro-rata reduction to the RSS awards where it feels the
reduction would be inappropriate.
Depending upon circumstances, the Committee may consider other payments in respect of any claims in connection with a termination of
employment where deemed appropriate, including an unfair dismissal award, outplacement support and assistance with legal fees.
Terms of appointment for Non-Executive Directors
The Non-Executive Directors serve subject to the Company’s Bye-laws and under letters of appointment. They are appointed subject
to re-election at the AGM and are also terminable by either party on six months’ notice except in the event of earlier termination in
accordance with the Bye-laws. The Non-Executive Directors are typically expected to serve for up to six years, although the Board may invite
a Non-Executive Director to serve for an additional period. Their letters of appointment are available for inspection at the Company’s
registered office and at each AGM.
In accordance with best practice under the Code, the Board ordinarily submits the Directors individually for re-election by the shareholders at
each AGM.
Legacy arrangements
In approving the Policy, authority is given to the Company for the duration of the Policy to honour commitments paid, promised to be paid
or awarded to: (i) current or former Directors prior to the date of this Policy being approved (provided that such payments or promises were
consistent with any Remuneration Policy of the Company which was approved by shareholders and was in effect at the time they were made); or
(ii) to an individual (who subsequently is appointed as a Director of the Company) at a time when the relevant individual was not a Director of
the Company and, in the opinion of the Committee, was not paid, promised to be paid or awarded as financial consideration of that individual
becoming a Director of the Company, even where such commitments are inconsistent with the provisions of the revised Policy.
For the avoidance of doubt, this includes all awards granted under the 2008 RSS rules in accordance with the Policy approved at the 2014 AGM
and the current Policy which was approved by shareholders at the 2017 AGM, and to employees of the Company who are not Directors at the
date of grant. Outstanding RSS awards that remain unvested or unexercised at the date of this report (including for current Executive Directors
as detailed on page 84 of the Annual Report on Remuneration) remain eligible for vesting or exercise based on their original award terms.
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Governance
Directors’ Remuneration Report: continued
Annual Report on Remuneration
This Annual Report on Remuneration together with the Chairman’s Statement, as detailed on pages 70 and 71, will be subject to an advisory
vote at the 2019 AGM. The following sections in respect of Directors’ emoluments have been audited by KPMG:
• Single figure of remuneration.
• Non-Executive Directors’ fees.
• 2019 annual bonus payment in respect of 2018 performance.
• Long-term share awards with performance periods ending in the year – 2016 RSS award.
• Scheme interests awarded during the year.
• Loss of office payments.
• Performance and deferred bonus awards under the RSS.
• Directors’ shareholdings and share interests.
Implementation of Remuneration Policy for 2019
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 2019.
Base salary and fees
Executive Directors
Increases and resulting salaries effective from 1 January 2019 are set out below:
• CEO – salary increased by 3 per cent to $869,460.
• CFO – salary increased by 3 per cent to $597,030.
For 2019, increases of 3 per cent are in line with the standard salary increases for Group employees.
Non-Executive Directors
The Chairman’s and Non-Executive Directors’ fees are as follows for 2019:
• The fee for the Chairman (Peter Clarke) will remain at $350,000 per annum.
• The Non-Executive Director fee will remain at $175,000 per annum.
Other fees
• Samantha Hoe-Richardson is a Non-Executive Director of LUK in which capacity she will receive a fee of $67,099 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 2019, the CEO and CFO will have a target bonus of 150 per cent of salary and, therefore, a maximum opportunity of 300 per cent of salary.
This is within the approved policy limit and is in line with last year’s opportunity and represents a maximum bonus opportunity which is
100 per cent of salary less than the set policy limit.
The financial and personal portions of the annual bonus will remain unchanged with 75 per cent on financial performance and 25 per cent on
personal performance.
Financial performance (75 per cent)
The Company’s most important financial KPI is RoE, which is the core indicator of the delivery of its 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 Annual Report and Accounts). For 2019, the financial component for annual bonus is to be based on the
performance of the Group’s RoE, measured as the internal rate of return of the change in FCBVS plus accrued dividends.
A sliding scale range of RoE targets has been set by reference to the Risk Free Rate of Return as follows:
• 25 per cent of target bonus shall be payable at a threshold level of RoE equal to RFRoR + 6 per cent (0 per cent will be payable below
this threshold).
• 50 per cent of target bonus shall be payable at a level of RoE equal to RFRoR + 7 per cent.
• 100 per cent of target bonus shall be payable at a level of RoE equal to RFRoR + 8 per cent.
• 200 per cent of target bonus shall be payable at a level of RoE equal to RFRoR + 14 per cent.
There shall be linear interpolation between these points. The Board considers that these target ranges are appropriately challenging, given
the current insurance market conditions, and will help to ensure a strong link between remuneration for the Executive Directors and the
Company’s financial performance, the strategy and risk profile of the business and the investment return environment, without encouraging
excessive risk-taking.
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Annual Report on Remuneration
This Annual Report on Remuneration together with the Chairman’s Statement, as detailed on pages 70 and 71, will be subject to an advisory
vote at the 2019 AGM. The following sections in respect of Directors’ emoluments have been audited by KPMG:
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 2019 personal objectives for each Executive Director.
Executive Director
Alex Maloney
Elaine Whelan
Personal performance
Effective leadership and management of the senior executive team and Group.
Development of the general business strategy.
Contribution aligned to the Lancashire Group Values.
Effective leadership and management of the finance function and the Bermuda office.
Development of the general business strategy.
Contribution aligned to the Lancashire Group Values.
The personal targets are broadly common among the Executive Directors, with variances being attributable to the specifics of their respective
roles. Specific granular areas for personal development within the set broad personal objectives are discussed between the Chairman and the
Executive Directors and agreed by the Committee. As part of the 2019 annual performance reviews, each Executive Director will receive a
performance rating which will determine the level of personal performance bonus payout for which each Executive Director will be eligible.
Restricted Share Scheme
Performance conditions
For Executive Directors, 2019 RSS awards are subject to a range based on (i) annual growth in FCBVS plus accrued dividends and
(ii) absolute TSR performance conditions, both measured by reference to a period ending on 31 December 2021. These metrics aim to
provide an appropriate focus on the Company’s underlying financial performance and cycle management, and in the case of absolute TSR
to provide an objective reward for delivering value to shareholders.
Weighting
For 2019, the weighting is 85 per cent on annual growth in FCBVS plus accrued dividends and 15 per cent on absolute TSR.
Target ranges
The annual growth in FCBVS plus accrued dividends target range for 2019 awards is:
• threshold – 6 per cent; and
• maximum – 13 per cent.
Within the three-year performance period each of the separate financial years will be treated as a separate element, each one contributing
one-third to the overall outcome of the vesting of this element of the RSS award. In each year performance will be measured against the target
range to determine the ultimate level of vesting in respect of one-third of the RSS award. Vesting will only occur after completion of the full
three-year performance period, and continued employment of the Executive Director at the time of vesting.
The relevant element of the RSS award will not vest if annual growth in FCBVS plus accrued dividends is below threshold, 25 per cent of the
relevant element of the RSS award will vest at threshold, and 100 per cent of the relevant element of the RSS award will vest at maximum.
Performance between threshold and maximum is determined on a straight-line basis.
Overriding downwards discretion
If any year produces a return that the Committee believes is significantly worse than competitors and reflects poor management decisions, the
Remuneration Committee will use its discretion to determine that no part (or a lesser part) of the RSS award accrued over the full three-year
period shall vest.
Directors’ Remuneration Report: continued
In relation to the Policy described in the previous section, the following section sets out additional disclosure on the expected application of the
• Single figure of remuneration.
• Non-Executive Directors’ fees.
• 2019 annual bonus payment in respect of 2018 performance.
• Long-term share awards with performance periods ending in the year – 2016 RSS award.
• Scheme interests awarded during the year.
• Loss of office payments.
• Performance and deferred bonus awards under the RSS.
• Directors’ shareholdings and share interests.
Implementation of Remuneration Policy for 2019
Policy for 2019.
Base salary and fees
Executive Directors
Increases and resulting salaries effective from 1 January 2019 are set out below:
• CEO – salary increased by 3 per cent to $869,460.
• CFO – salary increased by 3 per cent to $597,030.
For 2019, increases of 3 per cent are in line with the standard salary increases for Group employees.
Non-Executive Directors
The Chairman’s and Non-Executive Directors’ fees are as follows for 2019:
• The fee for the Chairman (Peter Clarke) will remain at $350,000 per annum.
• The Non-Executive Director fee will remain at $175,000 per annum.
• Samantha Hoe-Richardson is a Non-Executive Director of LUK in which capacity she will receive a fee of $67,099 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 2019, the CEO and CFO will have a target bonus of 150 per cent of salary and, therefore, a maximum opportunity of 300 per cent of salary.
This is within the approved policy limit and is in line with last year’s opportunity and represents a maximum bonus opportunity which is
100 per cent of salary less than the set policy limit.
The financial and personal portions of the annual bonus will remain unchanged with 75 per cent on financial performance and 25 per cent on
Other fees
Annual bonus
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 its 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 Annual Report and Accounts). For 2019, the financial component for annual bonus is to be based on the
performance of the Group’s RoE, measured as the internal rate of return of the change in FCBVS plus accrued dividends.
A sliding scale range of RoE targets has been set by reference to the Risk Free Rate of Return as follows:
• 25 per cent of target bonus shall be payable at a threshold level of RoE equal to RFRoR + 6 per cent (0 per cent will be payable below
this threshold).
• 50 per cent of target bonus shall be payable at a level of RoE equal to RFRoR + 7 per cent.
• 100 per cent of target bonus shall be payable at a level of RoE equal to RFRoR + 8 per cent.
• 200 per cent of target bonus shall be payable at a level of RoE equal to RFRoR + 14 per cent.
There shall be linear interpolation between these points. The Board considers that these target ranges are appropriately challenging, given
the current insurance market conditions, and will help to ensure a strong link between remuneration for the Executive Directors and the
Company’s financial performance, the strategy and risk profile of the business and the investment return environment, without encouraging
excessive risk-taking.
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Governance
Directors’ Remuneration Report: continued
The TSR target range for 2019 awards is:
• threshold – 8 per cent compound annual growth; and
• maximum – 12 per cent compound annual growth.
Absolute TSR will be measured over the full three-year performance period rather than looking at each year separately.
None of the award will vest if TSR is below threshold, 25 per cent of the award will vest at threshold, and 100 per cent of the award will vest at
maximum. Performance between threshold and maximum is determined on a straight-line basis.
Award levels
2019 RSS award levels are as follows:
• CEO – shares to the value of $2,608,380 (being 300 per cent of salary).
• CFO – shares to the value of $1,641,833 (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 of remuneration
The following table presents the Executive Directors’ emoluments in U.S. dollars in respect of the years ended 31 December 2018 and
31 December 2017.
Executive Directors
Alex Maloney4,, CEO
Elaine Whelan4,6, CFO
Salary
$
846,910
811,311
579,967
562,268
Pension
$
84,691
81,227
57,795
56,275
2018
2017
2018
2017
Taxable
benefits1
$
24,879
21,910
234,144
155,960
Annual bonus5
$
474,826
420,000
326,048
310,000
Long-Term
Incentives
(RSS)2,3
$
0
608,696
0
419,120
Total4
$
1,431,306
1,943,144
1,197,954
1,503,623
1. Benefits comprise Bermudian payroll taxes, social insurance, medical, dental and vision coverage and housing and other allowances paid by the Company for expatriates
(as is the case for the CFO), but exclude UK National Insurance contributions.
2. For 2018, the long-term incentive values are based on the 2016 RSS awards which vest at 0 per cent on 14 February 2019 and are based on a three-year performance period
that ended on 31 December 2018.
3. For 2017, the long-term incentive values were based on the 2015 RSS awards which vested at 22.5 per cent on 15 February 2018 and were based on a three-year
performance period that ended on 31 December 2017. The values are re-presented from the 2017 Annual Report and Accounts based on the share price at the vesting
date, 15 February 2018 ($8.397), 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 1.3420 for the year as they are set in U.S. dollars.
5. Bonus targets were set at the beginning of 2018 and are based on a clear split between Company financial performance and personal performance on a 75:25 basis.
Company financial performance is based on absolute financial performance against the RFRoR. The Company financial performance component paid out at 0 per cent
of target as the RoE was 2.4 per cent against a target level of RFRoR +8 per cent. The personal element of Executive Directors’ bonus opportunity was the only bonus
element to pay out. Final bonus payout to Executive Directors will be 19 per cent of the maximum for the CEO and 19 per cent of the maximum for the CFO. For full
details of Executive Directors’ bonuses and the associated performance delivered see pages 81 and 82. 25 per cent of Executive Directors’ annual bonus is deferred into
RSS awards without performance conditions, vesting at 33.3 per cent per year over a three-year period.
6. For Elaine Whelan, the increase in taxable benefits from 2017 to 2018 is a result of changes in the Bermuda payroll tax regime.
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Directors’ Remuneration Report: continued
The TSR target range for 2019 awards is:
• threshold – 8 per cent compound annual growth; and
• maximum – 12 per cent compound annual growth.
Absolute TSR will be measured over the full three-year performance period rather than looking at each year separately.
None of the award will vest if TSR is below threshold, 25 per cent of the award will vest at threshold, and 100 per cent of the award will vest at
maximum. Performance between threshold and maximum is determined on a straight-line basis.
Award levels
2019 RSS award levels are as follows:
• CEO – shares to the value of $2,608,380 (being 300 per cent of salary).
• CFO – shares to the value of $1,641,833 (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
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.
The following table presents the Executive Directors’ emoluments in U.S. dollars in respect of the years ended 31 December 2018 and
Salary
$
846,910
811,311
579,967
562,268
Pension
$
84,691
81,227
57,795
56,275
2018
2017
2018
2017
Taxable
benefits1
$
24,879
21,910
234,144
155,960
Annual bonus5
$
474,826
420,000
326,048
310,000
Long-Term
Incentives
(RSS)2,3
$
0
0
608,696
419,120
Total4
$
1,431,306
1,943,144
1,197,954
1,503,623
1. Benefits comprise Bermudian payroll taxes, social insurance, medical, dental and vision coverage and housing and other allowances paid by the Company for expatriates
(as is the case for the CFO), but exclude UK National Insurance contributions.
2. For 2018, the long-term incentive values are based on the 2016 RSS awards which vest at 0 per cent on 14 February 2019 and are based on a three-year performance period
that ended on 31 December 2018.
3. For 2017, the long-term incentive values were based on the 2015 RSS awards which vested at 22.5 per cent on 15 February 2018 and were based on a three-year
performance period that ended on 31 December 2017. The values are re-presented from the 2017 Annual Report and Accounts based on the share price at the vesting
date, 15 February 2018 ($8.397), 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 1.3420 for the year as they are set in U.S. dollars.
5. Bonus targets were set at the beginning of 2018 and are based on a clear split between Company financial performance and personal performance on a 75:25 basis.
Company financial performance is based on absolute financial performance against the RFRoR. The Company financial performance component paid out at 0 per cent
of target as the RoE was 2.4 per cent against a target level of RFRoR +8 per cent. The personal element of Executive Directors’ bonus opportunity was the only bonus
element to pay out. Final bonus payout to Executive Directors will be 19 per cent of the maximum for the CEO and 19 per cent of the maximum for the CFO. For full
details of Executive Directors’ bonuses and the associated performance delivered see pages 81 and 82. 25 per cent of Executive Directors’ annual bonus is deferred into
RSS awards without performance conditions, vesting at 33.3 per cent per year over a three-year period.
6. For Elaine Whelan, the increase in taxable benefits from 2017 to 2018 is a result of changes in the Bermuda payroll tax regime.
to the date of the award.
Post-vesting holding period
Single figure of remuneration
31 December 2017.
Executive Directors
Alex Maloney4,, CEO
Elaine Whelan4,6, CFO
Non-Executive Directors’ fees
Current Non-Executive Directors
Peter Clarke
Michael Dawson
Simon Fraser
Samantha Hoe-Richardson3
Robert Lusardi
Sally Williams2
Former Non-Executive Directors
Tom Milligan1
Fee
$
Other
$
Total
$
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
350,000
350,000
175,000
175,000
175,000
175,000
175,000
175,000
175,000
175,000
–
–
2018
2017
43,750
175,000
–
–
–
–
80,000
80,000
67,099
64,500
–
–
–
–
–
–
350,000
350,000
175,000
175,000
255,000
255,000
242,099
239,500
175,000
175,000
–
–
43,750
175,000
1. Tom Milligan was appointed as a Non-Executive Director with effect from 3 February 2015 and retired effective 31 March 2018. His 2018 fees were proportionally pro-rated
for the year.
2. Sally Williams was appointed on 10 July 2018 as a Non-Executive Director and her appointment took effect on 14 January 2019.
3. Samantha Hoe-Richardson is remunerated in GBP for her LUK Non-Executive Director fee and this is converted to USD at the average annual FX rate of 1.3420 for 2018
(1.2900 was used for 2017).
2019 annual bonus payments in respect of 2018 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, and the maximum payable was two times the target value. The RoE
is 2.4 per cent.
Financial performance
75 per cent of the 2018 bonus was based on Company performance conditions and the extent to which these were achieved is as follows:
Performance Measure
Absolute RoE
Financial Performance Weighting
(of total bonus)
%
75
Threshold
%
RFRoR
+6%
Target
%
Max
%
Actual
performance
%
% payout
RFRoR
+8%
RFRoR
+14%
2.4
0% of target payable in respect
of Company performance
In 2018 natural catastrophe losses occurred at above average frequency and financial returns were below the lower threshold targets. Bonus
targets were set at the beginning of 2018 and based on a clear split between Company financial performance and personal performance on a
75:25 basis. The Company financial performance component paid out at 0 per cent of target as RoE was 2.4 per cent against a target level of
RFRoR +8 per cent and a threshold of RFRoR +6 per cent.
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Governance
Directors’ Remuneration Report: continued
Personal performance
25 per cent of the 2018 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 2018 personal objectives for each Executive Director.
Executive Director
Alex Maloney
Elaine Whelan
Personal performance
Effective leadership and management of the senior executive team and Group.
Development of the general business strategy.
Contribution aligned to the Lancashire Group Values.
Effective leadership and management of the finance function and the Bermuda office.
Development of the general business strategy.
Contribution aligned to the Lancashire Group Values.
The personal targets 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 2018 annual performance reviews of each Executive Director, a performance rating was assigned to determine the level of bonus
payout for which each Executive Director was eligible.
Notwithstanding the financial performance of the Group in what was a higher than average year for catastrophe loss activity (in this regard
please see the strategy and performance sections on pages 16 to 21 of this Annual Report and Accounts), the Executive Directors each achieved
a strong performance rating against their objectives, in particular in delivering an underwriting portfolio which operated in such a way as to
moderate loss exposures through a combination of underwriting discipline and a carefully structured reinsurance programme. The leadership
of the Executive Directors in delivering a team of employees with strong professional skills at all levels throughout the Group and in particular
the recruitment of new underwriting teams during the year (see pages 22 to 25 for further details) is considered by the Board to position the
business well for the challenges and opportunities which lie ahead. For the 2018 performance against personal objectives, the ratings were
determined following a process for the evaluation of performance of the Executive Directors against the agreed personal targets and
discussion and agreement of the outcomes with the Chairman and members of the Board. The outcomes are expressed as a percentage
of the maximum award as illustrated in the table below.
A table of performance measures and total 2018 bonus achievement is set out below:
Executive Director
Alex Maloney
Elaine Whelan
Financial
performance
(max % of
total bonus)
%
Personal
performance
(max % of
total bonus)
%
Bonus
% of maximum
awarded
%
75
75
25
25
19
19
Total
bonus value1
$
474,826
326,048
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
$
356,119
244,536
118,707
81,512
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 2020, subject to the Company not being in a closed period. These awards vest on the relevant dates subject to continued employment only.
Lancashire Holdings Limited
Annual Report & Accounts 2018
82
Lancashire Holdings Limited | Annual Report & Accounts 2018
82
Directors’ Remuneration Report: continued
Personal performance
25 per cent of the 2018 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 2018 personal objectives for each Executive Director.
Executive Director
Alex Maloney
Personal performance
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 2018 annual performance reviews of each Executive Director, a performance rating was assigned to determine the level of bonus
payout for which each Executive Director was eligible.
Notwithstanding the financial performance of the Group in what was a higher than average year for catastrophe loss activity (in this regard
please see the strategy and performance sections on pages 16 to 21 of this Annual Report and Accounts), the Executive Directors each achieved
a strong performance rating against their objectives, in particular in delivering an underwriting portfolio which operated in such a way as to
moderate loss exposures through a combination of underwriting discipline and a carefully structured reinsurance programme. The leadership
of the Executive Directors in delivering a team of employees with strong professional skills at all levels throughout the Group and in particular
the recruitment of new underwriting teams during the year (see pages 22 to 25 for further details) is considered by the Board to position the
business well for the challenges and opportunities which lie ahead. For the 2018 performance against personal objectives, the ratings were
determined following a process for the evaluation of performance of the Executive Directors against the agreed personal targets and
discussion and agreement of the outcomes with the Chairman and members of the Board. The outcomes are expressed as a percentage
of the maximum award as illustrated in the table below.
A table of performance measures and total 2018 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
Value of bonus
Value of bonus
paid in cash
deferred into RSS
Total
(75 per cent of
awards (25 per cent
awarded
bonus value1
total bonus)
of total bonus)1
$
$
$
%
75
75
%
25
25
%
19
19
474,826
326,048
356,119
244,536
118,707
81,512
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 2020, subject to the Company not being in a closed period. These awards vest on the relevant dates subject to continued employment only.
Long-term share awards with performance periods ending in the year – 2016 RSS award
The 2016 RSS awards were based on a three-year performance period ending on 31 December 2018 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 0 per cent, and the actual number of awards vesting.
Performance level
Below threshold
Threshold
Stretch or above
Actual achieved
TSR
(relative to a comparator group of 11 companies)
(relevant to 25% of the 2016 RSS awards)
Average annual RoE
(over three years in excess of 13-week Treasury bill rate)
(relevant to 75% of the 2016 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
2.4
0
25
100
0
Details of the vesting for each Executive Director, based on the above, are shown in the table below:
Executive Director
Alex Maloney
Elaine Whelan
Number of
shares at grant
Number of
shares to lapse
Number of
shares to vest
Dividend accrual
on vested shares
value2
$
Value of shares
including dividend
accrual1
$
219,254
157,104
219,254
157,104
0
0
0
0
0
0
1. The value of the vested shares is based on the 2016 RSS awards which vest at 0 per cent on 14 February 2019 and are based on a three-year performance period that ended
on 31 December 2018.
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 23 February 2018.
Executive Director
Alex Maloney
Elaine Whelan
Grant date2
23-Feb-2018
23-Feb-2018
Number of awards
granted during
the year
315,762
198,755
Face value
of awards
granted during
the year1,3
$
2,532,876
1,594,308
% vesting
at threshold
performance
25
25
1. The awards were based on the five-day average closing share price prior to the award date, being £5.74 (a share price of $8.02 based on the exchange rate of 1.3982) and
the awards were granted as nil-cost options.
2. These awards are due to vest subject to performance conditions being met at the end of the performance period ending 31 December 2020 and becoming exercisable in
the first open period following the release of the Company’s 2020 year-end results after the meeting of the Board in February 2021.
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 2018 year.
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83
Governance
Directors’ Remuneration Report: continued
Details of all outstanding share awards
In addition to awards made during the 2018 financial year, the table below sets out details of all outstanding RSS awards held by
Executive Directors.
Performance and deferred bonus awards under the RSS
Performance RSS2,3
Deferred Bonus RSS4
Performance RSS2,3
Deferred Bonus RSS4
Performance RSS2,3
Deferred Bonus RSS4
Performance RSS3,5
Deferred Bonus RSS4
Performance RSS2,3
Deferred Bonus RSS4
Performance RSS2,3
Deferred Bonus RSS4
Performance RSS2,3
Deferred Bonus RSS4
Performance RSS3,5
Deferred Bonus RSS4
Grant date1
12-Feb-15
20-Mar-15
18-Feb-16
11-Mar-16
14-Mar-17
14-Mar-17
23-Feb-18
23-Feb-18
12-Feb-15
20-Mar-15
18-Feb-16
11-Mar-16
14-Mar-17
14-Mar-17
23-Feb-18
23-Feb-18
Exercise
price
Awards
held at
1-Jan-18
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-18
End of
performance
period
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
244,208
13,976
219,254
37,483
286,666
53,215
–
–
854,802
168,149
9,847
157,104
25,738
180,441
36,541
–
–
577,820
–
–
–
–
–
–
315,762
13,090
328,852
–
–
–
–
–
–
198,755
9,663
208,418
54,947
13,976
–
18,742
–
17,738
–
–
105,403
37,834
9,847
–
12,869
–
12,180
–
–
72,730
189,261
–
–
–
–
–
–
–
189,261
130,315
–
–
–
–
–
–
–
130,315
54,947
13,976
–
18,742
–
17,738
–
–
105,403
37,834
9,847
–
12,869
–
12,180
–
–
72,730
– 31-Dec-17
–
219,254 31-Dec-18
18,741
286,666 31-Dec-19
35,477
315,762 31-Dec-20
13,090
888,990
– 31-Dec-17
–
157,104 31-Dec-18
12,869
180,441 31-Dec-19
24,361
198,755 31-Dec-20
9,663
583,193
Alex Maloney,
Group CEO
Total
Elaine Whelan,
Group CFO &
LICL CEO
Total
1. The market values of the common shares on the dates of grant were:
• 12 February 2015 £6.36
• 20 March 2015 £6.30
• 18 February 2016 £6.17
• 11 March 2016 £5.37
• 14 March 2017 £7.02
• 23 February 2018 £5.69
4. The vesting dates of the RSS Deferred Bonus awards are subject to being out of a
closed period and, for the 2015 to 2018 Deferred Bonus awards, are as follows:
• 2015 – vest 33.33 per cent per year over a three-year period at the first open period following
the release of the Company’s year-end results for 2015, 2016 and 2017;
• 2016 – vest 33.33 per cent per year over a three-year period at the first open period following
2. The vesting of the RSS performance awards above is subject to two performance
the release of the Company’s year-end results for 2016, 2017 and 2018;
conditions as follows:
• 25 per cent of each award is subject to a performance condition measuring the TSR
performance of the Company against the TSR performance of a select group of comparator
companies (see page 86 for a list of comparator companies for each grant year), over a three-
year performance period. 25 per cent of this part of the award vests for median performance
by the Company, rising to 100 per cent vesting of this part of the award for upper quartile
performance by the Company or better (with proportionate vesting between these two
points).
• The other 75 per cent of each award is subject to a performance condition based on average
annual RoE over a three-year performance period. 25 per cent of this part of the award will
vest if average annual RoE over the performance period exceeds the criteria set out in the
table on page 85, whilst all of this part of the award will vest if the Company’s average RoE is
equal to the more stringent criteria set out in the table on page 85. Between these two points
vesting will take place on a straight-line basis from 25 per cent to 100 per cent for
RoE performance.
3. The vesting dates of the RSS performance awards are subject to being out of a
closed period and are as follows:
• 2015 – 15 February 2018;
• 2016 – 14 February 2019;
• 2017 – first open period following the release of the Company’s 2019 year-end results; and
• 2018 – first open period following the release of the Company’s 2020 year-end results.
• 2017 – vest 33.33 per cent per year over a three-year period at the first open period following
the release of the Company’s year-end results for 2017, 2018 and 2019; and
• 2018 – vest 33.33 per cent per year over a three-year period at the first open period following
the release of the Company’s year-end results for 2018, 2019 and 2020.
5. The vesting of the RSS performance awards above is subject to two performance
conditions as follows:
• 15 per cent of each award is subject to a performance condition measuring the absolute TSR
performance of the Company over a three-year performance period. 25 per cent of this part
of the award vests for threshold (8 per cent compound annual growth) performance by the
Company, rising to 100 per cent vesting of this part of the award for maximum performance
(12 per cent compound annual growth) by the Company or better. Performance between
threshold and maximum is determined on a straight-line basis.
• The other 85 per cent of each award is subject to a performance condition based on the
annual growth in FCBVS plus accrued dividends over a three-year performance period.
25 per cent of this part of the award will vest if annual growth in FCBVS plus accrued
dividends over the performance period exceeds the criteria set out in the table on page 85,
whilst all of this part of the award will vest if the Company’s annual growth in FCBVS plus
accrued dividends is equal to the more stringent criteria set out in the table on page 85.
Between these two points vesting will take place on a straight-line basis. Within the three-year
performance period each of the separate financial years will be treated as a separate element,
each one contributing one-third to the overall outcome of the vesting of this element of the
RSS award. Details of this calculation method were disclosed on page 69 of the 2017 Annual
Report and Accounts.
Lancashire Holdings Limited
Annual Report & Accounts 2018
84
Lancashire Holdings Limited | Annual Report & Accounts 2018
84
Directors’ Remuneration Report: continued
Details of all outstanding share awards
Executive Directors.
In addition to awards made during the 2018 financial year, the table below sets out details of all outstanding RSS awards held by
Performance and deferred bonus awards under the RSS
Alex Maloney,
Group CEO
Total
Elaine Whelan,
Group CFO &
LICL CEO
Grant date1
Exercise
price
Awards
held at
Awards
granted
Awards
vested
Awards
lapsed
Awards
exercised
Awards
held at
End of
performance
1-Jan-18
during the year
during the year
during the year
during the year
31-Dec-18
period
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
14-Mar-17
Deferred Bonus RSS4
14-Mar-17
Performance RSS3,5
Deferred Bonus RSS4
23-Feb-18
23-Feb-18
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
14-Mar-17
Deferred Bonus RSS4
14-Mar-17
Performance RSS3,5
Deferred Bonus RSS4
23-Feb-18
23-Feb-18
244,208
13,976
219,254
37,483
286,666
53,215
168,149
9,847
157,104
25,738
180,441
36,541
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
54,947
13,976
18,742
17,738
9,847
12,869
12,180
–
–
–
–
–
–
–
–
–
–
315,762
13,090
–
–
198,755
9,663
189,261
– 31-Dec-17
54,947
13,976
–
219,254 31-Dec-18
18,742
18,741
–
286,666 31-Dec-19
17,738
35,477
315,762 31-Dec-20
13,090
–
–
–
157,104 31-Dec-18
12,869
12,869
–
180,441 31-Dec-19
12,180
24,361
198,755 31-Dec-20
9,663
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
854,802
328,852
105,403
189,261
105,403
888,990
37,834
130,315
– 31-Dec-17
37,834
9,847
Total
577,820
208,418
72,730
130,315
72,730
583,193
2. The vesting of the RSS performance awards above is subject to two performance
the release of the Company’s year-end results for 2016, 2017 and 2018;
1. The market values of the common shares on the dates of grant were:
• 12 February 2015 £6.36
• 20 March 2015 £6.30
• 18 February 2016 £6.17
• 11 March 2016 £5.37
• 14 March 2017 £7.02
• 23 February 2018 £5.69
conditions as follows:
• 25 per cent of each award is subject to a performance condition measuring the TSR
performance of the Company against the TSR performance of a select group of comparator
companies (see page 86 for a list of comparator companies for each grant year), over a three-
year performance period. 25 per cent of this part of the award vests for median performance
by the Company, rising to 100 per cent vesting of this part of the award for upper quartile
performance by the Company or better (with proportionate vesting between these two
points).
• The other 75 per cent of each award is subject to a performance condition based on average
annual RoE over a three-year performance period. 25 per cent of this part of the award will
vest if average annual RoE over the performance period exceeds the criteria set out in the
table on page 85, whilst all of this part of the award will vest if the Company’s average RoE is
equal to the more stringent criteria set out in the table on page 85. Between these two points
vesting will take place on a straight-line basis from 25 per cent to 100 per cent for
RoE performance.
3. The vesting dates of the RSS performance awards are subject to being out of a
closed period and are as follows:
• 2015 – 15 February 2018;
• 2016 – 14 February 2019;
• 2017 – first open period following the release of the Company’s 2019 year-end results; and
• 2018 – first open period following the release of the Company’s 2020 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 2015 to 2018 Deferred Bonus awards, are as follows:
• 2015 – vest 33.33 per cent per year over a three-year period at the first open period following
the release of the Company’s year-end results for 2015, 2016 and 2017;
• 2016 – vest 33.33 per cent per year over a three-year period at the first open period following
• 2017 – vest 33.33 per cent per year over a three-year period at the first open period following
the release of the Company’s year-end results for 2017, 2018 and 2019; and
• 2018 – vest 33.33 per cent per year over a three-year period at the first open period following
the release of the Company’s year-end results for 2018, 2019 and 2020.
5. The vesting of the RSS performance awards above is subject to two performance
conditions as follows:
• 15 per cent of each award is subject to a performance condition measuring the absolute TSR
performance of the Company over a three-year performance period. 25 per cent of this part
of the award vests for threshold (8 per cent compound annual growth) performance by the
Company, rising to 100 per cent vesting of this part of the award for maximum performance
(12 per cent compound annual growth) by the Company or better. Performance between
threshold and maximum is determined on a straight-line basis.
• The other 85 per cent of each award is subject to a performance condition based on the
annual growth in FCBVS plus accrued dividends over a three-year performance period.
25 per cent of this part of the award will vest if annual growth in FCBVS plus accrued
dividends over the performance period exceeds the criteria set out in the table on page 85,
whilst all of this part of the award will vest if the Company’s annual growth in FCBVS plus
accrued dividends is equal to the more stringent criteria set out in the table on page 85.
Between these two points vesting will take place on a straight-line basis. Within the three-year
performance period each of the separate financial years will be treated as a separate element,
each one contributing one-third to the overall outcome of the vesting of this element of the
RSS award. Details of this calculation method were disclosed on page 69 of the 2017 Annual
Report and Accounts.
Relative TSR targets for RSS (25 per cent weighting)
100%
25%
Nil
RoE targets for RSS (75 per cent weighting)
100%
25%
Nil
* Average annual growth in FCBVS plus accrued dividends.
Absolute TSR targets for RSS (15 per cent weighting)
100%
25%
Nil
2014
2015
2016
2017
75th percentile
= median
< median
75th percentile
= median
< median
75th percentile
= median
< median
75th percentile
= median
< median
2014
2015
2016
RFRoR +15%
RFRoR + 6%
< RFRoR + 6%
RFRoR +15%
RFRoR + 6%
< RFRoR + 6%
RFRoR +15%
RFRoR + 6%
< RFRoR + 6%
2017*
13%
6%
< 6%
2019*
12%
8%
< 8%
2019*
13%
6%
< 6%
2018*
12%
8%
< 8%
2018*
13%
6%
< 6%
Annual growth in FCBVS plus accrued dividends targets for RSS (85 per cent weighting)
100%
25%
Nil
* See pages 79 and 80 for the vesting methodology to be applied for the 2018 and onwards RSS awards.
84
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85
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www.lancashiregroup.com
85
Governance
Directors’ Remuneration Report: continued
Historical Peer Group Data for 2017 and prior RSS awards (relative TSR element)
Peer Companies 13
2014 awards
2015 awards
2016 awards
2017 awards
Amlin plc1,6
Arch Capital Group Limited2, 5
Argo Group International Holdings, Ltd.
Aspen Insurance Holdings Limited3
Axis Capital Holdings Limited
Beazley plc
Catlin Group Ltd.4
Endurance Specialty Holdings Ltd.5,8
Everest Re Group, Ltd.6
Greenlight Capital Re, Ltd.11
The Hanover Insurance Group7
Hiscox Ltd.
Montpelier Re Holdings Ltd.7,8
Novae Group plc9,10
Renaissance Re Holdings Ltd.
Third Point Reinsurance Ltd. 12
Validus Holdings Ltd. 11
XL Group Ltd10,12
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. Apollo Funds announced on 28 August 2018 that it intended to acquire all outstanding common shares of Aspen Insurance Holdings Limited (‘Aspen’). The transaction is
due to close in the first half of 2019, subject to approval by regulators, Aspen shareholders and the satisfaction of other customary closing conditions. As a result of this
announcement, Aspen ceased to be in the comparator peer group from 30 June 2018.
4. Catlin Group Ltd. was acquired by the XL Group Ltd. with effect from 1 May 2015 and so was used as a comparator company up to 31 December 2014 and was replaced
by Novae Group plc.
5. 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.
6. Everest Re Group, Ltd. was added to the peer group of companies with effect from 1 July 2015 as a replacement for Amlin plc.
7. 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.
8. 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.
9. Novae Group plc was added to the peer group of companies with effect from 1 January 2015 as a replacement for Catlin Group Ltd.
10. Novae Group plc was acquired by Axis Capital Holdings Limited with effect from 2 October 2017 and so was used as a comparator company up to 30 June 2017 and was
replaced by XL Group Ltd as of 1 July 2017.
11. American International Group, Inc. announced on 22 January 2018 that it intended to acquire Validus Holdings Ltd (‘Validus’). Accordingly, the Committee decided to
use Greenlight Capital Re, Ltd as a comparator company with effect from 1 January 2018 as a replacement for Validus.
12. AXA announced on 5 March 2018 that it had entered into an agreement to acquire 100% of XL Group Ltd, which was approved by XL Group Ltd’s common shareholders
on 6 June 2018. Accordingly, the Committee decided to use Third Point Reinsurance Ltd as a comparator company with effect from 1 January 2018 as a replacement
for XL Group Ltd.
13. For 2018 and onwards RSS awards the Board adopted a range of absolute TSR targets. See page 85 for further details.
Lancashire Holdings Limited
Annual Report & Accounts 2018
86
Lancashire Holdings Limited | Annual Report & Accounts 2018
86
Directors’ Remuneration Report: continued
Historical Peer Group Data for 2017 and prior RSS awards (relative TSR element)
2014 awards
2015 awards
2016 awards
2017 awards
Peer Companies 13
Amlin plc1,6
Arch Capital Group Limited2, 5
Argo Group International Holdings, Ltd.
Aspen Insurance Holdings Limited3
Axis Capital Holdings Limited
Beazley plc
Catlin Group Ltd.4
Endurance Specialty Holdings Ltd.5,8
Everest Re Group, Ltd.6
Greenlight Capital Re, Ltd.11
The Hanover Insurance Group7
Hiscox Ltd.
Montpelier Re Holdings Ltd.7,8
Novae Group plc9,10
Renaissance Re Holdings Ltd.
Third Point Reinsurance Ltd. 12
Validus Holdings Ltd. 11
XL Group Ltd10,12
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. Apollo Funds announced on 28 August 2018 that it intended to acquire all outstanding common shares of Aspen Insurance Holdings Limited (‘Aspen’). The transaction is
due to close in the first half of 2019, subject to approval by regulators, Aspen shareholders and the satisfaction of other customary closing conditions. As a result of this
announcement, Aspen ceased to be in the comparator peer group from 30 June 2018.
4. Catlin Group Ltd. was acquired by the XL Group Ltd. with effect from 1 May 2015 and so was used as a comparator company up to 31 December 2014 and was replaced
5. 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
by Novae Group plc.
for Endurance.
6. Everest Re Group, Ltd. was added to the peer group of companies with effect from 1 July 2015 as a replacement for Amlin plc.
7. 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.
8. 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
9. Novae Group plc was added to the peer group of companies with effect from 1 January 2015 as a replacement for Catlin Group Ltd.
10. Novae Group plc was acquired by Axis Capital Holdings Limited with effect from 2 October 2017 and so was used as a comparator company up to 30 June 2017 and was
by The Hanover Insurance Group.
replaced by XL Group Ltd as of 1 July 2017.
11. American International Group, Inc. announced on 22 January 2018 that it intended to acquire Validus Holdings Ltd (‘Validus’). Accordingly, the Committee decided to
use Greenlight Capital Re, Ltd as a comparator company with effect from 1 January 2018 as a replacement for Validus.
12. AXA announced on 5 March 2018 that it had entered into an agreement to acquire 100% of XL Group Ltd, which was approved by XL Group Ltd’s common shareholders
on 6 June 2018. Accordingly, the Committee decided to use Third Point Reinsurance Ltd as a comparator company with effect from 1 January 2018 as a replacement
for XL Group Ltd.
13. For 2018 and onwards RSS awards the Board adopted a range of absolute TSR targets. See page 85 for further details.
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
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
Sally Williams
Total as at 1 January 2018
As at 31 December 2018
Number of Common Shares
Legally owned
Subject to deferral
under the RSS
Subject to
performance
conditions
under the RSS
Vested but
unexercised
awards under
other share-
based plans
1,435,104
1,102,190
44,000
7,200
1,000
3,947
3,000
–
657,724
627,169
60,000
11,000
1,000
5,356
8,000
–
67,308
46,893
N/A
N/A
N/A
N/A
N/A
N/A
821,682
536,300
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Total
1,546,714
1,210,362
N/A
N/A
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
Note: Share ownership interest equivalent is defined as wholly owned shares or the net of taxes value of RSS awards which have vested but are unexercised and the net of tax
value of deferred bonus RSS awards. Shares include those owned by persons closely associated with the relevant Executive Director.
Performance graph
The following graph shows the Company’s performance, measured by TSR, compared with the performance of the FTSE 250 Index.
The Company’s common shares commenced trading on the main market of the LSE on 16 March 2009 and the Company joined the FTSE 250
Index on 22 June 2009 and is currently a constituent of this.
TOTAL SHAREHOLDER RETURN
£
500
450
400
350
300
250
200
150
100
50
0
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Lancashire Holdings
FTSE 250 Index
Source: Datastream (Thomson Reuters)
This graph shows the value, by 31 December 2018, 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.
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Governance
Directors’ Remuneration Report: continued
Total remuneration history for CEO
The table below sets out the total single figure of remuneration for the CEOs over the last ten years with the annual bonus paid as
a percentage of the maximum and the percentage of long-term share awards vesting in each year.
Total remuneration ($000s)
Annual bonus (%)
LTI vesting (%)
7,244
68
N/A
9,945
94
99.6
9,623
73
100
10,460
73
99
10,175
80
100
10,072
80
611
2,405
73
50
3,853
72
75
3,800
76
67
1,943
17
22.53
1,431
19
0
2009
2010
2011
2012
2013
20141
20142
2015
2016
2017
2018
1. Richard Brindle was the CEO from 2005 until he retired from the Group and as a Director on 30 April 2014. Mr Brindle was afforded good leaver status and all RSS award
interests were 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.
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. For 2017, the long-term incentive values were based on the 2015 RSS awards which vested at 22.5 per cent on 15 February 2018 and were based on a three-year performance
period that ended on 31 December 2017. The values are re-presented from the 2017 Annual Report and Accounts based on the share price at the vesting date, 15 February
2018 ($8.397), and include the value of dividends accrued on vested shares.
The table above shows the total remuneration figure for the former CEO during each of the relevant financial years; figures for the current CEO are shown since his
appointment to the position on 1 May 2014. The total remuneration figure includes the annual bonus and LTI awards which vested based on performance in those years.
The annual bonus and LTI percentages show the payout for each year as a percentage of the maximum.
Percentage change in CEO remuneration
The following table sets out the percentage change in the aggregate value of salary, benefits and bonus for the CEO from the preceding year
and the average percentage change in respect of the employees of the Group taken as a whole.
Base salary
Benefits
Bonus
Year-on-year
change
CEO2
%
Average
year-on-year
change employees1,3
%
4
6
13
5
5
33
1. Employee numbers were calculated on a per permanent employee headcount basis for the years ending 31 December 2018 and 31 December 2017, adjusted for any joiners
and leavers during this period.
2. The underlying salary increase from 2017 to 2018 for the CEO was 3 per cent. However some amounts were paid in Sterling and converted at the average exchange rate of
1.3420 for the year, which has resulted in the overall 4 per cent base salary year-on-year change above.
3. The underlying salary increase from 2017 to 2018 for Group employees was a standard 3 per cent. The 5 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 2018 compared with
the year ended 31 December 2017.
Employee remuneration costs
Dividends
2018
$m
56.9
70.2
2017
$m
39.8
29.9
Percentage change
%
43
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Directors’ Remuneration Report: continued
Total remuneration history for CEO
The table below sets out the total single figure of remuneration for the CEOs over the last ten years with the annual bonus paid as
a percentage of the maximum and the percentage of long-term share awards vesting in each year.
Total remuneration ($000s)
7,244
9,945
9,623
10,460
10,175
10,072
2,405
3,853
3,800
1,943
1,431
Annual bonus (%)
LTI vesting (%)
68
N/A
94
99.6
73
100
73
99
80
100
80
611
73
50
72
75
76
67
17
22.53
19
0
2009
2010
2011
2012
2013
20141
20142
2015
2016
2017
2018
1. Richard Brindle was the CEO from 2005 until he retired from the Group and as a Director on 30 April 2014. Mr Brindle was afforded good leaver status and all RSS award
interests were 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.
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. For 2017, the long-term incentive values were based on the 2015 RSS awards which vested at 22.5 per cent on 15 February 2018 and were based on a three-year performance
period that ended on 31 December 2017. The values are re-presented from the 2017 Annual Report and Accounts based on the share price at the vesting date, 15 February
2018 ($8.397), and include the value of dividends accrued on vested shares.
The table above shows the total remuneration figure for the former CEO during each of the relevant financial years; figures for the current CEO are shown since his
appointment to the position on 1 May 2014. The total remuneration figure includes the annual bonus and LTI awards which vested based on performance in those years.
The annual bonus and LTI percentages show the payout for each year as a percentage of the maximum.
Percentage change in CEO remuneration
The following table sets out the percentage change in the aggregate value of salary, benefits and bonus for the CEO from the preceding year
and the average percentage change in respect of the employees of the Group taken as a whole.
Year-on-year
change
Average
year-on-year
CEO2
change employees1,3
%
4
6
13
%
5
5
33
Committee members, attendees and advice
For Remuneration Committee membership and attendance at meetings through 2018, please refer to page 68 of this Annual Report
and Accounts. The Remuneration Committee’s responsibilities are contained in its Terms of Reference, a copy of which is available on
the Company’s website. These responsibilities include determining the framework for the remuneration, including pension arrangements,
for all Executive Directors, the Chairman and senior executives. The Committee is also responsible for approving employment contracts for
senior executives.
Remuneration Committee adviser
The Remuneration Committee is advised by the Executive Compensation practice at Aon plc. Aon was appointed by the Remuneration
Committee in 2007. Aon has discussions with the Remuneration Committee Chairman regularly on Committee process and topics which are
of particular relevance to the Company.
Aon ReInsurance Solutions (which is part of Aon but is a separate business division) provides reinsurance broking services to the Group.
The primary role of Aon 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, Aon operates as a distinct business within the Aon Group and there is a robust separation between
the business activities and management of Aon and all other parts of the wider Aon Group. The Committee is satisfied that the advice that it
receives is objective and independent. Aon 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 Aon in respect of its services to the Committee for the year ended 31 December 2018 were $71,334 (2017 – $68,072).
Fees are predominantly charged on a ‘time spent’ basis.
Engagement with shareholders
Details of votes cast for and against the resolution to approve last year’s Remuneration Report are shown below along with the votes to approve
the 2017 Remuneration Policy which have been stated below; any matters discussed with shareholders during the year are provided in the
Implementation of Remuneration Policy for 2019 section of the report starting on page 78.
Base salary
Benefits
Bonus
and leavers during this period.
made during the year.
Employee remuneration costs
Dividends
1. Employee numbers were calculated on a per permanent employee headcount basis for the years ending 31 December 2018 and 31 December 2017, adjusted for any joiners
2. The underlying salary increase from 2017 to 2018 for the CEO was 3 per cent. However some amounts were paid in Sterling and converted at the average exchange rate of
1.3420 for the year, which has resulted in the overall 4 per cent base salary year-on-year change above.
3. The underlying salary increase from 2017 to 2018 for Group employees was a standard 3 per cent. The 5 per cent increase reflects staff promotions and other adjustments
For
Against
Total
Abstentions
Relative importance of the spend on pay
the year ended 31 December 2017.
The following table sets out the percentage change in dividends and overall spend on pay in the year ended 31 December 2018 compared with
Approved by the Board of Directors and signed on behalf of the Board.
2018
$m
56.9
70.2
2017
$m
39.8
29.9
Percentage change
%
43
135
Simon Fraser
Chairman of the Remuneration Committee
13 February 2019
Vote to approve 2017 Annual Report
on Remuneration (at the 2018 AGM)
Vote to approve 2017-2019
Remuneration Policy (at the 2017 AGM)
Total number
of votes
% of
votes cast
Total number
of votes
135,967,463
32,740,906
168,708,369
205,726
80.6
19.4
100.0
144,229,951
7,870,777
152,100,728
9,125,993
% of
votes cast
94.8
5.2
100.0
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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
and have a premium listing on the LSE.
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 26 to 32.
Dividends
For the year ended 31 December 2018, the following dividends were declared:
• a final dividend of $0.10 per common share was declared on 14 February 2018 and paid on 21 March 2018 in pounds sterling at the
pound/U.S. dollar exchange rate of 1.3985 or £0.0715 per common share;
• an interim dividend of $0.05 per common share was declared on 25 July 2018 and paid on 12 September 2018 in pounds sterling at the
pound/U.S. dollar exchange rate of 1.2715 or £0.0393 per common share; and
• a special dividend of $0.20 per common share was declared on 31 October 2018 and paid on 12 December 2018 in pounds sterling at the
pound/U.S. dollar exchange rate of 1.3030 or £0.1535 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)
• Michael Dawson (Non-Executive Director)
• Simon Fraser (Senior Independent Non-Executive Director)
• Samantha Hoe-Richardson (Non-Executive Director)
• Robert Lusardi (Non-Executive Director)
• Alex Maloney (Chief Executive Officer)
• Elaine Whelan (Chief Financial Officer)
• Sally Williams (Non-Executive Director)
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Directors’ report
Lancashire Holdings Limited is a Bermuda incorporated company (Registered Company No. 37415) with operating subsidiaries in Bermuda
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
Overview of the Group
and London, and two syndicates at Lloyd’s.
and have a premium listing on the LSE.
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 26 to 32.
Dividends
For the year ended 31 December 2018, the following dividends were declared:
pound/U.S. dollar exchange rate of 1.3985 or £0.0715 per common share;
• an interim dividend of $0.05 per common share was declared on 25 July 2018 and paid on 12 September 2018 in pounds sterling at the
pound/U.S. dollar exchange rate of 1.2715 or £0.0393 per common share; and
• a special dividend of $0.20 per common share was declared on 31 October 2018 and paid on 12 December 2018 in pounds sterling at the
pound/U.S. dollar exchange rate of 1.3030 or £0.1535 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)
• Michael Dawson (Non-Executive Director)
• Simon Fraser (Senior Independent Non-Executive Director)
• Samantha Hoe-Richardson (Non-Executive Director)
• Robert Lusardi (Non-Executive Director)
• Alex Maloney (Chief Executive Officer)
• Elaine Whelan (Chief Financial Officer)
• Sally Williams (Non-Executive Director)
• a final dividend of $0.10 per common share was declared on 14 February 2018 and paid on 21 March 2018 in pounds sterling at the
There have been no changes in Directors’ shareholdings between the end of the financial year and the date of this Report.
Directors’ interests
The Directors’ beneficial interests in the Company’s common shares as at 31 December 2018 and 2017 including interests held by family
members were as follows:
Directors
Peter Clarke1
Michael Dawson2
Simon Fraser
Samantha Hoe-Richardson3
Robert Lusardi4
Alex Maloney5
Elaine Whelan6
Sally Williams7
Common shares
held as at
31 December 2018
Common shares
held as at
31 December 2017
60,000
11,000
1,000
5,356
8,000
657,724
627,169
–
44,000
7,200
1,000
3,947
3,000
580,302
524,370
–
1. Peter Clarke conducted the following transactions in the Company’s shares during 2018:
• 16 February – purchase of 16,000 shares at a price of £5.67 costing £90,705.56.
2. Michael Dawson conducted the following transactions in the Company’s shares during 2018:
• 16 February – purchase of 3,800 shares at a price of £5.89 costing £22,363.
3. Samantha Hoe-Richardson conducted the following transactions in the Company’s shares during 2018:
• 19 February – purchase of 1,409 shares at a price of £5.68 costing £7,999.60.
4. Robert Lusardi conducted the following transactions in the Company’s shares during 2018:
• 20 February – purchase of 5,000 shares at a price of $7.89 costing $39,450.
5. Includes 155,722 shares owned by his spouse, Amanda Maloney. Alex Maloney conducted the following transactions in the Company’s shares during 2018:
• 15 February – exercise of 54,947 RSS awards and 50,456 deferred bonus RSS awards and related sale of 49,681 shares to cover tax liabilities, at a price of £6.08 realising
£302,042.59. The balance of 55,722 shares was transferred to his spouse, Amanda Maloney.
• 16 February – purchase of 21,700 shares at a price of £5.73 costing £124,341.
6. Includes 11,590 shares owned by her spouse, Kilian Whelan. Elaine Whelan conducted the following transactions in the Company’s shares during 2018:
• 15 February – exercise of 37,834 RSS awards and 34,896 deferred bonus RSS awards and related sale of 3,431 shares to cover tax liabilities, at a price of £6.08
realising £20,859.24.
• 16 February – purchase of 20,000 shares at a price of £5.90 costing £117,900.
• 20 February – purchase of 13,500 shares at a price of £5.58 costing £75,262.50.
7. Sally Williams was appointed to the Board with effect from 14 January 2019.
Transactions in own shares
The Company did not repurchase any of its own common shares during 2018 or 2017.
The Group’s current repurchase programme has 20,134,192 common shares remaining to be purchased as at 31 December 2018
(approximately $172.7 million at the 31 December 2018 share price). Further details of the share repurchase authority and programme are
set out in note 19 to the consolidated financial statements on page 156. The repurchase programme is subject to renewal at the 2019 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 70 to 89.
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Governance
Directors’ report: continued
Substantial shareholders
As at 13 February 2019, the Company was aware of the following interests of 3 per cent or more in the Company’s issued share capital:
Name
Invesco Limited
Setanta Asset Management Limited
Franklin Mutual Advisers, LLC
Oppenheimer Funds
Frank W Cawood & Associates
Wellington Management
Dimensional Fund Advisors LP
BlackRock, Inc.
Vanguard Group
Troy Asset Management Limited
Number of shares as
at 13 February 2019
% of shares
in issue
32,247,491
26,367,532
12,222,897
10,000,000
9,302,300
9,047,266
8,414,981
7,823,145
7,546,539
7,444,804
15.97
13.06
6.05
4.95
4.61
4.48
4.17
3.87
3.74
3.69
Corporate governance – compliance statement
The Company’s compliance with the Code is summarised in the Corporate Governance section of this Report on pages 55 to 57.
The Board considers and the Company confirms, in accordance with the principle of ‘comply or explain’ that the Company has complied
with the principles and provisions set out in the UK Corporate Governance Code throughout the year ended 31 December 2018.
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 engagement and sustainability section on page 43.
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 33 to 39 and in the risk disclosures section
on pages 111 to 133 of the consolidated financial statements. The Group’s use of derivative financial instruments can be found on
pages 124 to 125.
Accounting standards
The Group’s consolidated financial statements are prepared on a going concern basis in accordance with accounting principles generally
accepted under IFRS as adopted by the EU. Where IFRS is silent, as it is in respect of certain aspects relating to the measurement of insurance
products, the IFRS framework allows reference to another comprehensive body of accounting principles. In such instances, the Group’s
management determines appropriate measurement bases, to provide the most useful information to users of the consolidated financial
statements, using their judgement and considering U.S. GAAP.
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Directors’ report: continued
As at 13 February 2019, the Company was aware of the following interests of 3 per cent or more in the Company’s issued share capital:
Substantial shareholders
Name
Invesco Limited
Setanta Asset Management Limited
Franklin Mutual Advisers, LLC
Oppenheimer Funds
Frank W Cawood & Associates
Wellington Management
Dimensional Fund Advisors LP
BlackRock, Inc.
Vanguard Group
Troy Asset Management Limited
Number of shares as
at 13 February 2019
32,247,491
26,367,532
12,222,897
10,000,000
9,302,300
9,047,266
8,414,981
7,823,145
7,546,539
7,444,804
% of shares
in issue
15.97
13.06
6.05
4.95
4.61
4.48
4.17
3.87
3.74
3.69
Corporate governance – compliance statement
The Company’s compliance with the Code is summarised in the Corporate Governance section of this Report on pages 55 to 57.
The Board considers and the Company confirms, in accordance with the principle of ‘comply or explain’ that the Company has complied
with the principles and provisions set out in the UK Corporate Governance Code throughout the year ended 31 December 2018.
Health and safety
The Group considers the health and safety of its employees to be a management responsibility equal to that of any other function.
The Group operates in compliance with health and safety legislative requirements in Bermuda and the UK.
The Group’s greenhouse gas emissions are detailed in the engagement and sustainability section on page 43.
Greenhouse gas emissions
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.
pages 124 to 125.
Accounting standards
The Group’s consolidated financial statements are prepared on a going concern basis in accordance with accounting principles generally
accepted under IFRS as adopted by the EU. 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 2019 AGM, to be held on 1 May 2019 at the Company’s head office, Power House, 7 Par-la-Ville Road, Hamilton HM 11,
Bermuda, 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 26 to 32 sets out details of the Group’s financial performance, capital management, business
environment and outlook. In addition, further discussion of the principal risks and material uncertainties affecting the Group can be found
on pages 36 to 39. Starting on page 111, 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 25 July 2018. The Board receives quarterly reports from the Group CRO and sets, approves and monitors risk tolerances for
the business.
During 2018, 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 severe but
plausible 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 2021, 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 2021. 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 2019 AGM to re-appoint KPMG as the Company’s auditors and to authorise the Directors to
set the auditor’s remuneration.
Disclosure of information to the auditors
Each of the persons who is a Director at the date of approval of this Annual Report and Accounts confirms that:
Financial instruments and risk exposures
Information regarding the Group’s risk exposures is included in the ERM report on pages 33 to 39 and in the risk disclosures section
on pages 111 to 133 of the consolidated financial statements. The Group’s use of derivative financial instruments can be found on
• 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
13 February 2019
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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 as adopted by the EU. Where IFRS, as adopted by the EU, 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. 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 as adopted by the EU;
• 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 as adopted by the EU are considered to
be insufficient to enable users to understand the impact of particular transactions, events and conditions on the financial position
and performance;
• assess the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and
• use the going concern basis of accounting unless they either intend to liquidate the Group or to cease operations or have no realistic
alternative but to do so.
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 such internal control as they determine is necessary to
enable the preparation of the consolidated financial statements that are free from material misstatement, whether due to fraud or error, and
also have general responsibility for safeguarding the assets of the Group and hence for taking reasonable steps for prevention and detection
of fraud and other irregularities.
Directors’ responsibility statement
The Directors confirm that to the best of their knowledge:
• the consolidated financial statements, prepared in accordance with IFRS as adopted by the EU, 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 provides 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
13 February 2019
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Independent auditor’s report to the members of Lancashire Holdings Limited
1. Our opinion is unmodified
We have audited the consolidated financial statements of Lancashire Holdings Limited (‘the Group’) for the year ended 31 December 2018
which comprise the consolidated statement of comprehensive income (loss), the consolidated balance sheet, the consolidated statement of
changes in shareholders’ equity, the statement of consolidated cash flows, and the related notes, including the accounting policies on pages
104 to 110.
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 2018 and of its profit for the year then ended; and
• have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union
(IFRSs as adopted by the EU).
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (‘ISAs (UK)’) and applicable law. Our responsibilities
are described below. We have fulfilled our ethical responsibilities under, and are independent of the Group in accordance with, UK ethical
requirements including the FRC Ethical Standard as applied to listed entities. We believe that the audit evidence we have obtained is a sufficient
and appropriate basis for our opinion.
2. Key audit matters: our assessment of risks of material misstatement
Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the consolidated financial
statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those
which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement
team. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these matters. In arriving at our audit opinion above, the key audit matters, in decreasing
order of audit significance, were as follows:
Valuation of insurance contract liabilities for losses and loss adjustment expenses on a gross basis and net of
outwards reinsurance
($915.0m gross, $592.1m net of outwards reinsurance, of which incurred but not reported represented $389.3m gross, $233.0m net of outwards
reinsurance; (2017: $933.5m gross, $649.4m net of outwards reinsurance, of which incurred but not reported represented $446.6m gross,
$155.8m net of outwards reinsurance).
Refer to page 62 (Audit Committee report), page 107 (accounting policy) and page 148 to 151 (financial disclosures).
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Risk vs 2017: ◄ ►
Risk
The Group maintains reserves to cover the estimated ultimate cost
of settling all losses and loss adjustment expenses arising from events
which have occurred up to the balance sheet date, regardless of
whether those losses have been reported to the Group.
Subjective valuation
Insurance liabilities represent the single largest liability for the
Group. Valuation of these liabilities is highly judgemental because it
requires a number of assumptions to be made with high estimation
uncertainty such as expected loss ratios, estimates of ultimate
premium and of the frequency and severity of claims and, where
appropriate, the discount rate for longer tail classes of business
by territory and line of business. The determination and
application of the methodology and performance of the
calculations are also complex.
Response
We have used our own actuarial specialists to assist us in performing our
procedures in this area.
Our procedures included:
• Control operation
Tested the design and implementation of key controls around review
and approval of reserves as well as completeness and accuracy of the
data used in the reserving process.
• Methodology assessment
Assessed and challenged the reserving methodology (on a gross
basis and net of outwards reinsurance) based on our knowledge and
understanding of the reserving policy within the Group. This has also
involved comparing the Group’s reserving methodology with industry
practice and understanding the rationale for key differences.
These judgemental and complex calculations for insurance
liabilities are also used to derive the valuation of the related
reinsurance assets.
• Historical experience
Challenged the quality of the Group’s historical reserving estimates
by monitoring the development of losses against initial estimates.
A margin is added to the actuarial best estimate of insurance
liabilities to make allowance for specific risks identified in assessment
of the best estimate. The appropriate margin to recognise is a
subjective judgement and estimate taken by the Directors, based
on the perceived uncertainty and potential for volatility in the
underlying claims.
The effect of these matters is that, as part of our risk assessment,
we determined that valuation of gross and net insurance contract
liabilities for losses and loss adjustment expenses has a high degree
of estimation uncertainty, with a potential range of reasonable
outcomes greater than our materiality for the consolidated financial
statements as a whole, and possibly many times that amount. The
consolidated financial statements (note 13) discloses the sensitivity
estimated by the Group.
Completeness and accuracy of data
The valuation of insurance liabilities depends on complete and
accurate data about the volume, amount and pattern of current
and historical claims since they are often used to form expectations
about future claims. If the data used in calculating the insurance
liabilities, or for forming judgements over key assumptions, is not
complete and accurate then material impacts on the valuation of
insurance liabilities may arise.
• Independent re-performance
Applied our own assumptions, across all classes of business, to perform
re-projections on the insurance contract liabilities for loss and loss
adjustment expenses on both a gross and net basis and comparing
these to the Group’s projected results. Where there were significant
variances in the results, we have challenged the Group’s assumptions.
Our independent re-projections focussed on classes of business where
losses tend to relate to low frequency high severity events.
• Benchmarking of large losses
Assessed and challenged the reserving assumptions by comparing the
Group’s loss experience to peers in the market, on a gross and net
basis, including on a contract by contract basis for large loss and
catastrophe events.
• Data reconciliations
Checked the completeness and accuracy of the data used within the
reserving process by reconciling the actuarial source data to their
financial systems.
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Risk vs 2017: ◄ ►
Risk
of settling all losses and loss adjustment expenses arising from events
procedures in this area.
which have occurred up to the balance sheet date, regardless of
whether those losses have been reported to the Group.
Subjective valuation
Insurance liabilities represent the single largest liability for the
Group. Valuation of these liabilities is highly judgemental because it
requires a number of assumptions to be made with high estimation
Response
Our procedures included:
• Control operation
Tested the design and implementation of key controls around review
and approval of reserves as well as completeness and accuracy of the
data used in the reserving process.
uncertainty such as expected loss ratios, estimates of ultimate
• Methodology assessment
premium and of the frequency and severity of claims and, where
Assessed and challenged the reserving methodology (on a gross
appropriate, the discount rate for longer tail classes of business
basis and net of outwards reinsurance) based on our knowledge and
by territory and line of business. The determination and
application of the methodology and performance of the
calculations are also complex.
understanding of the reserving policy within the Group. This has also
involved comparing the Group’s reserving methodology with industry
practice and understanding the rationale for key differences.
These judgemental and complex calculations for insurance
liabilities are also used to derive the valuation of the related
reinsurance assets.
• Historical experience
Challenged the quality of the Group’s historical reserving estimates
by monitoring the development of losses against initial estimates.
A margin is added to the actuarial best estimate of insurance
• Independent re-performance
liabilities to make allowance for specific risks identified in assessment
Applied our own assumptions, across all classes of business, to perform
of the best estimate. The appropriate margin to recognise is a
re-projections on the insurance contract liabilities for loss and loss
subjective judgement and estimate taken by the Directors, based
adjustment expenses on both a gross and net basis and comparing
on the perceived uncertainty and potential for volatility in the
these to the Group’s projected results. Where there were significant
underlying claims.
The effect of these matters is that, as part of our risk assessment,
we determined that valuation of gross and net insurance contract
variances in the results, we have challenged the Group’s assumptions.
Our independent re-projections focussed on classes of business where
losses tend to relate to low frequency high severity events.
liabilities for losses and loss adjustment expenses has a high degree
• Benchmarking of large losses
of estimation uncertainty, with a potential range of reasonable
Assessed and challenged the reserving assumptions by comparing the
outcomes greater than our materiality for the consolidated financial
Group’s loss experience to peers in the market, on a gross and net
statements as a whole, and possibly many times that amount. The
basis, including on a contract by contract basis for large loss and
consolidated financial statements (note 13) discloses the sensitivity
catastrophe events.
estimated by the Group.
Completeness and accuracy of data
• Data reconciliations
Checked the completeness and accuracy of the data used within the
The valuation of insurance liabilities depends on complete and
reserving process by reconciling the actuarial source data to their
accurate data about the volume, amount and pattern of current
financial systems.
and historical claims since they are often used to form expectations
about future claims. If the data used in calculating the insurance
liabilities, or for forming judgements over key assumptions, is not
complete and accurate then material impacts on the valuation of
insurance liabilities may arise.
The Group maintains reserves to cover the estimated ultimate cost
We have used our own actuarial specialists to assist us in performing our
Refer to page 59 (Audit Committee report), pages 106 (accounting policy) and pages 134 and 135 (financial disclosures).
Valuation of premiums which are estimated, included in gross premiums written
(2018: $638.5m, 2017: $591.6m)
Risk vs 2017: ◄ ►
Risk
Subjective valuation
Pricing for certain contracts is based on a best estimate of ultimate
premiums as a result of premiums being based upon the latest information
received from third parties at the balance sheet date. Judgement is involved
in determining the ultimate estimates in order to establish the appropriate
premium value and, ultimately, the cash to be received. As updated
information is received over the life of the contract, adjustments are
made to the premium recognised.
It should however be noted that it is only a portion of the total gross
premiums written figures noted above that are subject to this valuation risk.
Response
Our procedures included:
• Control operation
Tested the design and implementation of key controls over the
periodic review of premium estimates booked.
• Historical experience
Performed procedures to understand the development
of estimated premium income by comparing the Group’s
estimated premium income to actual premium income once
received and checked actual premium income back to source
documentation for a sample of policies.
We continue to perform procedures over policies that are still earning on non-standard earning profiles. However, as the Group’s syndicates are
now materially earning all 2018 incepted business on straight line earning profiles, we have not assessed this as one of the most significant risks in
our current year audit and, therefore, it is not separately identified in our report this year.
3. Our application of materiality and an overview of the scope of our audit
Materiality for the consolidated financial statements as a whole was set at $5.1 million (2017: $7.0 million), determined with reference to a
benchmark of Group profit before tax normalised by averaging over the last five years due to fluctuations in the frequency and severity of
catastrophe loss events, of which it represents 5 per cent (2017: 5 per cent).
We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding $0.25 million (2017: $0.3 million),
in addition to other identified misstatements that warranted reporting on qualitative grounds.
Of the Group’s 9 (2017: 9) reporting components, including the parent company, UK insurance company, Bermuda insurance company, UK
service entity and Lloyd’s operations, we subjected 5 (2017: 8) to full scope audits for Group purposes. Including the audit of the consolidation
adjustments our scope covered 100 per cent (2017: 100 per cent) of gross premiums written, loss before tax and total assets.
The Group team instructed component auditors as to the significant areas to be covered, including the relevant risks detailed above and the
information to be reported back.
The Group team approved the component materialities, which ranged from $0.8m to $5.0m (2017: $9,500 to $3.8 million), having regard to
the mix of size and risk profile of the Group across the components.
The Group team visited all component locations in Bermuda and the UK (2017: Bermuda and the UK). Video and telephone conference
meetings were also held with these component auditors. At these visits and meetings, the findings reported to the Group team were discussed
in more detail, and any further work required by the Group team was then performed by the component auditor.
4. We have nothing to report on going concern
The Directors have prepared the consolidated financial statements on the going concern basis as they do not intend to liquidate the Group or to
cease their operations, and as they have concluded that the Group’s financial position means that this is realistic. They have also concluded that
there are no material uncertainties that could have cast significant doubt over their ability to continue as a going concern for at least a period of
twelve months from the date of approval of the consolidated financial statements (‘the going concern period’).
Our responsibility is to conclude on the appropriateness of the Directors’ conclusions and, had there been a material uncertainty related to going
concern, to make reference to that in this audit report. However, as we cannot predict all future events or conditions and as subsequent events
may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the absence of reference to a
material uncertainty in this auditor’s report is not a guarantee that the Group will continue in operation.
In our evaluation of the Directors’ conclusions, we considered the inherent risks to the Group’s business model, including the impact of Brexit,
and analysed how those risks might affect the Group’s financial resources or ability to continue operations over the going concern period.
We evaluated those risks and concluded that they were not significant enough to require us to perform additional audit procedures.
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Based on this work, we are required to report to you if we have anything material to add or draw attention to in relation to the Directors’
statement in the accounting policies section to the consolidated financial statements on the use of the going concern basis of accounting with
no material uncertainties that may cast significant doubt over the Group’s use of that basis for a period of at least twelve months from the date
of approval of the consolidated financial statements.
We have nothing to report in these respects, and we did not identify going concern as a key audit matter.
5. We have nothing to report on the other information in the Annual Report and Accounts
The Directors are responsible for the other information presented in the Annual Report and Accounts together with the consolidated financial
statements. Our opinion on the consolidated financial statements does not cover the other information and, accordingly, we do not express an
audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the
information therein is materially misstated or inconsistent with the consolidated financial statements or our audit knowledge. Based solely
on that work we have not identified material misstatements in the other information.
Directors’ Remuneration Report
In addition to our audit of the consolidated financial statements, the Directors have engaged us to audit the information in the Directors’
Remuneration Report that is described as having been audited, which the Directors have decided to prepare as if the Company was required to
comply with the requirements of Schedule 8 to The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008
(SI 2008 No. 410) made under the UK Companies Act 2006.
In our opinion the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the UK Companies
Act 2006, as if those requirements applied to the Company.
Disclosures of principal risks and longer-term viability
Based on the knowledge we acquired during our financial statements audit, we have nothing material to add or draw attention to in relation to:
• the Directors’ confirmation within viability statement page 93 that they have carried out a robust assessment of the principal risks facing the
Group, including those that would threaten its business model, future performance, solvency and liquidity;
• the Principal Risks disclosures describing these risks and explaining how they are being managed and mitigated; and
• the Directors’ explanation in the viability statement of how they have assessed the prospects of the Group, over what period they have done so
and why they considered that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group
will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures
drawing attention to any necessary qualifications or assumptions.
Our work is limited to assessing these matters in the context of only the knowledge acquired during our financial statements audit. As we
cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgements that
were reasonable at the time they were made, the absence of anything to report on these statements is not a guarantee as to the Group’s
longer-term viability.
Corporate governance disclosures
We are required to report to you if we have identified material inconsistencies between the knowledge we acquired during our financial
statements audit and the Directors’ statement that they consider that the Annual Report and Accounts taken as a whole is fair, balanced and
understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and
strategy; or the section of the Annual Report and Accounts describing the work of the Audit Committee does not appropriately address matters
communicated by us to the Audit Committee.
We are required to report to you if the Corporate Governance Statement does not properly disclose a departure from the eleven provisions of the
UK Corporate Governance Code specified by the Listing Rules for our review.
We have nothing to report in these respects.
6. Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on page 94, the Directors are responsible for: the preparation of the consolidated financial
statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the
preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error; assessing the
Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern
basis of accounting unless they either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material
misstatement, whether due to fraud or other irregularities (see below), or error, and to issue our opinion in an auditor’s report. Reasonable
assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud, other irregularities or error and are considered material if, individually or
in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the consolidated
financial statements.
A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities.
7. The purpose of our audit work and to whom we owe our responsibilities
This report is made solely to the Company’s members, as a body, in accordance with section 90 of the Bermuda Companies Act 1981 and the
terms of our engagement. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required
to state to them in an auditor’s report and the further matters we are required to state to them in accordance with the terms agreed with the
Company and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than
the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed.
for and on behalf of KPMG LLP, Statutory Auditor
Rees Aronson
Chartered Accountants
15 Canada Square
London, E14 5GL
13 February 2019
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Based on this work, we are required to report to you if we have anything material to add or draw attention to in relation to the Directors’
statement in the accounting policies section to the consolidated financial statements on the use of the going concern basis of accounting with
no material uncertainties that may cast significant doubt over the Group’s use of that basis for a period of at least twelve months from the date
of approval of the consolidated financial statements.
We have nothing to report in these respects, and we did not identify going concern as a key audit matter.
5. We have nothing to report on the other information in the Annual Report and Accounts
The Directors are responsible for the other information presented in the Annual Report and Accounts together with the consolidated financial
statements. Our opinion on the consolidated financial statements does not cover the other information and, accordingly, we do not express an
audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the
information therein is materially misstated or inconsistent with the consolidated financial statements or our audit knowledge. Based solely
on that work we have not identified material misstatements in the other information.
Directors’ Remuneration Report
In addition to our audit of the consolidated financial statements, the Directors have engaged us to audit the information in the Directors’
Remuneration Report that is described as having been audited, which the Directors have decided to prepare as if the Company was required to
comply with the requirements of Schedule 8 to The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008
(SI 2008 No. 410) made under the UK Companies Act 2006.
In our opinion the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the UK Companies
Act 2006, as if those requirements applied to the Company.
Disclosures of principal risks and longer-term viability
Based on the knowledge we acquired during our financial statements audit, we have nothing material to add or draw attention to in relation to:
• the Directors’ confirmation within viability statement page 93 that they have carried out a robust assessment of the principal risks facing the
Group, including those that would threaten its business model, future performance, solvency and liquidity;
• the Principal Risks disclosures describing these risks and explaining how they are being managed and mitigated; and
• the Directors’ explanation in the viability statement of how they have assessed the prospects of the Group, over what period they have done so
and why they considered that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group
will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures
drawing attention to any necessary qualifications or assumptions.
Our work is limited to assessing these matters in the context of only the knowledge acquired during our financial statements audit. As we
cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgements that
were reasonable at the time they were made, the absence of anything to report on these statements is not a guarantee as to the Group’s
longer-term viability.
Corporate governance disclosures
We are required to report to you if we have identified material inconsistencies between the knowledge we acquired during our financial
statements audit and the Directors’ statement that they consider that the Annual Report and Accounts taken as a whole is fair, balanced and
understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and
strategy; or the section of the Annual Report and Accounts describing the work of the Audit Committee does not appropriately address matters
communicated by us to the Audit Committee.
We are required to report to you if the Corporate Governance Statement does not properly disclose a departure from the eleven provisions of the
UK Corporate Governance Code specified by the Listing Rules for our review.
We have nothing to report in these respects.
6. Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on page 94, the Directors are responsible for: the preparation of the consolidated financial
statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the
preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error; assessing the
Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern
basis of accounting unless they either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material
misstatement, whether due to fraud or other irregularities (see below), or error, and to issue our opinion in an auditor’s report. Reasonable
assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud, other irregularities or error and are considered material if, individually or
in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the consolidated
financial statements.
A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities.
7. The purpose of our audit work and to whom we owe our responsibilities
This report is made solely to the Company’s members, as a body, in accordance with section 90 of the Bermuda Companies Act 1981 and the
terms of our engagement. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required
to state to them in an auditor’s report and the further matters we are required to state to them in accordance with the terms agreed with the
Company and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than
the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed.
Rees Aronson
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square
London, E14 5GL
13 February 2019
98
Lancashire Holdings Limited
Annual Report & Accounts 2018
99
www.lancashiregroup.com
www.lancashiregroup.com
99
Financial statements
Consolidated statement of comprehensive income (loss)
For the year ended 31 December 2018
Gross premiums written
Outwards reinsurance premiums
Net premiums written
Change in unearned premiums
Change in unearned premiums on premiums ceded
Net premiums earned
Net investment income
Net other investment (losses) income
Net realised (losses) gains and impairments
Share of loss of associate
Other income
Net foreign exchange (losses) gains
Total net revenue
Insurance losses and loss adjustment expenses
Insurance losses and loss adjustment expenses recoverable
Net insurance losses
Insurance acquisition expenses
Insurance acquisition expenses ceded
Other operating expenses
Equity based compensation
Total expenses
Results of operating activities
Financing costs
Profit (loss) before tax
Tax credit
Profit (loss) for the year
Profit (loss) for the year attributable to:
Equity shareholders of LHL
Non-controlling interests
Profit (loss) for the year
Other comprehensive (loss) income to be reclassified to profit or loss in subsequent periods
Net change in unrealised gains/losses on investments
Tax provision on net change in unrealised gains/losses on investments
Other comprehensive (loss) income
Total comprehensive income (loss) for the year
Total comprehensive income (loss) attributable to:
Equity shareholders of LHL
Non-controlling interests
Total comprehensive income (loss) for the year
Notes
2
2
2
2
3
3
3
16
5
2, 13
2, 13
2, 4
2, 4
6, 7, 21
7
8
9
3, 11
11
2018
$m
638.5
(220.8)
417.7
(19.7)
15.5
413.5
34.7
(4.2)
(5.1)
(7.1)
12.4
(1.6)
442.6
307.4
(142.0)
165.4
131.0
(4.6)
89.2
7.9
388.9
53.7
20.1
33.6
4.0
37.6
37.5
0.1
37.6
(12.9)
0.1
(12.8)
24.8
24.7
0.1
24.8
2017
$m
591.6
(193.6)
398.0
22.6
7.3
427.9
30.5
1.2
9.1
(9.4)
17.2
2.3
478.8
538.0
(202.6)
335.4
120.7
(5.1)
83.6
(0.4)
534.2
(55.4)
17.5
(72.9)
2.3
(70.6)
(71.1)
0.5
(70.6)
4.9
–
4.9
(65.7)
(66.2)
0.5
(65.7)
Earnings (loss) per share
Basic
Diluted
22
22
$0.19
$0.19
($0.36)
($0.36)
Lancashire Holdings Limited
Annual Report & Accounts 2018
100 Lancashire Holdings Limited
Annual Report & Accounts 2018
100
Consolidated statement of comprehensive income (loss)
For the year ended 31 December 2018
Consolidated balance sheet
As at 31 December 2018
Gross premiums written
Outwards reinsurance premiums
Net premiums written
Change in unearned premiums
Change in unearned premiums on premiums ceded
Net premiums earned
Net investment income
Net other investment (losses) income
Net realised (losses) gains and impairments
Share of loss of associate
Other income
Net foreign exchange (losses) gains
Total net revenue
Insurance losses and loss adjustment expenses
Insurance losses and loss adjustment expenses recoverable
Net insurance losses
Insurance acquisition expenses
Insurance acquisition expenses ceded
Other operating expenses
Equity based compensation
Total expenses
Results of operating activities
Financing costs
Profit (loss) before tax
Tax credit
Profit (loss) for the year
Profit (loss) for the year attributable to:
Equity shareholders of LHL
Non-controlling interests
Profit (loss) for the year
Other comprehensive (loss) income
Total comprehensive income (loss) for the year
Total comprehensive income (loss) attributable to:
Equity shareholders of LHL
Non-controlling interests
Total comprehensive income (loss) for the year
Earnings (loss) per share
Basic
Diluted
Other comprehensive (loss) income 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
Notes
2
2
2
2
3
3
3
16
5
2, 13
2, 13
2, 4
2, 4
6, 7, 21
7
8
9
3, 11
11
2018
$m
638.5
(220.8)
417.7
(19.7)
15.5
413.5
34.7
(4.2)
(5.1)
(7.1)
12.4
(1.6)
442.6
307.4
(142.0)
165.4
131.0
(4.6)
89.2
7.9
388.9
53.7
20.1
33.6
4.0
37.6
37.5
0.1
37.6
(12.9)
0.1
(12.8)
24.8
24.7
0.1
24.8
2017
$m
591.6
(193.6)
398.0
22.6
7.3
427.9
30.5
1.2
9.1
(9.4)
17.2
2.3
478.8
538.0
(202.6)
335.4
120.7
(5.1)
83.6
(0.4)
534.2
(55.4)
17.5
(72.9)
2.3
(70.6)
(71.1)
0.5
(70.6)
4.9
–
4.9
(65.7)
(66.2)
0.5
(65.7)
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
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
10, 18
11, 12, 18
14
13
14
14
12, 16
17
13
15
18
18
19
19
20
11
23
2018
$m
2017
$m
154.6
6.8
1,659.0
318.1
56.7
322.9
9.8
35.3
67.1
1.4
74.2
153.8
2,859.7
915.0
370.6
36.0
81.3
7.1
45.4
0.9
11.2
0.4
324.3
1,792.2
101.0
(9.4)
869.0
(14.3)
120.9
1,067.2
0.3
1,067.5
2,859.7
256.5
6.1
1,654.6
297.9
41.2
284.1
20.7
42.4
59.4
2.6
76.7
153.8
2,896.0
933.5
350.9
40.7
65.5
2.5
48.0
2.8
16.5
2.0
326.3
1,788.7
100.7
(12.1)
866.2
(1.5)
153.6
1,106.9
0.4
1,107.3
2,896.0
The consolidated financial statements were approved by the Board of Directors on 13 February 2019 and signed on its behalf by:
22
22
$0.19
$0.19
($0.36)
($0.36)
Peter Clarke
Director/Chairman
Elaine Whelan
Director/CFO
100 Lancashire Holdings Limited
Annual Report & Accounts 2018
101
www.lancashiregroup.com
www.lancashiregroup.com
101
Financial statements
Consolidated statement of changes in shareholders’ equity
For the year ended 31 December 2018
Balance as at 31 December 2016
Total comprehensive loss for the year
Shares donated to the trust
Distributed by the trust
Dividends on common shares
Dividends paid to minority
interest holders
Equity based compensation – credit
Balance as at 31 December 2017
Total comprehensive income for the year
Shares purchased by the trust
Distributed by the trust
Purchase of shares from
non-controlling interest
Dividends on common shares
Equity based compensation – expense
Balance as at 31 December 2018
Notes
19, 20, 23
19, 20
19
23
20
19, 20, 23
19, 20
20
19
20
Share
capital
$m
100.7
–
–
–
–
–
–
100.7
–
0.3
–
–
–
–
101.0
Own
shares
$m
(23.2)
–
1.2
9.9
–
–
–
(12.1)
–
(4.6)
7.3
–
–
–
(9.4)
Other
reserves
$m
881.6
–
(1.2)
(13.8)
–
–
(0.4)
866.2
–
4.3
(9.9)
(0.1)
–
8.5
869.0
Accumulated
other
comprehensive
loss
$m
Retained
earnings
$m
Shareholders’
equity
attributable to
equity
shareholders of
LHL
$m
Non-
controlling
interests
$m
Total
shareholders’
equity
$m
(6.4)
4.9
–
–
–
–
–
(1.5)
(12.8)
–
–
–
–
–
(14.3)
254.6
(71.1)
–
–
(29.9)
–
–
153.6
37.5
–
–
–
(70.2)
–
120.9
1,207.3
(66.2 )
–
(3.9 )
(29.9 )
–
(0.4 )
1,106.9
24.7
–
(2.6 )
(0.1 )
(70.2 )
8.5
1,067.2
0.5
0.5
–
–
–
(0.6)
–
0.4
0.1
–
–
(0.2)
–
–
0.3
1,207.8
(65.7)
–
(3.9)
(29.9)
(0.6)
(0.4)
1,107.3
24.8
–
(2.6)
(0.3)
(70.2)
8.5
1,067.5
Lancashire Holdings Limited
Annual Report & Accounts 2018
102 Lancashire Holdings Limited
Annual Report & Accounts 2018
102
Consolidated statement of changes in shareholders’ equity
For the year ended 31 December 2018
Statement of consolidated cash flows
For the year ended 31 December 2018
Notes
Share
capital
$m
Own
shares
$m
reserves
$m
100.7
(23.2)
881.6
Balance as at 31 December 2016
Total comprehensive loss for the year
Shares donated to the trust
Distributed by the trust
Dividends on common shares
Dividends paid to minority
interest holders
Equity based compensation – credit
Balance as at 31 December 2017
Total comprehensive income for the year
Distributed by the trust
Purchase of shares from
non-controlling interest
Dividends on common shares
Equity based compensation – expense
Balance as at 31 December 2018
19, 20, 23
19, 20
19
23
20
20
19
20
19, 20
Shares purchased by the trust
19, 20, 23
0.3
–
–
–
–
–
–
–
–
–
–
–
–
1.2
9.9
–
–
–
–
–
–
–
(4.6)
7.3
(1.2)
(13.8)
–
–
–
(0.4)
–
4.3
(9.9)
(0.1)
–
8.5
Accumulated
other
Shareholders’
attributable to
equity
equity
Other
comprehensive
Retained
shareholders of
controlling
shareholders’
loss
$m
earnings
$m
(6.4)
4.9
254.6
(71.1)
(29.9)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(70.2)
LHL
$m
1,207.3
(66.2 )
–
(3.9 )
(29.9 )
–
(0.4 )
24.7
–
(2.6 )
(0.1 )
(70.2 )
8.5
Non-
interests
$m
0.5
0.5
–
–
–
(0.6)
–
0.4
0.1
–
–
–
–
(0.2)
Total
equity
$m
1,207.8
(65.7)
–
(3.9)
(29.9)
1,107.3
(0.6)
(0.4)
24.8
–
(2.6)
(0.3)
(70.2)
8.5
100.7
(12.1)
866.2
(1.5)
153.6
1,106.9
(12.8)
37.5
101.0
(9.4)
869.0
(14.3)
120.9
1,067.2
0.3
1,067.5
Cash flows used in operating activities
Profit (loss) 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 loss of associate
Net other investment loss (income)
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 used in operating activities
Cash flows (used in) 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 (used in) from investing activities
Cash flows used in financing activities
Interest paid
Dividends paid
Dividends paid to minority interest holders
Distributions by trust
Purchase of shares from non-controlling interest
Net cash flows used in financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of exchange rate fluctuations on cash and cash equivalents
Cash and cash equivalents at end of year
Notes
6
8
7
16
3
23
19
23
10
2018
$m
33.6
(3.3)
1.4
18.1
(36.6)
(0.6)
7.9
(4.3)
7.1
3.9
5.1
(1.6)
(51.5)
18.3
(2.5)
35.9
(0.2)
(14.8)
(1,143.1)
1,115.8
(6.4)
(18.0)
(70.2)
–
(2.6)
(0.3)
(91.1)
(100.0)
256.5
(1.9)
154.6
2017
$m
(72.9)
1.3
1.8
16.4
(37.1)
2.8
(0.4)
9.4
9.4
(1.2)
(9.1)
(1.7)
52.0
(9.4)
(38.7)
37.6
(0.6)
(19.1)
(1,196.1)
1,209.5
31.3
(16.3)
(29.9)
(0.6)
(3.9)
–
(50.7)
(58.1)
308.8
5.8
256.5
102 Lancashire Holdings Limited
Annual Report & Accounts 2018
103
www.lancashiregroup.com
www.lancashiregroup.com
103
Financial statements
Accounting policies
For the year ended 31 December 2018
Summary of significant accounting policies
The basis of preparation, use of estimates, consolidation principles and significant accounting policies adopted in the preparation of these
consolidated financial statements are set out below.
Basis of preparation
The consolidated financial statements are prepared on a going concern basis in accordance with accounting principles generally accepted under
IFRS as adopted by the EU.
Where IFRS is silent, as it is in respect of certain aspects relating to the measurement of insurance products, the IFRS framework allows reference
to another comprehensive body of accounting principles. In such instances, the Group’s management determines appropriate measurement
bases, to provide the most useful information to users of the consolidated financial statements, using their judgement and considering U.S.
GAAP. In the course of preparing the consolidated financial statements, no judgements have been made in the process of applying the Group’s
accounting policies, other than those involving estimations as noted in the ‘Use of Estimates’ section below, that have had a significant effect on
amounts recognised in the consolidated financial statements.
All amounts, excluding share data or where otherwise stated, are in millions of U.S. dollars.
Changes in accounting standards
IFRS 15, Revenue from Contracts with Customers, was effective on 1 January 2018. The adoption of IFRS 15, using the cumulative effect
approach, has not had a material impact on the results and disclosures reported in the consolidated financial statements for the year ended
31 December 2018 and is consistent with the Group’s previous treatment of other income. While a number of other amended IFRS and IFRIC
standards have become effective this year, none of these standards have had a material impact on the Group.
Future accounting changes
IFRS 17, Insurance Contracts, issued in May 2017, specifies the financial reporting for insurance contracts by an insurer. The new standard is
currently effective for annual periods beginning on or after 1 January 2021. At its board meeting on 14 November 2018, the IASB tentatively
decided to propose an amendment of the IFRS 17 effective date to reporting periods on or after 1 January 2022. The standard includes a
number of significant changes regarding the measurement and disclosure of insurance contracts both in terms of liability measurement and
profit recognition. The Group will continue to assess the impact that the new standard will have on its results and the presentation and disclosure
requirements. IFRS 17 has not yet been endorsed by the EU.
IFRS 9, Financial Instruments: Classification and Measurement, is effective for annual periods beginning on or after 1 January 2018. The
amendments to IFRS 4, Insurance Contracts, issued in 2016, provide a temporary exemption from applying IFRS 9. The Group qualifies for, and
has elected to apply, the temporary exemption available to companies whose predominant activity is to issue insurance contracts. The exemption
lasts until accounting periods beginning on or after 1 January 2022, subject to the proposed deferral of IFRS 17 as noted above, and addresses
the accounting consequences of applying IFRS 9 to insurers prior to the adoption of IFRS 17, Insurance Contracts. IFRS 9 introduces new
classification and measurement requirements for financial instruments, an expected credit loss impairment model that replaces the IAS 39
incurred loss model and new hedge accounting requirements. Applying the new requirements of IFRS 9, the Group currently anticipates
that all investments held by the Group will be classified as at FVTPL (mandatory), because they are managed on a fair value basis. As a result
all investments currently disclosed in Note 11 as AFS will be reclassified as at FVTPL (mandatory) with changes in unrealised gains (losses)
currently recorded within other comprehensive (loss) income to be reclassified and recorded within net investment income in profit or (loss).
The reclassification from AFS to FVTPL (mandatory) will not result in a change in the carrying value of the investments disclosed in Note 11
of the consolidated financial statements. Further implications from the change in classification from AFS to FVTPL (mandatory) will be that
balances within accumulated other comprehensive loss will be reclassified to retained earnings on the date of transition.
IFRS 16, Leases, is effective for annual periods beginning on or after 1 January 2019 and replaces the existing lease standard IAS 17. IFRS 16
introduces a single on-balance sheet accounting model for both finance and operating leases. The adoption of the standard results in the
recognition of a right-of-use asset and associated lease liability on the balance sheet. In addition, the current operating lease rental charges in
the consolidated statement of comprehensive income (loss) will be replaced with a depreciation charge for the right-of-use asset and an interest
expense for the lease liabilities. IFRS 16 will be adopted by the Group on 1 January 2019 using the fully retrospective transition approach.
The estimated $1.8 million cumulative effect of adopting IFRS 16 will be recognised in the consolidated financial statements for the year ending
31 December 2019 as a credit to the opening balance of retained earnings as at 1 January 2018, with a re-statement of comparative information.
The consolidated balance sheet is presented in order of decreasing liquidity.
Lancashire Holdings Limited
Annual Report & Accounts 2018
104 Lancashire Holdings Limited
Annual Report & Accounts 2018
104
Accounting policies
For the year ended 31 December 2018
Summary of significant accounting policies
consolidated financial statements are set out below.
The basis of preparation, use of estimates, consolidation principles and significant accounting policies adopted in the preparation of these
Basis of preparation
IFRS as adopted by the EU.
The consolidated financial statements are prepared on a going concern basis in accordance with accounting principles generally accepted under
Where IFRS is silent, as it is in respect of certain aspects relating to the measurement of insurance products, the IFRS framework allows reference
to another comprehensive body of accounting principles. In such instances, the Group’s management determines appropriate measurement
bases, to provide the most useful information to users of the consolidated financial statements, using their judgement and considering U.S.
GAAP. In the course of preparing the consolidated financial statements, no judgements have been made in the process of applying the Group’s
accounting policies, other than those involving estimations as noted in the ‘Use of Estimates’ section below, that have had a significant effect on
amounts recognised in the consolidated financial statements.
All amounts, excluding share data or where otherwise stated, are in millions of U.S. dollars.
Changes in accounting standards
IFRS 15, Revenue from Contracts with Customers, was effective on 1 January 2018. The adoption of IFRS 15, using the cumulative effect
approach, has not had a material impact on the results and disclosures reported in the consolidated financial statements for the year ended
31 December 2018 and is consistent with the Group’s previous treatment of other income. While a number of other amended IFRS and IFRIC
standards have become effective this year, none of these standards have had a material impact on the Group.
Future accounting changes
IFRS 17, Insurance Contracts, issued in May 2017, specifies the financial reporting for insurance contracts by an insurer. The new standard is
currently effective for annual periods beginning on or after 1 January 2021. At its board meeting on 14 November 2018, the IASB tentatively
decided to propose an amendment of the IFRS 17 effective date to reporting periods on or after 1 January 2022. The standard includes a
number of significant changes regarding the measurement and disclosure of insurance contracts both in terms of liability measurement and
profit recognition. The Group will continue to assess the impact that the new standard will have on its results and the presentation and disclosure
requirements. IFRS 17 has not yet been endorsed by the EU.
IFRS 9, Financial Instruments: Classification and Measurement, is effective for annual periods beginning on or after 1 January 2018. The
amendments to IFRS 4, Insurance Contracts, issued in 2016, provide a temporary exemption from applying IFRS 9. The Group qualifies for, and
has elected to apply, the temporary exemption available to companies whose predominant activity is to issue insurance contracts. The exemption
lasts until accounting periods beginning on or after 1 January 2022, subject to the proposed deferral of IFRS 17 as noted above, and addresses
the accounting consequences of applying IFRS 9 to insurers prior to the adoption of IFRS 17, Insurance Contracts. IFRS 9 introduces new
classification and measurement requirements for financial instruments, an expected credit loss impairment model that replaces the IAS 39
incurred loss model and new hedge accounting requirements. Applying the new requirements of IFRS 9, the Group currently anticipates
that all investments held by the Group will be classified as at FVTPL (mandatory), because they are managed on a fair value basis. As a result
all investments currently disclosed in Note 11 as AFS will be reclassified as at FVTPL (mandatory) with changes in unrealised gains (losses)
currently recorded within other comprehensive (loss) income to be reclassified and recorded within net investment income in profit or (loss).
The reclassification from AFS to FVTPL (mandatory) will not result in a change in the carrying value of the investments disclosed in Note 11
of the consolidated financial statements. Further implications from the change in classification from AFS to FVTPL (mandatory) will be that
balances within accumulated other comprehensive loss will be reclassified to retained earnings on the date of transition.
IFRS 16, Leases, is effective for annual periods beginning on or after 1 January 2019 and replaces the existing lease standard IAS 17. IFRS 16
introduces a single on-balance sheet accounting model for both finance and operating leases. The adoption of the standard results in the
recognition of a right-of-use asset and associated lease liability on the balance sheet. In addition, the current operating lease rental charges in
the consolidated statement of comprehensive income (loss) will be replaced with a depreciation charge for the right-of-use asset and an interest
expense for the lease liabilities. IFRS 16 will be adopted by the Group on 1 January 2019 using the fully retrospective transition approach.
The estimated $1.8 million cumulative effect of adopting IFRS 16 will be recognised in the consolidated financial statements for the year ending
31 December 2019 as a credit to the opening balance of retained earnings as at 1 January 2018, with a re-statement of comparative information.
The consolidated balance sheet 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, both gross and net of outwards
reinsurance recoverable. This is discussed on page 106 and 107 and also in the risk disclosures section from page 118.
Less significant estimates are made in determining the estimated fair value of certain financial instruments and management judgement is
applied in determining impairment charges. The estimation of the fair value of financial instruments is discussed on pages 107 and 108 and
in note 11.
Whilst not significant, estimates are also utilised in the valuation of intangible assets. The fair value of intangible assets recognised on 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 assumptions made by management in performing annual 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 17.
Consolidation principles
The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as at and for the year ended
31 December 2018. 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 subsidiary and has the ability to affect those
returns through its power over the subsidiary.
The Group participates in 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 (loss). 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 or (loss) from such
investments in its consolidated statement of comprehensive income (loss) for the period. Adjustments are made to associate accounting policies,
where necessary, in order to be consistent with the Group’s accounting policies.
Foreign currency
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 revalued at period end exchange rates. The resulting exchange differences on revaluation are recorded in the
consolidated statement of comprehensive income (loss) within net foreign exchanges (losses)gains. Non-monetary assets and liabilities
denominated in a foreign currency are carried 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.
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Financial statements
Accounting policies: continued
Intangible assets
The Group’s intangible assets comprise syndicate participation rights and goodwill. The cost of syndicate participation rights and goodwill
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 CGU and related intangible assets. 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.
Syndicate participation rights and goodwill are considered to have an indefinite life.
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 regularly reviewed for impairment, with any impairment loss recognised
as an expense in the period in which it is determined.
Acquisition costs represent commissions, brokerage, profit commissions and other variable costs that relate directly to the successful securing of
new contracts and the renewing of existing contracts. They are generally deferred over the period in which the related premiums are earned to
the extent they are recoverable out of expected future revenue margins. All other acquisition costs are recognised as an expense when incurred.
Outwards reinsurance
Outwards reinsurance premiums comprise the cost of reinsurance contracts entered into. Outwards reinsurance premiums are accounted for in
the period in which the contract incepts, or the period in which the contract is bound if later. The provision for the reinsurers’ share of unearned
premiums represents that part of reinsurance premiums ceded which are estimated to be earned in future financial periods. Unearned
reinsurance commissions are recognised as a liability using the same principles.
Any amounts recoverable from reinsurers are estimated using the same methodology as for the underlying losses. The Group monitors the
creditworthiness of its reinsurers on an ongoing basis and assesses any reinsurance assets for impairment, with any impairment loss recognised
as an expense in the period in which it is determined.
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Accounting policies: continued
Intangible assets
The Group’s intangible assets comprise syndicate participation rights and goodwill. The cost of syndicate participation rights and goodwill
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 CGU and related intangible assets. 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.
Syndicate participation rights and goodwill are considered to have an indefinite life.
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.
as an expense in the period in which it is determined.
Acquisition costs represent commissions, brokerage, profit commissions and other variable costs that relate directly to the successful securing of
new contracts and the renewing of existing contracts. They are generally deferred over the period in which the related premiums are earned to
the extent they are recoverable out of expected future revenue margins. All other acquisition costs are recognised as an expense when incurred.
Outwards reinsurance
Outwards reinsurance premiums comprise the cost of reinsurance contracts entered into. Outwards reinsurance premiums are accounted for in
the period in which the contract incepts, or the period in which the contract is bound if later. The provision for the reinsurers’ share of unearned
premiums represents that part of reinsurance premiums ceded which are estimated to be earned in future financial periods. Unearned
reinsurance commissions are recognised as a liability using the same principles.
Any amounts recoverable from reinsurers are estimated using the same methodology as for the underlying losses. The Group monitors the
creditworthiness of its reinsurers on an ongoing basis and assesses any reinsurance assets for impairment, with any impairment loss recognised
as an expense in the period in which it is determined.
Losses
Losses comprise losses and loss adjustment expenses paid in the period and changes in the provision for outstanding losses and ACR, including
the provision for IBNR and related expenses. Losses and loss adjustment expenses are charged to profit or loss as they are incurred.
Losses and loss adjustment expenses represent the estimated ultimate cost of settling all insurance claims 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 reported losses received from third parties. ACR 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.
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.
The estimation of the ultimate loss and loss adjustment expense liability 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 estimated losses and loss
adjustment expenses.
Liability adequacy tests
At each balance sheet date, the Group performs a liability adequacy test to determine if there is an overall excess of expected claims over
unearned premiums for the period of unexpired risk by 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.
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 regularly reviewed for impairment, with any impairment loss recognised
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 include quoted and unquoted investments that are classified as either 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, the composition, duration and allocation of these investments
are reviewed by management on a regular basis in order to respond to needs for liquidity, changes in interest rates and other market conditions.
The Group has elected to carry certain fixed maturity securities at FVTPL upon initial recognition. This category includes instruments in which
the cash flows are linked to the performance of an underlying pool of securities. Presentation of these securities in the FVTPL category is
consistent with how management monitors and evaluates the performance of these securities.
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.
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Financial statements
Accounting policies: continued
Regular way purchases and sales of investments are recognised at estimated fair value including, in the case of investments not carried at FVTPL,
transaction costs attributable to the acquisition of that investment on the trade date and are subsequently carried at estimated fair value. The
estimated fair values of quoted and unquoted investments are determined based on bid prices from recognised exchanges, broker-dealers,
recognised indices or pricing vendors. Unrealised gains and losses from changes in the estimated fair value of AFS investments are included in
accumulated other comprehensive loss in shareholders’ equity. Changes in estimated fair value of investments classified at FVTPL are recognised
in the consolidated statement of comprehensive income (loss) within net other investment (losses) income.
Investments are derecognised when the Group has transferred substantially all of the risks and rewards of ownership. On derecognition of
an AFS investment, previously recorded unrealised gains and losses are recycled from accumulated other comprehensive loss in shareholders’
equity and included in the consolidated statement of comprehensive income (loss) as a realised gain or loss within net realised (losses) gains
and impairments.
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. Such evidence would include a prolonged
decline in estimated fair value below cost or amortised cost, where other factors, such as expected cash flows, do not support a recovery in value.
If an impairment is deemed appropriate, the difference between cost or amortised cost and estimated fair value is removed from accumulated
other comprehensive loss in shareholders’ equity and charged to current period profit or loss. Impairment losses on fixed maturity securities may
be subsequently reversed through profit or loss while impairment losses on equity securities are not subsequently reversed through profit or loss.
Derivative financial instruments
Derivatives are classified as financial assets or liabilities at FVTPL. They are initially 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 derivative instruments are recognised in the consolidated statement of comprehensive income (loss) within
net other investment(losses) 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.
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Accounting policies: continued
Regular way purchases and sales of investments are recognised at estimated fair value including, in the case of investments not carried at FVTPL,
transaction costs attributable to the acquisition of that investment on the trade date and are subsequently carried at estimated fair value. The
estimated fair values of quoted and unquoted investments are determined based on bid prices from recognised exchanges, broker-dealers,
recognised indices or pricing vendors. Unrealised gains and losses from changes in the estimated fair value of AFS investments are included in
accumulated other comprehensive loss in shareholders’ equity. Changes in estimated fair value of investments classified at FVTPL are recognised
in the consolidated statement of comprehensive income (loss) within net other investment (losses) income.
Investments are derecognised when the Group has transferred substantially all of the risks and rewards of ownership. On derecognition of
an AFS investment, previously recorded unrealised gains and losses are recycled from accumulated other comprehensive loss in shareholders’
equity and included in the consolidated statement of comprehensive income (loss) as a realised gain or loss within net realised (losses) gains
and impairments.
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. Such evidence would include a prolonged
decline in estimated fair value below cost or amortised cost, where other factors, such as expected cash flows, do not support a recovery in value.
If an impairment is deemed appropriate, the difference between cost or amortised cost and estimated fair value is removed from accumulated
other comprehensive loss in shareholders’ equity and charged to current period profit or loss. Impairment losses on fixed maturity securities may
be subsequently reversed through profit or loss while impairment losses on equity securities are not subsequently reversed through profit or loss.
Derivative financial instruments
Derivatives are classified as financial assets or liabilities at FVTPL. They are initially 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 derivative instruments are recognised in the consolidated statement of comprehensive income (loss) within
net other investment(losses) 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
Other income is measured based on the consideration specified in a contract and excludes amounts collected on behalf of third parties.
Nature of services
The table below details the type of services from which the Group derives its other income.
Services
Kinesis underwriting fees
Kinesis profit commission
Lloyd’s consortium management fees
Lloyd’s consortium profit commission
Lloyd’s managing agency fees
Nature, timing of satisfaction of performance obligation and significant payment terms
The Group recognises underwriting fees over the underwriting cycle based on the underlying
exposure of the covered contracts. Underwriting fees are received by or before the collateral
funding date, which is prior to commencement of the underwriting cycle.
The Group recognises profit commission following the end of the underwriting cycle based
on the underlying performance of the covered contracts and as collateral is released. Profit
commissions may only be received once the profit commission hurdle has been met.
The Group recognises consortium fees over the risk period based on the underlying exposure
of the covered contracts. Consortium fees are received quarterly.
The Group recognises profit commission in line with the underlying performance of covered
contracts once the year of account closes, which is also when the profit commissions are received.
The Group recognises managing agency fees in line with services provided for each year of
account. Managing agency fees are received quarterly.
Lloyd’s managing agency profit commission The Group recognises profit commission on open years of account when measurement is virtually
certain. Profit commissions are received once the year of account closes.
Long-term debt
Long-term debt is recognised initially at fair value, net of transaction costs incurred. Thereafter it is held at amortised cost, with the amortisation
calculated using the effective interest rate method. Derecognition occurs when the obligation has been extinguished.
Property, plant and equipment
Property, plant and equipment is carried at historical cost, less accumulated depreciation and any impairment in value. Depreciation
is calculated to write off the cost over the estimated useful economic life on a straight-line basis as follows:
IT equipment
Office furniture and equipment
Leasehold improvements
33% per annum
20% to 33% per annum
20% per annum
The assets’ residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each balance sheet date.
An item of property, plant or equipment is derecognised on disposal or when no future economic benefits are expected to arise from the
continued use of the asset.
Gains and losses on the disposal of property, plant and equipment are determined by comparing proceeds with the carrying amount of the asset,
and are included in the consolidated statement of comprehensive income (loss). Costs for repairs and maintenance are charged to profit or loss
as incurred.
Leases
Rentals payable under operating leases are charged to profit or loss on a straight-line basis over the lease term.
Employee benefits
Equity compensation plans
The Group currently operates an RSS under which nil-cost options have been granted. The fair value of the equity instruments granted is
estimated on the date of grant. The estimated fair value is recognised as an expense pro-rata over the vesting period of the instrument, adjusted
for the impact of any non-market vesting conditions. No adjustment to vesting assumptions is made in respect of market vesting conditions.
At each balance sheet date, the Group revises its estimate of the number of RSS nil-cost options that are expected to become exercisable.
It recognises the impact of the revision of original estimates, if any, as equity based compensation expense (credit) in the consolidated
statement of comprehensive income (loss), 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 (loss) and the actual cost
to the Group, if any, is transferred to other reserves in shareholders’ equity.
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Financial statements
Accounting policies: continued
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 (loss) 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 (loss) due
to non-taxable income and certain items which are not tax deductible or which are deferred to subsequent periods.
Deferred tax is recognised on all temporary differences between the assets and liabilities in the consolidated balance sheet and their tax base,
except when the deferred tax liability arises from the initial recognition of goodwill. Deferred tax assets or liabilities are accounted for using the
balance sheet liability method. Deferred tax assets are recognised to the extent that realising the related tax benefit through future taxable profits
is likely and are reassessed each year for recognition.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and
when the deferred income taxes relate to the same fiscal authority.
Where the current estimated fair value of equity based compensation awards differs from the estimated fair value at the time of grant, adjusted
where applicable for dividends, the related corporation tax and deferred tax charge or credit is recognised directly in other reserves.
Own shares
Own shares include shares repurchased under share repurchase authorisations and held in treasury, plus shares repurchased and held in
trust, for the purposes of employee equity based compensation schemes. Own shares are deducted from shareholders’ equity. No gain or loss
is recognised on the purchase, sale, cancellation or issue of own shares and any consideration paid or received is recognised directly in equity.
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Accounting policies: continued
Risk disclosures
Pensions
are rendered.
Tax
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 (loss) in the period when the services
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 (loss) due
to non-taxable income and certain items which are not tax deductible or which are deferred to subsequent periods.
Deferred tax is recognised on all temporary differences between the assets and liabilities in the consolidated balance sheet and their tax base,
except when the deferred tax liability arises from the initial recognition of goodwill. Deferred tax assets or liabilities are accounted for using the
balance sheet liability method. Deferred tax assets are recognised to the extent that realising the related tax benefit through future taxable profits
is likely and are reassessed each year for recognition.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and
when the deferred income taxes relate to the same fiscal authority.
Where the current estimated fair value of equity based compensation awards differs from the estimated fair value at the time of grant, adjusted
where applicable for dividends, the related corporation tax and deferred tax charge or credit is recognised directly in other reserves.
Own shares
Own shares include shares repurchased under share repurchase authorisations and held in treasury, plus shares repurchased and held in
trust, for the purposes of employee equity based compensation schemes. Own shares are deducted from shareholders’ equity. No gain or loss
is recognised on the purchase, sale, cancellation or issue of own shares and any consideration paid or received is recognised directly in equity.
Risk disclosures: introduction
The Group is exposed to risks from several sources, classified into six primary risk categories. These are insurance risk, market risk, liquidity risk,
credit risk, operational risk and strategic risk. The primary risk to the Group is insurance risk.
The primary objective of the Group’s ERM framework is to ensure that the capital resources held are matched to the risk profile of the Group
and that the balance between risk and return is considered as part of all key business decisions. The Group has formulated, and keeps under
review, a risk appetite which is set by the Board of Directors. The Group’s appetite for risk will vary marginally from time to time to reflect the
potential risks and returns that present themselves. However, protecting the Group’s capital and maximising risk-adjusted returns for investors
over the long term are constants. The risk appetite of the Group is central to how the business is run and permeates into the risk appetites that
the individual operating entity boards of directors have adopted. These risk appetites are expressed through detailed risk tolerances at both a
Group and an operating entity level. Risk tolerances represent the maximum amount of capital, generally on a modelled 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 modelled potential losses against risk tolerances and ensure that risk levels are managed in accordance with them.
Economic capital models
The Group maintains economic capital models at the LICL, LUK and syndicate levels. These models are primarily focused on insurance risks,
however they are also used to model other risks including market, credit and operational risks. The syndicate models are vetted by Lloyd’s as part
of its own capital and solvency regulations.
The economic capital models produce data in the form of stochastic distributions for all classes, including non-elemental classes. The
distributions include the mean outcome and the result at various return periods, including very remote events. Projected financial outcomes
for each insurance class are calculated, 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.
The six primary risk categories are discussed in detail on pages 112 to 133.
110 Lancashire Holdings Limited
Annual Report & Accounts 2018
111
www.lancashiregroup.com
www.lancashiregroup.com
111
Financial statements
Risk disclosures: continued
A. Insurance risk
The Group underwrites worldwide, predominantly short-tail, insurance and reinsurance contracts that transfer insurance risk, including risks
exposed to both natural and man-made catastrophes. The Group’s exposure in connection with insurance contracts is, in the event of insured
losses, whether premiums will be sufficient to cover the loss payments and expenses. Insurance and reinsurance markets are cyclical and premium
rates and terms and conditions vary by line of business depending on market conditions and the stage of the cycle. Market conditions are
impacted by capacity and recent loss events, and broader economic cycle impacts amongst other factors. The Group’s underwriters assess likely
losses using their experience and knowledge of past loss experience, industry trends and current circumstances. This allows them to estimate the
premiums sufficient to meet likely losses and expenses and desired levels of profitability consistent with the Group’s risk-adjusted RoE targets.
The Group considers insurance risk at an individual contract level, at a segment level, a geographic level and at an aggregate portfolio level.
This ensures that 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, Aviation and Marine. 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 Board
and the boards of directors at 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 overriding 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 syndicates’ 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;
• 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 modelling 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.
Some of the Group’s business provides coverage for natural catastrophes (e.g. hurricanes, earthquakes, wildfires and floods) and is subject to
potential seasonal variation and the effects of climate change. 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.
Lancashire Holdings Limited
Annual Report & Accounts 2018
112 Lancashire Holdings Limited
Annual Report & Accounts 2018
112
Risk disclosures: continued
A. Insurance risk
The Group underwrites worldwide, predominantly short-tail, insurance and reinsurance contracts that transfer insurance risk, including risks
exposed to both natural and man-made catastrophes. The Group’s exposure in connection with insurance contracts is, in the event of insured
losses, whether premiums will be sufficient to cover the loss payments and expenses. Insurance and reinsurance markets are cyclical and premium
rates and terms and conditions vary by line of business depending on market conditions and the stage of the cycle. Market conditions are
impacted by capacity and recent loss events, and broader economic cycle impacts amongst other factors. The Group’s underwriters assess likely
losses using their experience and knowledge of past loss experience, industry trends and current circumstances. This allows them to estimate the
premiums sufficient to meet likely losses and expenses and desired levels of profitability consistent with the Group’s risk-adjusted RoE targets.
The Group considers insurance risk at an individual contract level, at a segment level, a geographic level and at an aggregate portfolio level.
This ensures that 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, Aviation and Marine. 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 Board
and the boards of directors at individual entity level.
A number of controls are deployed to manage the amount of insurance exposure assumed:
• 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 syndicates’ 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;
• each authorised class has a predetermined normal maximum line structure;
• each underwriter has a clearly defined limit of underwriting authority;
single events;
• risk levels versus tolerances are monitored on a regular basis;
• the Group and individual operating entities have predetermined tolerances on probabilistic and deterministic losses of capital for certain
• 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 modelling 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.
Some of the Group’s business provides coverage for natural catastrophes (e.g. hurricanes, earthquakes, wildfires and floods) and is subject to
potential seasonal variation and the effects of climate change. 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.
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.
• the Group has a rolling three-year strategic plan that helps establish the overriding business goals that the Board of Directors aims to achieve;
1. Landing hurricane from Florida to Texas.
As at 31 December 2018
Zones
Gulf of Mexico1
Non-Gulf of Mexico – U.S.
California
Pan-European
Japan
Japan
Pacific North West
As at 31 December 2017
Zones
Gulf of Mexico1
Non-Gulf of Mexico – U.S.
California
Pan-European
Japan
Japan
Pacific North West
1. Landing hurricane from Florida to Texas.
Perils
Hurricane
Hurricane
Earthquake
Windstorm
Earthquake
Typhoon
Earthquake
Perils
Hurricane
Hurricane
Earthquake
Windstorm
Earthquake
Typhoon
Earthquake
100 year return period
estimated net loss
250 year return period
estimated net loss
$m
% of
tangible capital
$m
% of
tangible capital
163.2
110.2
78.0
70.7
45.0
36.3
22.7
13.2
8.9
6.3
5.7
3.6
2.9
1.8
242.8
241.6
129.5
118.0
81.2
49.1
73.1
19.6
19.5
10.5
9.5
6.6
4.0
5.9
100 year return period
estimated net loss
250 year return period
estimated net loss
$m
% of
tangible capital
$m
% of
tangible capital
173.8
140.9
96.1
77.2
46.6
51.6
33.1
13.6
11.0
7.5
6.0
3.6
4.0
2.6
253.6
306.5
181.1
125.1
85.6
68.1
79.6
19.8
24.0
14.2
9.8
6.7
5.3
6.2
There can be no guarantee that the modelled assumptions and techniques deployed in calculating these figures are accurate. There could
also be an unmodelled loss which exceeds these figures. In addition, any modelled loss scenario could cause a larger loss to capital than the
modelled expectation.
Details of annual gross premiums written by geographic area of risks insured are provided below:
U.S. and Canada
Worldwide, including the U.S. and Canada1
Worldwide offshore
Europe
Far East
Worldwide, excluding the U.S. and Canada2
Middle East
Rest of world
Total
2018
$m
188.2
129.8
118.6
51.3
29.0
13.4
8.2
100.0
638.5
%
29.5
20.3
18.6
8.0
4.5
2.1
1.3
15.7
100.0
2017
$m
177.6
98.6
162.5
38.9
27.9
11.5
6.9
67.7
591.6
%
30.0
16.7
27.5
6.6
4.7
1.9
1.2
11.4
100.0
1. Worldwide, including the U.S. and Canada, comprises insurance and reinsurance contracts that insure or reinsure risks in more than one geographic area.
2. Worldwide, excluding the U.S. and Canada, comprises insurance and reinsurance contracts that insure or reinsure risks in more than one geographic area, but that specifically
exclude the U.S. and Canada.
112 Lancashire Holdings Limited
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113
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www.lancashiregroup.com
113
Financial statements
Risk disclosures: continued
Details of annual gross premiums written by business segment are provided below:
Lloyd’s
Property
Energy
Aviation
Marine
Total
2018
$m
256.8
214.6
103.0
33.0
31.1
638.5
%
40.2
33.6
16.1
5.2
4.9
100.0
2017
$m
207.3
198.0
101.8
16.9
67.6
591.6
%
35.0
33.5
17.2
2.9
11.4
100.0
Further details of the gross premiums written and the risks associated with each of these five principal business segments are described on the
following pages.
I. Lloyd’s
Gross premiums written, for the year:
Property reinsurance
Property direct and facultative
Other aviation and satellite
Marine cargo
Energy
Aviation deductible
Terrorism
Total
2018
$m
82.3
74.4
37.7
31.9
19.0
6.4
5.1
256.8
2017
$m
88.5
56.1
25.0
22.5
10.8
–
4.4
207.3
Property reinsurance predominantly includes property catastrophe excess of loss, property per risk excess of loss and property retrocession lines
of business. Property catastrophe excess of loss and property per risk excess of loss provide protection for elemental and non-elemental risks and
are written on an excess of loss treaty basis within the U.S. and internationally. The U.S. property catastrophe excess of loss book is particularly
focused on regional clients. Property retrocession is written on an excess of loss basis through treaty arrangements. It provides coverage for
elemental risks when sold on a catastrophe basis and both elemental and non-elemental risks when sold on a per risk retrocession basis.
Protection is generally given on a regional basis and may cover specific property risks or all catastrophe perils. It is also generally written
on an UNL basis, meaning loss payments are linked to the ceding company’s own loss.
Property direct and facultative is a worldwide book of largely commercial property business, written both in the open market and under
delegated authorities. The account spans small individual locations to Fortune 500 accounts but with a bias towards small to medium-sized risks.
Policies are generally provided both for non-elemental and elemental perils, although not all risks include both elemental and non-elemental
coverage. Coverage is generally written on a full value, primary or excess of loss basis, although the very largest accounts are currently seldom
written at the primary level.
Other aviation and satellite includes aviation reinsurance, aviation war, general aviation, airlines hull and liability and 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
whilst the airlines hull and liability line provides cover to the airlines directly. Both lines include 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 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.
Lancashire Holdings Limited
Annual Report & Accounts 2018
114 Lancashire Holdings Limited
Annual Report & Accounts 2018
114
Risk disclosures: continued
Details of annual gross premiums written by business segment are provided below:
Further details of the gross premiums written and the risks associated with each of these five principal business segments are described on the
Lloyd’s
Property
Energy
Aviation
Marine
Total
following pages.
I. Lloyd’s
Gross premiums written, for the year:
Property reinsurance
Property direct and facultative
Other aviation and satellite
Marine cargo
Energy
Aviation deductible
Terrorism
Total
2018
$m
256.8
214.6
103.0
33.0
31.1
638.5
%
40.2
33.6
16.1
5.2
4.9
100.0
2017
$m
207.3
198.0
101.8
16.9
67.6
591.6
%
35.0
33.5
17.2
2.9
11.4
100.0
2017
$m
88.5
56.1
25.0
22.5
10.8
–
4.4
2018
$m
82.3
74.4
37.7
31.9
19.0
6.4
5.1
256.8
207.3
Property reinsurance predominantly includes property catastrophe excess of loss, property per risk excess of loss and property retrocession lines
of business. Property catastrophe excess of loss and property per risk excess of loss provide protection for elemental and non-elemental risks and
are written on an excess of loss treaty basis within the U.S. and internationally. The U.S. property catastrophe excess of loss book is particularly
focused on regional clients. Property retrocession is written on an excess of loss basis through treaty arrangements. It provides coverage for
elemental risks when sold on a catastrophe basis and both elemental and non-elemental risks when sold on a per risk retrocession basis.
Protection is generally given on a regional basis and may cover specific property risks or all catastrophe perils. It is also generally written
on an UNL basis, meaning loss payments are linked to the ceding company’s own loss.
Property direct and facultative is a worldwide book of largely commercial property business, written both in the open market and under
delegated authorities. The account spans small individual locations to Fortune 500 accounts but with a bias towards small to medium-sized risks.
Policies are generally provided both for non-elemental and elemental perils, although not all risks include both elemental and non-elemental
coverage. Coverage is generally written on a full value, primary or excess of loss basis, although the very largest accounts are currently seldom
written at the primary level.
Other aviation and satellite includes aviation reinsurance, aviation war, general aviation, airlines hull and liability and 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
whilst the airlines hull and liability line provides cover to the airlines directly. Both lines include 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 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.
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. Power generation and utility business can be written either ground-up or on a primary or excess
basis. The core composition of the portfolio is operational conventional thermal power generation, renewable energy and associated transmission
& distribution assets. Midstream exposures encompass the onshore movements of electricity, oil, gas and water and can include treatment and
processing plants. Risks associated with the processing or refining of oil or petroleum by-products are excluded. Our underwriting appetite
targets well engineered and operated power and midstream opportunities, whilst carefully balancing the associated natural catastrophe and
business interruption exposures.
Aviation deductible business is a specialist area with small individual limits normally up to $1.0 million and covers the deductible the airline would
normally have for each and every loss under the terms of their airline policy.
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 to reduce the exposure to large risk losses and large natural catastrophe losses in the U.S., Canada and worldwide
with certain exclusions. Reinsurance may also be purchased to mitigate an accumulation of smaller, attritional losses. Reinsurance may be
purchased on a facultative, excess of loss treaty or proportional treaty basis.
II. Property
Gross premiums written, for the year:
Property catastrophe excess of loss
Terrorism
Property political risk
Property risk excess of loss
Property retrocession
Other property
Total
2018
$m
103.7
41.3
35.4
15.0
10.0
9.2
214.6
2017
$m
101.9
34.9
31.1
12.9
10.0
7.2
198.0
Property catastrophe excess of loss covers elemental risks and is written on an excess of loss treaty basis. The property catastrophe excess of loss
portfolio is written within the U.S. and also internationally. Cover is offered for specific perils and regions or countries.
Terrorism business can be written either ground-up or for primary or excess layers, with cover provided for U.S. and worldwide property risks,
but typically excluding nuclear, chemical, biological and cyber coverage in most territories. Cover is generally provided to medium to large
commercial and industrial enterprises. Policies are typically written for scheduled locations and exposure is controlled by setting limits on
aggregate exposure within a ‘blast zone’ radius. The term of these contracts is often multi-year reflecting the term of the underlying exposures.
Some national pools are also written, which may include nuclear, chemical and biological coverage and may have an element of life coverage.
Property political risk cover is written either ground-up or on an excess of loss basis. Coverage that the Group provides in the political risk book
is split between confiscation perils coverage and sovereign/quasi-sovereign obligor coverage. Confiscation perils coverage protects against CEND
and may be extended to include other perils. Sovereign/quasi-sovereign obligors coverage protects against the non-payment or non-honouring of
an obligation by a sovereign or quasi-sovereign entity. Cover is provided to medium to large commercial and industrial clients as well as bank and
commodity trading clients. The term of these contracts is often multi-year reflecting the term of the underlying exposures. The Group does not
provide cover against purely private obligor credit risk.
Property risk excess of loss is written on an excess of loss basis through UNL treaty arrangements, predominantly covering fire and allied perils
in addition to natural catastrophe exposure. The portfolio is written on a worldwide basis, with particular focus on the U.S. market.
Property retrocession is written on an excess of loss basis through treaty arrangements and covers elemental risks. Cover may be on a worldwide
or regional basis and may cover specific risks or all catastrophe perils. Coverage may be given on a UNL basis, meaning that loss payments are
linked directly to the ceding company’s own loss, or on an ILW basis, meaning that loss payments are linked to the overall industry insured loss
as measured by independent third-party loss index providers.
114 Lancashire Holdings Limited
Annual Report & Accounts 2018
115
www.lancashiregroup.com
www.lancashiregroup.com
115
Financial statements
Risk disclosures: continued
The Group is exposed to large natural catastrophe losses, such as windstorm and earthquake losses, primarily from assuming property
catastrophe excess of loss and property retrocession portfolio risks. Exposure to such events is controlled and measured by setting limits on
aggregate exposures in certain classes per geographic zone and through loss modelling. The accuracy of the latter exposure analysis is limited
by the quality of data and the effectiveness of the modelling. It is possible that a catastrophic event significantly exceeds the expected modelled
event loss. The Group’s appetite and exposure guidelines for large losses are set out on pages 112 and 113.
Reinsurance may be purchased to mitigate exposures to large natural catastrophe losses in the U.S., Canada and worldwide with certain
exclusions. Reinsurance may also be purchased to reduce the Group’s worldwide exposure to large risk losses. Reinsurance is typically purchased
on an excess of loss basis, however ILWs or quota share arrangements may be entered into.
III. Energy
Gross premiums written, for the year:
Worldwide offshore energy
Onshore energy
Gulf of Mexico offshore energy
Construction energy
Energy liabilities
Other energy
Total
2018
$m
63.8
14.6
10.6
4.1
3.1
6.8
103.0
2017
$m
66.6
3.5
24.4
(1.1)
3.0
5.4
101.8
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.
Onshore energy risks can include onshore Gulf of Mexico and worldwide energy installations and are largely subject to the same loss events
as the Gulf of Mexico offshore energy programmes.
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 modelling. The accuracy of this exposure analysis is limited by the quality of data and the effectiveness of the modelling. It is possible that a
catastrophic event significantly exceeds the expected modelled event loss. The Group’s appetite and exposure guidelines to large losses are set
out on pages 112 and 113.
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 standalone basis. Unlike the liability contained within the energy packages that Lancashire writes,
standalone 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.
IV. Aviation
Gross premiums written, for the year:
AV52
Aviation deductible
Other aviation
Total
2018
$m
19.4
11.1
2.5
33.0
2017
$m
16.8
–
0.1
16.9
AV52 is written on a risk-attaching excess of loss basis and provides coverage for third-party liability, excluding own passenger liability, resulting
from acts of war or hijack of aircraft. Cover excludes countries whose governments provide a backstop coverage, but does include some U.S.
commercial airlines.
Lancashire Holdings Limited
Annual Report & Accounts 2018
116 Lancashire Holdings Limited
Annual Report & Accounts 2018
116
Risk disclosures: continued
The Group is exposed to large natural catastrophe losses, such as windstorm and earthquake losses, primarily from assuming property
catastrophe excess of loss and property retrocession portfolio risks. Exposure to such events is controlled and measured by setting limits on
aggregate exposures in certain classes per geographic zone and through loss modelling. The accuracy of the latter exposure analysis is limited
by the quality of data and the effectiveness of the modelling. It is possible that a catastrophic event significantly exceeds the expected modelled
event loss. The Group’s appetite and exposure guidelines for large losses are set out on pages 112 and 113.
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.
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.
Onshore energy risks can include onshore Gulf of Mexico and worldwide energy installations and are largely subject to the same loss events
as the Gulf of Mexico offshore energy programmes.
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 modelling. The accuracy of this exposure analysis is limited by the quality of data and the effectiveness of the modelling. It is possible that a
catastrophic event significantly exceeds the expected modelled event loss. The Group’s appetite and exposure guidelines to large losses are set
out on pages 112 and 113.
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 standalone basis. Unlike the liability contained within the energy packages that Lancashire writes,
standalone 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.
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 include some U.S.
2018
$m
63.8
14.6
10.6
4.1
3.1
6.8
2017
$m
66.6
3.5
24.4
(1.1)
3.0
5.4
103.0
101.8
2018
$m
19.4
11.1
2.5
33.0
2017
$m
16.8
–
0.1
16.9
III. Energy
Gross premiums written, for the year:
Worldwide offshore energy
Onshore energy
Gulf of Mexico offshore energy
Construction energy
Energy liabilities
Other energy
Total
IV. Aviation
Gross premiums written, for the year:
Aviation deductible
Other aviation
AV52
Total
commercial airlines.
116 Lancashire Holdings Limited
Annual Report & Accounts 2018
Aviation deductible business is a specialist area with small individual limits normally up to $1.0 million and covers the deductible the airline would
normally have for each and every loss under the terms of their airline policy.
Reinsurance may be purchased to mitigate exposures to an AV52 event loss. Reinsurance is typically purchased on a treaty excess of loss basis.
Quota share reinsurance is typically used to reduce the Group’s exposure to aviation deductible business.
V. Marine
Gross premiums written, for the year:
Marine hull and total loss
Marine P&I clubs
Marine builders’ risk
Marine hull war
Marine excess of loss
Other marine
Total
2018
$m
14.0
7.3
6.0
5.5
(3.9)
2.2
31.1
2017
$m
20.0
10.1
13.9
7.1
13.4
3.1
67.6
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 P&I clubs is mostly
the reinsurance of the International Group of Protection and Indemnity Clubs and covers marine liabilities. Marine builders’ risk covers the
building of ocean-going vessels in specialised yards worldwide and their testing and commissioning. Marine hull war is mostly direct insurance of
loss of vessels from war, piracy or terrorist attack, with a very limited amount of facultative reinsurance. Marine excess of loss is written on a treaty
basis and covers ocean and inland marine risks.
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 wrecks.
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.
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 modelled 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 the Group’s
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
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 of the Group’s reserves are reported on an undiscounted basis.
117
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117
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Financial statements
Risk disclosures: continued
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. This represents management’s best estimate of ultimate loss
and loss adjustment expenses. The Group’s internal actuaries review the reserving assumptions and methodologies on a quarterly basis with loss
estimates being subject to a semi-annual independent review by external actuaries. The results of the independent review are 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, monitoring their development and approving any changes in reserving methodology and assumptions.
The extent to which the reserving process relies on management’s judgement is dependent on a number of factors including 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 pro-rata basis.
Generally, the Group writes most of its business on a direct excess of loss basis and the Group does not currently write a significant amount of
long-tail business.
Insurance versus reinsurance
Loss reserve calculations, whether reserving for direct insurance business or for reinsurance classes, 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. The estimates and judgements relied on in making
loss reserve calculations are based on a number of factors and may be revised as additional experience or other data becomes available. Loss
reserve calculations are also reviewed as new or improved methodologies are developed and as laws or regulations change.
Furthermore, as a business operating within a broker market, 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 management’s estimates of the ultimate losses.
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. 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.
Lancashire Holdings Limited
Annual Report & Accounts 2018
118 Lancashire Holdings Limited
Annual Report & Accounts 2018
118
Risk disclosures: continued
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. This represents management’s best estimate of ultimate loss
and loss adjustment expenses. The Group’s internal actuaries review the reserving assumptions and methodologies on a quarterly basis with loss
estimates being subject to a semi-annual independent review by external actuaries. The results of the independent review are 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, monitoring their development and approving any changes in reserving methodology and assumptions.
The extent to which the reserving process relies on management’s judgement is dependent on a number of factors including 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 pro-rata basis.
Generally, the Group writes most of its business on a direct excess of loss basis and the Group does not currently write a significant amount of
long-tail business.
Insurance versus reinsurance
Loss reserve calculations, whether reserving for direct insurance business or for reinsurance classes, 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. The estimates and judgements relied on in making
loss reserve calculations are based on a number of factors and may be revised as additional experience or other data becomes available. Loss
reserve calculations are also reviewed as new or improved methodologies are developed and as laws or regulations change.
Furthermore, as a business operating within a broker market, 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
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. 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
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
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.
to management’s estimates of the ultimate losses.
Short-tail versus long-tail
vendor binding authorities.
Excess of loss versus proportional
as actual experience becomes known.
Time lags
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 2018, management’s estimates for IBNR represented 39.3 per cent of total net loss reserves (31 December 2017 – 44.8 per
cent). The estimate relates to catastrophe events during recent years, in addition to potential claims on non-elemental risks where timing delays
in insured or cedant reporting may mean losses could have occurred of which the Group was not made aware by the balance sheet date.
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 the UK’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;
• reviews outputs 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.
118 Lancashire Holdings Limited
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119
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www.lancashiregroup.com
119
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 five external investment managers. The Group also has a diversified low volatility multi-
strategy portfolio of hedge funds and a small equity portfolio. The performance of the managers is monitored on an ongoing basis.
Within the Group’s investment guidelines are subsets of guidelines for the portion of funds required to meet near-term obligations and cash flow
needs following an extreme event. These guidelines add 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 and core plus portfolios and the portfolio duration is matched to the duration of the insurance
liabilities, within an agreed range. The core and core plus portfolios are invested in fixed maturity securities, fixed maturity funds and cash
and cash equivalents. The combined core and core plus portfolios 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 and core plus portfolios are typically held in the surplus portfolio. The surplus portfolio
is invested in fixed maturity securities, principal protected equity-linked notes, derivative instruments, cash and cash equivalents, equity securities
and hedge funds. In general, the duration of the surplus portfolio is slightly longer than the core or core plus portfolio.
The Group reviews the composition, duration and asset allocation of its investment portfolio on a regular basis in order to respond to changes in
interest rates and other market conditions. If certain asset classes are anticipated to produce a higher return within management’s risk tolerance,
an adjustment in asset allocation may be made. Conversely, if the risk profile is expected to move outside of tolerance levels, adjustments may be
made to reduce the risks in the portfolio.
The investment portfolio is currently structured to perform similarly in risk-on and risk-off environments. 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.
Lancashire Holdings Limited
Annual Report & Accounts 2018
120 Lancashire Holdings Limited
Annual Report & Accounts 2018
120
Risk disclosures: continued
II. Investment risk
Movements in investments resulting from changes in interest and inflation rates and currency exchange rates, amongst other factors, may lead
to an adverse impact on the value of the Group’s investment portfolio. Investment guidelines are established by the Investment Committee of
the Board of Directors to manage this risk. Investment guidelines set parameters within which the Group’s external investment managers must
operate. Important parameters include guidelines on permissible asset classes, duration ranges, credit quality, currency, maturity, sectors,
geographical, sovereign and issuer exposures. Compliance with guidelines is monitored on a monthly basis. Any adjustments to the investment
guidelines are approved by the Investment Committee and the Board of Directors.
The Group’s fixed maturity portfolios are managed by five external investment managers. The Group also has a diversified low volatility multi-
strategy portfolio of hedge funds and a small equity portfolio. The performance of the managers is monitored on an ongoing basis.
Within the Group’s investment guidelines are subsets of guidelines for the portion of funds required to meet near-term obligations and cash flow
needs following an extreme event. These guidelines add 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 and core plus portfolios and the portfolio duration is matched to the duration of the insurance
liabilities, within an agreed range. The core and core plus portfolios are invested in fixed maturity securities, fixed maturity funds and cash
and cash equivalents. The combined core and core plus portfolios 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 and core plus portfolios are typically held in the surplus portfolio. The surplus portfolio
is invested in fixed maturity securities, principal protected equity-linked notes, derivative instruments, cash and cash equivalents, equity securities
and hedge funds. In general, the duration of the surplus portfolio is slightly longer than the core or core plus portfolio.
The Group reviews the composition, duration and asset allocation of its investment portfolio on a regular basis in order to respond to changes in
interest rates and other market conditions. If certain asset classes are anticipated to produce a higher return within management’s risk tolerance,
an adjustment in asset allocation may be made. Conversely, if the risk profile is expected to move outside of tolerance levels, adjustments may be
made to reduce the risks in the portfolio.
The investment portfolio is currently structured to perform similarly in risk-on and risk-off environments. 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.
ERM framework.
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
The investment mix of the fixed maturity portfolios is as follows:
As at 31 December 2018
– 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
– Agency commercial 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 2017
– Short-term investments
– Fixed maturity funds
– U.S. treasuries
– Other government bonds
– U.S. municipal bonds
– U.S. government agency debt
– Asset backed securities
– U.S. government agency mortgage
backed securities
– Non-agency mortgage backed securities
– Non-agency commercial mortgage
backed securities
– Bank loans
– Corporate bonds
Total fixed maturity securities – AFS
Fixed maturity securities – at FVTPL
Total fixed maturity securities
Core
$m
48.1
11.4
69.6
15.9
1.0
13.1
16.5
4.8
3.8
–
0.4
–
200.1
384.7
–
384.7
Core
$m
8.8
31.0
100.7
16.4
1.9
17.1
15.9
8.4
2.2
–
–
168.7
371.1
–
371.1
%
3.2
0.8
4.7
1.0
0.1
0.9
1.1
0.3
0.3
–
–
–
13.5
25.9
–
25.9
%
0.6
2.1
6.8
1.1
0.1
1.2
1.1
0.6
0.1
–
–
11.4
25.1
–
25.1
Core plus
$m
175.6
–
113.1
29.5
4.4
69.6
62.2
15.0
10.4
1.9
–
–
277.9
759.6
–
759.6
Core plus
$m
98.7
–
118.2
13.4
4.1
34.5
56.7
22.4
3.3
0.2
–
264.7
616.2
–
616.2
%
11.8
–
7.6
2.0
0.3
4.7
4.2
1.0
0.7
0.1
–
–
18.7
51.1
–
51.1
%
6.7
–
8.0
0.9
0.3
2.3
3.8
1.5
0.2
–
–
18.0
41.7
–
41.7
Surplus
$m
1.8
–
3.9
13.3
–
5.4
50.6
60.1
6.9
3.3
0.1
109.1
43.6
298.1
45.0
343.1
Surplus
$m
3.6
–
16.8
41.6
–
18.9
71.4
110.2
7.7
–
106.7
88.0
464.9
25.7
490.6
%
0.1
–
0.3
0.9
–
0.4
3.4
4.0
0.5
0.2
–
7.3
2.9
20.0
3.0
23.0
%
0.2
–
1.1
2.8
–
1.3
4.8
7.6
0.5
–
7.2
6.0
31.5
1.7
33.2
Total
$m
225.5
11.4
186.6
58.7
5.4
88.1
129.3
79.9
21.1
5.2
0.5
109.1
521.6
1,442.4
45.0
1,487.4
Total
$m
111.1
31.0
235.7
71.4
6.0
70.5
144.0
141.0
13.2
0.2
106.7
521.4
1,452.2
25.7
1,477.9
%
15.1
0.8
12.6
3.9
0.4
6.0
8.7
5.3
1.5
0.3
–
7.3
35.1
97.0
3.0
100.0
%
7.5
2.1
15.9
4.8
0.4
4.8
9.7
9.7
0.8
–
7.2
35.4
98.3
1.7
100.0
120 Lancashire Holdings Limited
Annual Report & Accounts 2018
121
www.lancashiregroup.com
www.lancashiregroup.com
121
Financial statements
Risk disclosures: continued
Bank loans, corporate bonds, fixed maturity securities at FVTPL and other government bonds by country are as follows:
As at 31 December 2018
United States
United Kingdom
Canada
Japan
Netherlands
France
Switzerland
Germany
Spain
Sweden
Denmark
Supranational
Australia
Italy
Belgium
Other
Total
Financials
$m
Other
industries
$m
171.7
33.3
10.7
17.9
4.6
13.0
7.8
1.7
9.8
4.1
4.9
7.0
6.8
1.5
–
5.2
300.0
295.7
18.7
10.9
7.8
8.6
2.2
7.5
3.3
0.7
–
–
–
–
3.5
4.0
12.8
375.7
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 2017
United States
Canada
United Kingdom
Netherlands
Germany
France
Australia
Japan
Sweden
Luxembourg
Denmark
Switzerland
India
Spain
China
Other
Total
Financials
$m
Other
industries
$m
183.4
13.4
15.5
9.6
5.2
15.0
14.5
12.6
6.9
1.5
2.1
3.0
–
3.5
–
5.9
292.1
300.2
13.6
12.3
10.4
5.7
3.5
0.2
2.6
–
5.3
0.3
2.6
–
0.7
1.2
3.1
361.7
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.
Total1
$m
467.4
52.0
21.6
25.7
13.2
15.2
15.3
5.0
10.5
4.1
4.9
7.0
6.8
5.0
4.0
18.0
675.7
Total1
$m
483.6
27.0
27.8
20.0
10.9
18.5
14.7
15.2
6.9
6.8
2.4
5.6
–
4.2
1.2
9.0
653.8
Other
government
bonds
$m
–
0.1
19.8
–
7.2
1.8
–
7.5
–
6.1
3.4
–
–
–
0.5
12.3
58.7
Other
government
bonds
$m
–
19.3
2.0
6.3
13.9
5.1
1.0
–
5.1
–
3.9
–
4.2
–
2.7
7.9
71.4
Total2
$m
467.4
52.1
41.4
25.7
20.4
17.0
15.3
12.5
10.5
10.2
8.3
7.0
6.8
5.0
4.5
30.3
734.4
Total2
$m
483.6
46.3
29.8
26.3
24.8
23.6
15.7
15.2
12.0
6.8
6.3
5.6
4.2
4.2
3.9
16.9
725.2
Lancashire Holdings Limited
Annual Report & Accounts 2018
122 Lancashire Holdings Limited
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122
Risk disclosures: continued
Financials
$m
171.7
33.3
10.7
17.9
4.6
13.0
7.8
1.7
9.8
4.1
4.9
7.0
6.8
1.5
–
5.2
300.0
Financials
$m
183.4
13.4
15.5
9.6
5.2
15.0
14.5
12.6
6.9
1.5
2.1
3.0
3.5
–
–
5.9
Other
industries
$m
295.7
18.7
10.9
7.8
8.6
2.2
7.5
3.3
0.7
–
–
–
–
3.5
4.0
12.8
375.7
Other
industries
$m
300.2
13.6
12.3
10.4
5.7
3.5
0.2
2.6
–
5.3
0.3
2.6
–
0.7
1.2
3.1
Total1
$m
467.4
52.0
21.6
25.7
13.2
15.2
15.3
5.0
10.5
4.1
4.9
7.0
6.8
5.0
4.0
18.0
675.7
Total1
$m
483.6
27.0
27.8
20.0
10.9
18.5
14.7
15.2
6.9
6.8
2.4
5.6
–
4.2
1.2
9.0
Other
government
bonds
$m
–
0.1
19.8
–
7.2
1.8
7.5
6.1
3.4
–
–
–
–
–
0.5
12.3
58.7
–
19.3
2.0
6.3
13.9
5.1
1.0
5.1
3.9
4.2
–
–
–
–
2.7
7.9
71.4
Other
government
bonds
$m
Total2
$m
467.4
52.1
41.4
25.7
20.4
17.0
15.3
12.5
10.5
10.2
8.3
7.0
6.8
5.0
4.5
30.3
734.4
Total2
$m
483.6
46.3
29.8
26.3
24.8
23.6
15.7
15.2
12.0
6.8
6.3
5.6
4.2
4.2
3.9
16.9
725.2
As at 31 December 2018
United States
United Kingdom
Canada
Japan
Netherlands
France
Switzerland
Germany
Spain
Sweden
Denmark
Supranational
Australia
Italy
Belgium
Other
Total
As at 31 December 2017
United States
Canada
United Kingdom
Netherlands
Germany
France
Australia
Japan
Sweden
Luxembourg
Denmark
Switzerland
India
Spain
China
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.
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.
292.1
361.7
653.8
Bank loans, corporate bonds, fixed maturity securities at FVTPL and other government bonds by country are as follows:
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
2018
$m
344.8
293.0
30.9
7.0
675.7
%
51.0
43.4
4.6
1.0
100.0
2017
$m
329.1
289.5
32.6
2.6
653.8
%
50.3
44.3
5.0
0.4
100.0
The Group’s net asset value is directly impacted by movements in the fair value of investments held. Values can be impacted by movements in
interest rates, credit ratings, exchange rates, current economic environment and outlook.
The Group’s investment portfolio is mainly comprised of fixed maturity securities and cash and cash equivalents. Fixed maturity funds are
overseas deposits held by the syndicates 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 a hedge fund portfolio as well as a small equity portfolio. 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)
2018
$m
(22.4)
(16.8)
(11.2)
(5.6)
6.4
12.7
19.1
25.5
%
(1.5 )
(1.1 )
(0.8 )
(0.4 )
0.4
0.9
1.3
1.7
2017
$m
(28.5)
(21.4)
(14.3)
(7.1)
7.2
14.4
21.6
28.8
%
(1.9)
(1.4)
(1.0)
(0.5)
0.5
1.0
1.5
1.9
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 modelled 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 for 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.
2018
years
1.8
1.7
1.3
1.6
2017
years
1.7
1.7
2.0
1.8
The overall duration for fixed maturity, managed cash and cash equivalents and certain derivatives is 1.5 years (2017 – 1.7 years).
In addition to duration management, the Group monitors VaR 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 modelling 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.
122 Lancashire Holdings Limited
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123
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.
2018
2017
$m
26.0
% of shareholders’
equity
2.4
$m
27.0
% of shareholders’
equity
2.4
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 (losses) on the Group’s derivative financial instruments recognised in the consolidated statement of comprehensive income (loss)
are as follows:
As at 31 December 2018
Interest rate futures
Forward foreign currency contracts
Interest rate swaps
Total
As at 31 December 2017
Interest rate futures
Forward foreign currency contracts
Total
Net realised
losses
$m
Net foreign
exchange
gains
$m
(1.0 )
–
–
(1.0 )
Net realised
losses
$m
(0.7 )
–
(0.7 )
–
1.6
–
1.6
Net foreign
exchange
losses
$m
–
(0.7)
(0.7)
Financing
gains
$m
–
–
0.9
0.9
Financing
gains
$m
–
–
–
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
2018
2017
Other
investments
$m
Other
receivables
$m
Other
payables
$m
Interest
rate swaps
$m
Other
investments
$m
Other
receivables
$m
Other
payables
$m
Interest
rate swaps
$m
(0.3 )
–
(0.3 )
1.1
–
1.1
(1.0)
–
(1.0)
–
(0.4)
(0.4)
(0.5)
–
(0.5)
1.6
–
1.6
(0.1)
–
(0.1)
–
(2.0)
(2.0)
Lancashire Holdings Limited
Annual Report & Accounts 2018
124 Lancashire Holdings Limited
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124
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.
Derivative financial instruments
% of shareholders’
% of shareholders’
2018
$m
26.0
equity
2.4
2017
$m
27.0
equity
2.4
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:
The net gains (losses) on the Group’s derivative financial instruments recognised in the consolidated statement of comprehensive income (loss)
c. Forward foreign currency contracts; and
a. Futures;
b. Options;
d. Swaps.
are as follows:
Forward foreign currency contracts
As at 31 December 2018
Interest rate futures
Interest rate swaps
Total
As at 31 December 2017
Interest rate futures
Forward foreign currency contracts
Total
Net realised
Net foreign
exchange
losses
$m
(1.0 )
–
–
(1.0 )
losses
$m
(0.7 )
–
(0.7 )
gains
$m
1.6
–
–
1.6
losses
$m
–
(0.7)
(0.7)
Financing
gains
$m
–
–
0.9
0.9
–
–
–
Financing
gains
$m
Net realised
Net foreign
exchange
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
$m
(0.3 )
–
(0.3 )
Other
Other
investments
receivables
Interest
rate swaps
Other
Other
investments
receivables
2018
$m
1.1
–
1.1
Other
payables
$m
(1.0)
–
(1.0)
$m
–
(0.4)
(0.4)
$m
(0.5)
–
(0.5)
2017
$m
1.6
–
1.6
Other
payables
$m
(0.1)
–
(0.1)
Interest
rate swaps
$m
–
(2.0)
(2.0)
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.
The Group’s exposure to interest rate futures are as follows:
As at 31 December
Interest rate futures
Total
Notional
long
$m
69.1
69.1
2018
Notional
short
$m
94.1
94.1
Net notional
long (short)
$m
(25.0)
(25.0)
Notional
long
$m
100.1
100.1
2017
Notional
short
$m
103.5
103.5
Net notional
long (short)
$m
(3.4)
(3.4)
B. Options
The Group’s investment guidelines permit the use of exchange-traded options on U.S. treasury futures and Euro dollar 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 2018 and 2017.
The investment guidelines also restrict the maximum notional options exposure as a percentage of the investment portfolio’s estimated fair value.
124 Lancashire Holdings Limited
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125
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125
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, insurance related currency exposures and/or expenses.
Forward contracts expose the Group to credit, market and liquidity risks. Credit risk arises from the potential inability of counterparties to
perform under the terms of the contract. The Group is exposed to market risk to the extent that adverse changes occur in the exchange rate of
the underlying foreign currency. Liquidity risk represents the possibility that the Group may not be able to rapidly adjust the size of its forward
positions at a reasonable price in times of high volatility and financial stress. These risks are mitigated by requiring a minimum counterparty
credit quality, restricting the maximum notional exposure as a percentage of the investment portfolio’s estimated fair value and restricting
exposures to foreign currencies, individually and in aggregate, as a percentage of the investment portfolio’s estimated fair value.
The notional amount of a derivative contract is the underlying quantity upon which payment obligations are calculated. A long position is
equivalent to buying the underlying currency whereas a short position is equivalent to having sold the underlying currency.
The Group has the following open forward foreign currency contracts:
As at 31 December
Canadian Dollar
Euro
Australian Dollar
Japanese Yen
Swedish Krona
Mexican Peso
Malaysian Ringgit
British Pound
Total
Notional
long
$m
2018
Notional
short
$m
Net notional
long (short)
$m
Notional
long
$m
2017
Notional
short
$m
Net notional
long (short)
$m
–
22.9
–
–
–
0.7
3.9
67.3
94.8
20.3
38.0
5.8
3.6
2.8
–
–
3.5
74.0
(20.3)
(15.1)
(5.8)
(3.6)
(2.8)
0.7
3.9
63.8
20.8
–
24.0
–
–
–
1.7
4.9
53.5
84.1
26.9
44.6
7.2
3.9
3.0
–
–
4.0
89.6
(26.9)
(20.6)
(7.2)
(3.9)
(3.0)
1.7
4.9
49.5
(5.5)
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 to 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 2018 and 2017.
Through the use of interest rate swaps, the Group has fixed the interest rate on Lancashire’s subordinated loan notes until December 2020. As at
31 December 2018 the notional amount of interest rate swaps held for hedging purposes was $124.5 million (31 December 2017 – $125.8 million).
The Group may utilise credit default swaps to add or reduce credit risk to an individual issuer, or a basket of issuers, without investing directly
in their securities. The group did not hold any credit default swaps at 31 December 2018 or 31 December 2017.
III. Debt risk
The Group has issued long-term debt as described in note 18. The LHL subordinated loan notes due in 2035 bear interest at a floating rate
that is reset on a quarterly basis, plus a fixed margin of 3.70 per cent. The Group is subject to interest rate risk on the coupon payments of these
subordinated loan notes. The Group has mitigated the interest rate risk on the LHL subordinated loan notes by entering into interest rate swap
contracts on the following loan notes:
Subordinated loan notes $97.0 million
Subordinated loan notes €24.0 million
Maturity date
Interest hedged
15 December 2035
15 June 2035
100%
100%
The interest rate swaps expire on 15 December 2020, therefore until 2020 the Group has a fixed interest rate on the LHL subordinated loan
notes due in 2035.
Lancashire Holdings Limited
Annual Report & Accounts 2018
126 Lancashire Holdings Limited
Annual Report & Accounts 2018
126
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, insurance related currency exposures and/or expenses.
Forward contracts expose the Group to credit, market and liquidity risks. Credit risk arises from the potential inability of counterparties to
perform under the terms of the contract. The Group is exposed to market risk to the extent that adverse changes occur in the exchange rate of
the underlying foreign currency. Liquidity risk represents the possibility that the Group may not be able to rapidly adjust the size of its forward
positions at a reasonable price in times of high volatility and financial stress. These risks are mitigated by requiring a minimum counterparty
credit quality, restricting the maximum notional exposure as a percentage of the investment portfolio’s estimated fair value and restricting
exposures to foreign currencies, individually and in aggregate, as a percentage of the investment portfolio’s estimated fair value.
The notional amount of a derivative contract is the underlying quantity upon which payment obligations are calculated. A long position is
equivalent to buying the underlying currency whereas a short position is equivalent to having sold the underlying currency.
The Group has the following open forward foreign currency contracts:
As at 31 December
Canadian Dollar
Euro
Australian Dollar
Japanese Yen
Swedish Krona
Mexican Peso
Malaysian Ringgit
British Pound
Total
D. Swaps
Notional
long
$m
22.9
–
–
–
–
0.7
3.9
67.3
94.8
2018
Notional
Net notional
long (short)
short
$m
20.3
38.0
5.8
3.6
2.8
–
–
3.5
74.0
$m
(20.3)
(15.1)
(5.8)
(3.6)
(2.8)
0.7
3.9
63.8
20.8
Notional
long
$m
24.0
–
–
–
–
1.7
4.9
53.5
84.1
2017
Notional
short
$m
26.9
44.6
7.2
3.9
3.0
–
–
4.0
89.6
Net notional
long (short)
$m
(26.9)
(20.6)
(7.2)
(3.9)
(3.0)
1.7
4.9
49.5
(5.5)
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 to 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 2018 and 2017.
Through the use of interest rate swaps, the Group has fixed the interest rate on Lancashire’s subordinated loan notes until December 2020. As at
31 December 2018 the notional amount of interest rate swaps held for hedging purposes was $124.5 million (31 December 2017 – $125.8 million).
The Group may utilise credit default swaps to add or reduce credit risk to an individual issuer, or a basket of issuers, without investing directly
in their securities. The group did not hold any credit default swaps at 31 December 2018 or 31 December 2017.
The Group has issued long-term debt as described in note 18. The LHL subordinated loan notes due in 2035 bear interest at a floating rate
that is reset on a quarterly basis, plus a fixed margin of 3.70 per cent. The Group is subject to interest rate risk on the coupon payments of these
subordinated loan notes. The Group has mitigated the interest rate risk on the LHL subordinated loan notes by entering into interest rate swap
The interest rate swaps expire on 15 December 2020, therefore until 2020 the Group has a fixed interest rate on the LHL subordinated loan
Maturity date
Interest hedged
15 December 2035
15 June 2035
100%
100%
III. Debt risk
contracts on the following loan notes:
Subordinated loan notes $97.0 million
Subordinated loan notes €24.0 million
notes due in 2035.
126 Lancashire Holdings Limited
Annual Report & Accounts 2018
The senior unsecured notes maturing 1 October 2022 bear interest at a fixed rate of 5.70 per cent and therefore the Group is not exposed to cash
flow interest rate risk on this long-term debt.
The Group is subject to interest rate risk on the coupon payments on Cathedral’s long-term debt described in note 18. An increase of 100 basis
points on the EURIBOR and LIBOR three-month deposit rates would result in an increase in the interest expense on long-term debt for the
Group of approximately $0.7 million on an annual basis.
IV. Currency risk
The Group underwrites from two locations, Bermuda and London, although risks are assumed on a worldwide basis. Risks assumed are
predominantly denominated in U.S. dollars.
The Group is exposed to currency risk to the extent its assets are denominated in different currencies to its liabilities. The Group is also exposed
to non-retranslation risk on non-monetary assets such as unearned premiums and deferred acquisition costs. Exchange gains and losses can
impact profit or loss.
The Group hedges monetary non-U.S. dollar liabilities primarily with non-U.S. dollar assets, but may also use derivatives to mitigate foreign
currency exposures. The Group’s main foreign currency exposure relates to its insurance obligations, cash holdings, investments, premiums
receivable, dividends payable and the Euro denominated subordinated loan notes discussed in note 18. The Group uses forward foreign currency
contracts for the purposes of managing currency exposures. See page 126 for a listing of the Group’s open forward foreign currency contracts.
The Group’s assets and liabilities, categorised by currency at their translated carrying amount, are as follows:
Assets
Cash and cash equivalents
Accrued interest receivable
Investments
Inwards premiums receivable from insureds
and cedants
Reinsurance assets
Other receivables
Investment in associate
Property, plant and equipment
Deferred acquisition costs
Intangible assets
Total assets as at 31 December 2018
Liabilities
Losses and loss adjustment expenses
Unearned premiums
Insurance contracts – other payables
Amounts payable to reinsurers
Deferred acquisition costs ceded
Other payables
Corporation tax payable
Deferred tax liability
Interest rate swap
Long-term debt
Total liabilities as at 31 December 2018
U.S.$
$m
86.0
6.6
1,546.0
270.9
361.1
26.7
67.1
0.2
48.4
153.8
2,566.8
U.S.$
$m
685.4
265.8
26.9
75.8
4.7
23.9
–
7.8
(0.8)
284.4
1,373.9
Sterling
$m
15.2
0.1
18.0
11.2
13.6
8.2
–
1.2
8.0
–
75.5
Sterling
$m
59.5
25.4
4.7
2.8
–
21.0
0.9
3.4
–
–
117.7
127
Euro
$m
19.4
0.1
69.8
20.6
12.1
–
–
–
11.6
–
133.6
Japanese Yen
$m
9.0
–
–
5.3
–
–
–
–
1.0
–
15.3
Euro
$m
Japanese Yen
$m
113.7
43.3
2.9
2.5
2.1
0.4
–
–
1.2
39.9
206.0
19.7
10.4
–
–
–
–
–
–
–
–
30.1
Other
$m
25.0
–
25.2
10.1
2.6
0.4
–
–
5.2
–
68.5
Other
$m
36.7
25.7
1.5
0.2
0.3
0.1
–
–
–
–
64.5
Total
$m
154.6
6.8
1,659.0
318.1
389.4
35.3
67.1
1.4
74.2
153.8
2,859.7
Total
$m
915.0
370.6
36.0
81.3
7.1
45.4
0.9
11.2
0.4
324.3
1,792.2
www.lancashiregroup.com
www.lancashiregroup.com
127
Financial statements
Risk disclosures: continued
Assets
Cash and cash equivalents
Accrued interest receivable
Investments
Inwards premiums receivable from insureds
and cedants
Reinsurance assets
Other receivables
Investment in associate
Property, plant and equipment
Deferred acquisition costs
Intangible assets
Total assets as at 31 December 2017
Liabilities
Losses and loss adjustment expenses
Unearned premiums
Insurance contracts – other payables
Amounts payable to reinsurers
Deferred acquisition costs ceded
Other payables
Corporation tax payable
Deferred tax liability
Interest rate swap
Long-term debt
Total liabilities as at 31 December 2017
U.S.$
$m
158.1
6.1
1,538.2
252.1
331.9
39.3
59.4
0.3
55.2
153.8
2,594.4
U.S.$
$m
773.5
259.7
30.4
62.8
2.1
30.8
–
7.8
0.2
283.3
1,450.6
Sterling
$m
16.9
–
20.8
13.4
6.1
2.5
–
2.3
6.5
–
68.5
Euro
$m
33.6
–
82.1
19.7
6.1
–
–
–
9.4
–
150.9
Japanese Yen
$m
11.7
–
–
2.3
–
–
–
–
0.9
–
14.9
Sterling
$m
Euro
$m
Japanese Yen
$m
38.5
20.7
5.8
1.5
–
16.4
2.8
8.7
–
–
94.4
72.9
37.9
2.6
1.0
0.3
0.7
–
–
1.8
43.0
160.2
8.6
8.6
–
–
–
–
–
–
–
–
17.2
Other
$m
36.2
–
13.5
10.4
1.9
0.6
–
–
4.7
–
67.3
Other
$m
40.0
24.0
1.9
0.2
0.1
0.1
–
–
–
–
66.3
Total
$m
256.5
6.1
1,654.6
297.9
346.0
42.4
59.4
2.6
76.7
153.8
2,896.0
Total
$m
933.5
350.9
40.7
65.5
2.5
48.0
2.8
16.5
2.0
326.3
1,788.7
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 $5.4 million (2017 – $3.5 million).
Lancashire Holdings Limited
Annual Report & Accounts 2018
128 Lancashire Holdings Limited
Annual Report & Accounts 2018
128
Risk disclosures: continued
Inwards premiums receivable from insureds
Assets
Cash and cash equivalents
Accrued interest receivable
Investments
and cedants
Reinsurance assets
Other receivables
Investment in associate
Property, plant and equipment
Deferred acquisition costs
Intangible assets
Total assets as at 31 December 2017
Liabilities
Losses and loss adjustment expenses
Unearned premiums
Insurance contracts – other payables
Amounts payable to reinsurers
Deferred acquisition costs ceded
Other payables
Corporation tax payable
Deferred tax liability
Interest rate swap
Long-term debt
U.S.$
$m
158.1
6.1
1,538.2
252.1
331.9
39.3
59.4
0.3
55.2
153.8
2,594.4
U.S.$
$m
773.5
259.7
30.4
62.8
2.1
30.8
–
7.8
0.2
283.3
1,450.6
Sterling
$m
16.9
–
20.8
13.4
6.1
2.5
–
2.3
6.5
–
68.5
38.5
20.7
5.8
1.5
–
16.4
2.8
8.7
–
–
94.4
Sterling
$m
Euro
$m
33.6
–
82.1
19.7
6.1
–
–
–
–
9.4
Euro
$m
72.9
37.9
2.6
1.0
0.3
0.7
–
–
150.9
1.8
43.0
160.2
Japanese Yen
$m
11.7
2.3
–
–
–
–
–
–
0.9
–
14.9
$m
8.6
8.6
–
–
–
–
–
–
–
–
Other
$m
36.2
–
13.5
10.4
1.9
0.6
–
–
–
4.7
67.3
Other
$m
40.0
24.0
1.9
0.2
0.1
0.1
–
–
–
–
Total
$m
256.5
6.1
1,654.6
297.9
346.0
42.4
59.4
2.6
76.7
153.8
2,896.0
Total
$m
933.5
350.9
40.7
65.5
2.5
48.0
2.8
16.5
2.0
326.3
1,788.7
Total liabilities as at 31 December 2017
17.2
66.3
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 $5.4 million (2017 – $3.5 million).
C. Liquidity risk
Liquidity risk is the risk that cash may not be available to pay obligations when they are due without incurring an unreasonable cost. The Group’s
main exposures to liquidity risk are with respect to its insurance and investment activities. The Group is exposed if proceeds from financial assets
are not sufficient to fund obligations arising from its insurance contracts. The Group can be exposed to daily calls on its available investment
assets, principally to settle insurance claims and to fund trust accounts following a large catastrophe loss.
Exposures in relation to insurance activities are as follows:
• large catastrophic events, or multiple medium-sized events in quick succession, resulting in a requirement to pay a large value of claims within
a relatively short time frame or fund trust accounts;
• failure of insureds or cedants to meet their contractual obligations with respect to the payment of premiums in a timely manner; and
• failure of reinsurers to meet their contractual obligations with respect to the payment of claims in a timely manner.
Exposures in relation to investment activities are as follows:
• adverse market movements and/or a duration mismatch to obligations, resulting in investments being disposed of at a significant realised loss;
and
Japanese Yen
• 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 2018
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 2017
Less than one year
Between one and two years
Between two and three years
Between three and four years
Between four and five years
Over five years
Asset backed and mortgage backed securities
Total fixed maturity securities
Core
$m
100.2
104.9
76.2
30.0
34.4
13.5
25.5
384.7
Core
$m
89.5
102.7
95.6
18.8
27.3
10.7
26.5
371.1
Core plus
$m
245.3
156.0
89.1
66.4
75.3
38.0
89.5
759.6
Core plus
$m
211.0
84.1
103.1
44.1
49.4
41.9
82.6
616.2
Surplus
$m
11.9
35.3
20.5
18.0
28.4
108.0
121.0
343.1
Surplus
$m
12.6
45.5
27.2
40.4
48.9
126.7
189.3
490.6
The maturity profile of the insurance contracts and financial liabilities of the Group is as follows:
As at 31 December 2018
Losses and loss adjustment expenses
Insurance contracts – other payables
Amounts payable to reinsurers
Other payables
Interest rate swap
Long-term debt1
Total
Balance sheet
$m
Less than one
$m
One to three
$m
Three to five
$m
Over five
$m
Years until liability becomes due – undiscounted values
915.0
36.0
81.3
45.4
0.4
324.3
1,402.4
497.9
35.7
81.3
45.4
0.1
16.2
676.6
269.4
0.3
–
–
0.3
37.3
307.3
89.9
–
–
–
–
160.0
249.9
57.8
–
–
–
–
344.3
402.1
1. The maturity profile of long-term debt includes accrued interest.
Total
$m
357.4
296.2
185.8
114.4
138.1
159.5
236.0
1,487.4
Total
$m
313.1
232.3
225.9
103.3
125.6
179.3
298.4
1,477.9
Total
$m
915.0
36.0
81.3
45.4
0.4
557.8
1,635.9
128 Lancashire Holdings Limited
Annual Report & Accounts 2018
129
www.lancashiregroup.com
www.lancashiregroup.com
129
Financial statements
Risk disclosures: continued
As at 31 December 2017
Losses and loss adjustment expenses
Insurance contracts – other payables
Amounts payable to reinsurers
Other payables
Interest rate swap
Long-term debt1
Total
Balance sheet
$m
Less than one
$m
One to three
$m
Three to five
$m
Over five
$m
Years until liability becomes due – undiscounted values
933.5
40.7
65.5
48.0
2.0
326.3
1,416.0
524.3
37.5
65.5
48.0
0.9
15.1
691.3
265.6
3.2
–
–
1.1
36.2
306.1
88.0
–
–
–
–
167.6
255.6
55.6
–
–
–
–
354.8
410.4
Total
$m
933.5
40.7
65.5
48.0
2.0
573.7
1,663.4
1. The maturity profile of long-term debt includes accrued interest.
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, liquid securities, sufficient to meet its insurance liabilities and
other near-term liquidity requirements. The creation of the core and core plus portfolios with their 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.
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 15.0 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 117.
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.
Lancashire Holdings Limited
Annual Report & Accounts 2018
130 Lancashire Holdings Limited
Annual Report & Accounts 2018
130
Risk disclosures: continued
As at 31 December 2017
Losses and loss adjustment expenses
Insurance contracts – other payables
Amounts payable to reinsurers
Other payables
Interest rate swap
Long-term debt1
Total
Balance sheet
Less than one
One to three
Three to five
Years until liability becomes due – undiscounted values
$m
933.5
40.7
65.5
48.0
2.0
326.3
1,416.0
$m
524.3
37.5
65.5
48.0
0.9
15.1
691.3
$m
265.6
3.2
–
–
1.1
36.2
306.1
$m
88.0
–
–
–
–
167.6
255.6
Over five
$m
55.6
–
–
–
–
354.8
410.4
Total
$m
933.5
40.7
65.5
48.0
2.0
573.7
1,663.4
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, liquid securities, sufficient to meet its insurance liabilities and
other near-term liquidity requirements. The creation of the core and core plus portfolios with their 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.
D. Credit risk
from reinsurers.
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
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 15.0 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 117.
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.
1. The maturity profile of long-term debt includes accrued interest.
1. Reinsurance recoveries classified as ‘other’ include $100.5 million of reserves that are fully collateralised.
As at 31 December 2018
AAA
AA+, AA, AA-
A+, A, A-
BBB+, BBB, BBB-
Other1
Total
As at 31 December 2017
AAA
AA+, AA, AA-
A+, A, A-
BBB+, BBB, BBB-
Other1
Total
1. Reinsurance recoveries classified as ‘other’ include $93.6 million of reserves that are fully collateralised.
The counterparty to the Group’s long-term debt interest rate swaps is currently rated A by S&P.
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
Cash and fixed
maturity securities
$m
Inwards
premiums
receivable and
other receivables
$m
335.9
586.2
402.6
219.7
97.6
1,642.0
–
–
87.0
–
276.2
363.2
Cash and fixed
maturity securities
$m
Inwards
premiums
receivable and
other receivables
$m
368.0
621.8
403.7
237.3
103.6
1,734.4
–
–
69.5
–
291.5
361.0
2018
$m
8.5
5.5
8.4
22.4
Reinsurance
recoveries
$m
–
3.6
208.3
–
111.0
322.9
Reinsurance
recoveries
$m
–
2.7
177.0
–
104.4
284.1
2017
$m
15.3
5.3
14.0
34.6
Provisions of $2.9 million (2017 – $2.4 million) have been made for impaired or irrecoverable balances and $0.5 million (2017 – $1.4 million)
was charged to the consolidated statement of comprehensive income (loss) in respect of bad debts.
E. Operational risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes or systems. The Group and its subsidiaries have identified
and evaluated their key operational risks and these are incorporated in the risk registers and modelled within the subsidiaries’ capital models.
The Group has also established, and monitors compliance with, internal operational risk tolerances. The RRC reviews operational risk on at
least an annual basis and operational risk is covered in the Group CRO’s quarterly ORSA report to the LHL Board and entity boards and in
the Cathedral RCCC 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.
130 Lancashire Holdings Limited
Annual Report & Accounts 2018
131
www.lancashiregroup.com
www.lancashiregroup.com
131
Financial statements
Risk disclosures: continued
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.
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
2018
$m
1,067.2
324.3
1,391.5
(153.8)
1,237.7
2017
$m
1,106.9
326.3
1,433.2
(153.8)
1,279.4
Risks associated with the effectiveness of the Group’s capital management are mitigated as follows:
• regular monitoring of current and prospective regulatory and rating agency capital requirements;
• regular discussion with the Cathedral management team regarding Lloyd’s capital requirements;
• oversight of capital requirements by the Board of Directors;
• ability to purchase sufficient, cost effective reinsurance;
• maintaining contact with vendors, regulators and rating agencies in order to stay abreast of upcoming developments; and
• participation in industry groups such as the International 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 maximise risk-adjusted returns for its shareholders across the cycle. The return is generated within a broad framework
of risk parameters. The return is measured by management in terms of the IRR of the increase in FCBVS in the period adjusted for dividends
accrued. This aim is a long-term goal, acknowledging that management expects both higher and lower results in the shorter term. The cyclicality
and volatility of the insurance market is expected to be the largest driver of this pattern. Management monitors these peaks and troughs,
adjusting the Group’s portfolio to make the most effective use of available capital and seeking to maximise the risk-adjusted return.
Lancashire Holdings Limited
Annual Report & Accounts 2018
132 Lancashire Holdings Limited
Annual Report & Accounts 2018
132
The Group addresses the risks associated with the planning and execution of the business plan through a combination of the following:
31 December 2018
31 December 2017
IRR achieved is as follows:
31 December 2018
31 December 2017
IRR achieved in excess of the three-month treasury yield is as follows:
Annual
return
%
2.4
(5.9 )
Annual
return
%
0.5
(6.8 )
Compound
annual return
%
17.5
17.7
Compound
annual return
%
16.4
16.7
Inception to
date return
%
716.3
608.2
Inception to
date return
%
701.1
595.2
The primary source of capital used by the Group is equity shareholders’ funds and borrowings (note 18). 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.
Between 2014 and 2018 the PRA operated as the Group’s Solvency II supervisor and the Group was subject to the requirements of the UK’s
Solvency II regime. Effective 1 January 2019, the Company will establish its Group supervisory and tax domiciles in Bermuda and therefore be
supervised by the BMA. This change will not affect the Group’s UK regulated insurance entities, which will continue to be regulated by the PRA
and the FCA. Additionally, CUL is also regulated by Lloyd’s.
Under Solvency II the basis for assessing capital and solvency comprises a market-consistent economic balance sheet and a SCR, using either
an internal model or the standard formula. Both the Group and LUK calculate their SCR using the standard formula. The Group’s and LUK’s
Solvency II own funds are primarily comprised of Tier 1 items for the years ended 31 December 2018 and 31 December 2017. Tier 1 capital is the
highest quality capital under Solvency II with the greatest loss absorbing capacity, comprising share capital and retained earnings. For the years
ended 31 December 2018 and 2017 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
has been assessed as equivalent to the Solvency II regime. LICL’s capital requirement is calculated using the BSCR standard formula model.
For the years ended 31 December 2018 and 2017, 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 2019
calendar year the Group’s corporate member’s FAL requirement was set at 67.8 per cent (2018 – 66.5 per cent) of underwriting capacity
supported. Further solvency adjustments are made to allow for open year profits and losses of the syndicates on which the corporate member
participates. The Group has met its FAL requirement of £187.8 million as at 31 December 2018 (31 December 2017 – £184.3 million).
For the years ended 31 December 2018 and 2017 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.
Risk disclosures: continued
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
• 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.
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
2018
$m
1,067.2
324.3
1,391.5
(153.8)
1,237.7
2017
$m
1,106.9
326.3
1,433.2
(153.8)
1,279.4
Risks associated with the effectiveness of the Group’s capital management are mitigated as follows:
• regular monitoring of current and prospective regulatory and rating agency capital requirements;
• regular discussion with the Cathedral management team regarding Lloyd’s capital requirements;
• oversight of capital requirements by the Board of Directors;
• ability to purchase sufficient, cost effective reinsurance;
• maintaining contact with vendors, regulators and rating agencies in order to stay abreast of upcoming developments; and
• participation in industry groups such as the International 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 maximise risk-adjusted returns for its shareholders across the cycle. The return is generated within a broad framework
of risk parameters. The return is measured by management in terms of the IRR of the increase in FCBVS in the period adjusted for dividends
accrued. This aim is a long-term goal, acknowledging that management expects both higher and lower results in the shorter term. The cyclicality
and volatility of the insurance market is expected to be the largest driver of this pattern. Management monitors these peaks and troughs,
adjusting the Group’s portfolio to make the most effective use of available capital and seeking to maximise the risk-adjusted return.
132 Lancashire Holdings Limited
Annual Report & Accounts 2018
133
www.lancashiregroup.com
www.lancashiregroup.com
133
Financial statements
Notes to the accounts
1. General information
The Group is a provider of global specialty insurance and reinsurance products with operations in London and Bermuda. LHL was incorporated
under the laws of Bermuda on 12 October 2005. On 16 March 2009, LHL was added to the Official List and its common shares were admitted
to trading on the main market of the LSE; previously LHL’s shares were listed on AIM, a subsidiary market of the LSE. Since 21 May 2007,
LHL’s shares have had a secondary listing on the BSX. LHL’s head office and registered office is Power House, 7 Par-la-Ville Road, Hamilton
HM 11, Bermuda.
The consolidated financial statements for the year ended 31 December 2018 include the Company’s subsidiary companies, the Company’s
investment 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 23.
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 114 to 117. Operating segment performance is measured by the net underwriting profit or loss and the
combined ratio.
All amounts reported are transactions with external parties and associates. There are no significant inter-segmental transactions and there are
no significant insurance or reinsurance contracts that insure or reinsure risks in Bermuda, the Group’s country of domicile.
Revenue and expense by operating segment
For the year ended 31 December 2018
Gross premiums written by geographic area
U.S. and Canada
Worldwide, including the U.S. and Canada1
Worldwide offshore
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 (loss)
Net unallocated income and expenses
Profit before tax
Net loss ratio
Net acquisition cost ratio
Expense ratio
Combined ratio
Property
$m
Energy
$m
Marine
$m
Aviation
$m
Lloyd’s
$m
Total
$m
78.9
30.7
0.3
27.4
15.3
6.7
4.4
50.9
214.6
(90.8)
(4.9)
13.0
131.9
(93.0)
48.2
(34.8)
3.3
55.6
1.8
6.5
87.0
1.9
0.5
1.5
2.3
1.5
103.0
(28.9)
7.9
(6.1)
75.9
22.0
(1.4)
(34.1)
0.5
62.9
–
–
31.3
–
–
–
–
(0.2)
31.1
(20.2)
10.6
–
21.5
(70.5)
48.5
(11.4)
(0.6)
(12.5)
–
32.9
–
–
–
0.1
–
–
33.0
(11.0 )
(7.3 )
3.1
17.8
(3.6 )
3.2
(9.4 )
1.0
9.0
107.5
59.7
–
22.0
13.2
5.1
1.5
47.8
256.8
(69.9)
(26.0)
5.5
166.4
(162.3)
43.5
(41.3)
0.4
6.7
34.0%
23.9%
–
57.9%
(27.1%)
44.3%
–
17.2%
102.3%
55.8%
–
158.1%
2.2 %
47.2 %
–
49.4 %
71.4%
24.6%
–
96.0%
188.2
129.8
118.6
51.3
29.0
13.4
8.2
100.0
638.5
(220.8)
(19.7)
15.5
413.5
(307.4)
142.0
(131.0)
4.6
121.7
(88.1)
33.6
40.0%
30.6%
21.6%
92.2%
1. Worldwide, including the U.S. and Canada, comprises insurance and reinsurance contracts that insure or reinsure risks in more than one geographic area.
2. Worldwide, excluding the U.S. and Canada, comprises insurance and reinsurance contracts that insure or reinsure risks in more than one geographic area, but that specifically
exclude the U.S. and Canada.
Lancashire Holdings Limited
Annual Report & Accounts 2018
134
www.lancashiregroup.com
134
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 head office and registered office is Power House, 7 Par-la-Ville Road, Hamilton
The consolidated financial statements for the year ended 31 December 2018 include the Company’s subsidiary companies, the Company’s
investment in associate, and the Group’s share of the syndicates’ assets and liabilities and income and expenses. A full listing of the Group’s
HM 11, Bermuda.
related parties can be found in note 23.
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 114 to 117. Operating segment performance is measured by the net underwriting profit or loss and the
combined ratio.
All amounts reported are transactions with external parties and associates. There are no significant inter-segmental transactions and there are
no significant insurance or reinsurance contracts that insure or reinsure risks in Bermuda, the Group’s country of domicile.
Revenue and expense by operating segment
For the year ended 31 December 2018
Gross premiums written by geographic area
Worldwide, including the U.S. and Canada1
U.S. and Canada
Worldwide offshore
Europe
Far East
Middle East
Rest of world
Total
Worldwide, excluding the U.S. and Canada2
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 (loss)
Net unallocated income and expenses
Profit before tax
Net loss ratio
Net acquisition cost ratio
Expense ratio
Combined ratio
exclude the U.S. and Canada.
Property
$m
Energy
$m
Marine
$m
Aviation
$m
Lloyd’s
$m
Total
$m
78.9
30.7
0.3
27.4
15.3
6.7
4.4
50.9
214.6
(90.8)
(4.9)
13.0
131.9
(93.0)
48.2
(34.8)
3.3
55.6
1.8
6.5
87.0
1.9
0.5
1.5
2.3
1.5
103.0
(28.9)
7.9
(6.1)
75.9
22.0
(1.4)
(34.1)
0.5
62.9
31.3
–
–
–
–
–
–
(0.2)
31.1
(20.2)
10.6
–
21.5
(70.5)
48.5
(11.4)
(0.6)
(12.5)
32.9
–
–
–
–
–
–
0.1
33.0
(11.0 )
(7.3 )
3.1
17.8
(3.6 )
3.2
(9.4 )
1.0
9.0
107.5
59.7
–
22.0
13.2
5.1
1.5
47.8
256.8
(69.9)
(26.0)
5.5
166.4
(162.3)
43.5
(41.3)
0.4
6.7
34.0%
23.9%
–
(27.1%)
44.3%
–
57.9%
17.2%
102.3%
55.8%
–
158.1%
2.2 %
47.2 %
–
49.4 %
71.4%
24.6%
–
96.0%
188.2
129.8
118.6
51.3
29.0
13.4
8.2
100.0
638.5
(220.8)
(19.7)
15.5
413.5
(307.4)
142.0
(131.0)
4.6
121.7
(88.1)
33.6
40.0%
30.6%
21.6%
92.2%
1. Worldwide, including the U.S. and Canada, comprises insurance and reinsurance contracts that insure or reinsure risks in more than one geographic area.
2. Worldwide, excluding the U.S. and Canada, comprises insurance and reinsurance contracts that insure or reinsure risks in more than one geographic area, but that specifically
Revenue and expense by operating segment
For the year ended 31 December 2017
Gross premiums written by geographic area
U.S. and Canada
Worldwide, including the U.S. and Canada1
Worldwide offshore
Europe
Far East
Worldwide, excluding the U.S. and Canada2
Middle East
Rest of world
Total
Outwards reinsurance premiums
Change in unearned premiums
Change in unearned premiums on premiums ceded
Net premiums earned
Insurance losses and loss adjustment expenses
Insurance losses and loss adjustment expenses
recoverable
Insurance acquisition expenses
Insurance acquisition expenses ceded
Net underwriting (loss) profit
Net unallocated income and expenses
Loss before tax
Net loss ratio
Net acquisition cost ratio
Expense ratio
Combined ratio
Aviation
$m
Lloyd’s
$m
Total
$m
Property
$m
Energy
$m
80.0
30.3
0.2
23.1
16.5
6.0
5.3
36.6
198.0
(66.3)
11.6
3.2
146.5
(254.9)
87.3
(30.2)
2.6
(48.7)
4.7
2.5
94.8
–
–
0.1
–
(0.3)
101.8
(45.1)
7.5
6.2
70.4
(34.7)
23.6
(32.4)
1.4
28.3
Marine
$m
–
–
67.5
–
–
–
–
0.1
67.6
(11.3)
(5.6)
–
50.7
(17.3)
0.6
(19.0)
0.6
15.6
–
16.9
–
–
–
–
–
–
16.9
(7.2 )
4.4
(2.5 )
11.6
1.6
0.6
(3.3 )
0.1
10.6
92.9
48.9
–
15.8
11.4
5.4
1.6
31.3
207.3
(63.7)
4.7
0.4
148.7
(232.7)
90.5
(35.8)
0.4
(28.9)
114.4%
18.8%
–
133.2%
15.8%
44.0%
–
59.8%
32.9%
36.3%
–
69.2%
(19.0 %)
27.6 %
–
8.6 %
95.6%
23.8%
–
119.4%
177.6
98.6
162.5
38.9
27.9
11.5
6.9
67.7
591.6
(193.6)
22.6
7.3
427.9
(538.0)
202.6
(120.7)
5.1
(23.1)
(49.8)
(72.9)
78.4%
27.0%
19.5%
124.9%
1. Worldwide, including the U.S. and Canada, comprises insurance and reinsurance contracts that insure or reinsure risks in more than one geographic area.
2. Worldwide, excluding the U.S. and Canada, comprises insurance and reinsurance contracts that insure or reinsure risks in more than one geographic area, but that specifically
exclude the U.S. and Canada.
www.lancashiregroup.com
134
135
www.lancashiregroup.com
www.lancashiregroup.com
135
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 2018
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
(losses) income1
$m
Net realised
(losses) gains
and impairments
$m
Net change
in unrealised
gains/losses on AFS2
$m
Total investment
return excluding
foreign exchange
$m
Net foreign
exchange
(losses) gains
$m
Total investment
return including
foreign exchange
$m
31.8
(0.7)
–
(4.7)
1.2
2.9
30.5
(6.4)
–
–
2.3
(1.0)
–
(5.1)
(12.4)
–
(0.5)
–
–
–
(12.9)
13.0
(0.7 )
(0.5 )
(2.4 )
0.2
2.9
12.5
(5.4)
–
–
–
3.8
(0.3)
(1.9)
7.6
(0.7)
(0.5)
(2.4)
4.0
2.6
10.6
1. Net unrealised gains/(losses) on our FVTPL investments are included within net investment income and net other investment income.
2. Applying IFRS 9, net change in unrealised gains /losses on AFS will be classified within net investment income and net other investment income.
For the year ended 31 December 2017
Fixed maturity securities – AFS
Fixed maturity securities – at FVTPL
Equity securities – AFS
Hedge funds – at FVTPL
Other investments
Cash and cash equivalents
Total investment return
Net investment
income and net other
investment (losses)
income1
$m
Net realised
(losses) gains
and impairments
$m
Net change
in unrealised
gains/losses on AFS2
$m
Total investment
return excluding
foreign exchange
$m
Net foreign
exchange
(losses) gains
$m
Total investment
return including
foreign exchange
$m
28.6
(1.0)
–
1.1
1.1
1.9
31.7
(2.9)
2.4
0.8
9.5
(0.7)
–
9.1
2.1
–
2.8
–
–
–
4.9
27.8
1.4
3.6
10.6
0.4
1.9
45.7
9.8
–
–
–
(2.6)
0.5
7.7
37.6
1.4
3.6
10.6
(2.2)
2.4
53.4
1. Net unrealised gains/(losses) on our FVTPL investments are included within net investment income and net other investment income.
2. Applying IFRS 9, net change in unrealised gains /losses on AFS will be classified within net investment income and net other investment income.
Net realised (losses) gains and impairments includes impairment losses of $0.4 million (2017 – $1.3 million) recognised on fixed
maturity securities.
Refer to pages 124 to 125 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 net investment income and net other investment income is $4.4 million (2017 – $4.6 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
2018
$m
128.5
2.5
(9.2 )
4.6
126.4
2017
$m
115.9
4.8
(7.2)
2.1
115.6
Lancashire Holdings Limited
Annual Report & Accounts 2018
136 Lancashire Holdings Limited
Annual Report & Accounts 2018
136
Notes to the accounts: continued
3. Investment return
The total investment return for the Group is as follows:
For the year ended 31 December 2018
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
For the year ended 31 December 2017
Fixed maturity securities – AFS
Fixed maturity securities – at FVTPL
Equity securities – AFS
Hedge funds – at FVTPL
Other investments
Cash and cash equivalents
Total investment return
Net investment
income and net
other investment
(losses) income1
Net realised
(losses) gains
Net change
in unrealised
and impairments
gains/losses on AFS2
Total investment
return excluding
foreign exchange
Net foreign
exchange
(losses) gains
Total investment
return including
foreign exchange
$m
31.8
(0.7)
–
(4.7)
1.2
2.9
30.5
$m
28.6
(1.0)
–
1.1
1.1
1.9
31.7
$m
(6.4)
–
–
–
2.3
(1.0)
(5.1)
$m
(2.9)
2.4
0.8
9.5
–
9.1
(0.7)
$m
(12.4)
(0.5)
–
–
–
–
(12.9)
$m
2.1
2.8
–
–
–
–
4.9
$m
13.0
(0.7 )
(0.5 )
(2.4 )
0.2
2.9
12.5
$m
27.8
1.4
3.6
10.6
0.4
1.9
45.7
$m
(5.4)
–
–
–
3.8
(0.3)
(1.9)
$m
9.8
–
–
–
(2.6)
0.5
7.7
$m
7.6
(0.7)
(0.5)
(2.4)
4.0
2.6
10.6
$m
37.6
1.4
3.6
10.6
(2.2)
2.4
53.4
Net investment
income and net other
investment (losses)
Net realised
(losses) gains
Net change
in unrealised
income1
and impairments
gains/losses on AFS2
Total investment
return excluding
foreign exchange
Net foreign
exchange
(losses) gains
Total investment
return including
foreign exchange
1. Net unrealised gains/(losses) on our FVTPL investments are included within net investment income and net other investment income.
2. Applying IFRS 9, net change in unrealised gains /losses on AFS will be classified within net investment income and net other investment income.
1. Net unrealised gains/(losses) on our FVTPL investments are included within net investment income and net other investment income.
2. Applying IFRS 9, net change in unrealised gains /losses on AFS will be classified within net investment income and net other investment income.
Net realised (losses) gains and impairments includes impairment losses of $0.4 million (2017 – $1.3 million) recognised on fixed
maturity securities.
Refer to pages 124 to 125 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 net investment income and net other investment income is $4.4 million (2017 – $4.6 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
2018
$m
128.5
2.5
(9.2 )
4.6
126.4
2017
$m
115.9
4.8
(7.2)
2.1
115.6
5. Other income
Kinesis underwriting fees
Kinesis profit commission
Lloyd’s managing agency fees
Lloyd’s consortium fees
Lloyd’s consortium profit commission
Lloyd’s profit commission
Total other income
2018
$m
6.6
–
1.2
0.5
1.4
2.7
12.4
As at 31 December 2018, contract assets in relation to other income amounted to $10.9 million (31 December 2017 – $9.0 million).
6. Results of operating activities
Results of operating activities are stated after charging the following amounts:
Depreciation on owned assets
Operating lease charges
Auditor’s remuneration
– Group audit fees
Total
2018
$m
1.4
3.4
1.7
6.5
2017
$m
5.8
5.9
1.0
0.2
1.5
2.8
17.2
2017
$m
1.8
3.4
1.8
7.0
During 2018, KPMG provided non-audit services in relation to specific U.S. taxation advisory work. Fees for non-audit services provided in
2018 totalled fifteen thousand dollars. During 2017, KPMG provided non-audit services in relation to specified work over distributable reserves
and pre-appointment procedures on the first quarter of 2017 earnings release. Fees for non-audit services provided in 2017 totalled twenty
thousand dollars.
7. Employee benefits
Wages and salaries
Pension costs
Bonus and other benefits
Total cash compensation
RSS – performance
RSS – ordinary
RSS – bonus deferral
RSS – Cathedral acquisition grant
Total equity based compensation
Total employee benefits
2018
$m
32.4
2.6
14.0
49.0
1.5
5.0
1.0
0.4
7.9
56.9
2017
$m
27.6
2.5
10.1
40.2
(1.9)
2.9
2.1
(3.5)
(0.4)
39.8
136 Lancashire Holdings Limited
Annual Report & Accounts 2018
137
www.lancashiregroup.com
www.lancashiregroup.com
137
Financial statements
Notes to the accounts: continued
7. Employee benefits continued
Equity based compensation
The Group’s equity based compensation scheme is its RSS. All outstanding and future RSS grants have an exercise period of ten years from the
grant date.
The fair value of any TSR component of the nil-cost options is estimated using a stochastic model. For all other components the Black-Scholes
model is used to estimate the fair value.
The following table lists the assumptions used in the stochastic model for the RSS awards granted during the years ended 31 December 2018
and 2017:
Assumptions
Dividend yield
Expected volatility1
Risk-free interest rate2
Expected average life of options
Share price
2018
–
24.1 %
0.8 %
3 years
$7.95
2017
–
25.1%
0.1%
3 years
$8.60
1. The expected volatility of LHL and comparator companies’ share prices are calculated based on the movement in the share prices over a period prior to the grant date, equal
in length to the expected life of the award.
2. The risk-free interest rate is consistent with three- year UK government bond yields on the date of grant.
The calculation of the equity based compensation expense assumes forfeitures due to employee turnover of 10.0 per cent per annum prior to
vesting, with subsequent adjustments to reflect actual experience.
RSS – performance
The performance RSS options vest after a three-year period and are dependent on certain performance criteria. A maximum of 85.0 per cent
(2017 – 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 15.0 per cent (2017 – 25.0 per cent) of the performance RSS options will vest only on the achievement of an absolute TSR in excess of a
required amount. For the 2017 awards, TSR was determined on a relative basis of a predefined comparator group. 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 2016
Granted
Exercised
Forfeited
Lapsed
Outstanding as at 31 December 2017
Granted
Exercised
Forfeited
Lapsed
Outstanding as at 31 December 2018
Exercisable as at 31 December 2017
Exercisable as at 31 December 2018
Weighted average remaining contractual life
Weighted average fair value at date of grant during the year
Weighted average share price at date of exercise during the year
Total number of
restricted stock
3,363,157
1,018,933
(509,524)
(156,461)
(257,894)
3,458,211
1,041,567
(381,359)
(47,260)
(1,090,376)
2,980,783
249,112
183,141
2018
2017
Total
restricted stock
Total
restricted stock
8.0 years
$6.96
$8.14
7.8 years
$7.56
$8.82
Lancashire Holdings Limited
Annual Report & Accounts 2018
138 Lancashire Holdings Limited
Annual Report & Accounts 2018
138
Notes to the accounts: continued
The Group’s equity based compensation scheme is its RSS. All outstanding and future RSS grants have an exercise period of ten years from the
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
The following table lists the assumptions used in the stochastic model for the RSS awards granted during the years ended 31 December 2018
7. Employee benefits continued
Equity based compensation
grant date.
model is used to estimate the fair value.
and 2017:
Assumptions
Dividend yield
Expected volatility1
Risk-free interest rate2
Expected average life of options
Share price
1. The expected volatility of LHL and comparator companies’ share prices are calculated based on the movement in the share prices over a period prior to the grant date, equal
in length to the expected life of the award.
2. The risk-free interest rate is consistent with three- year UK government bond yields on the date of grant.
The calculation of the equity based compensation expense assumes forfeitures due to employee turnover of 10.0 per cent per annum prior to
vesting, with subsequent adjustments to reflect actual experience.
RSS – performance
The performance RSS options vest after a three-year period and are dependent on certain performance criteria. A maximum of 85.0 per cent
(2017 – 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 15.0 per cent (2017 – 25.0 per cent) of the performance RSS options will vest only on the achievement of an absolute TSR in excess of a
required amount. For the 2017 awards, TSR was determined on a relative basis of a predefined comparator group. 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
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.
2018
–
24.1 %
0.8 %
3 years
$7.95
2017
–
25.1%
0.1%
3 years
$8.60
Outstanding as at 31 December 2016
Granted
Forfeited
Outstanding as at 31 December 2017
Granted
Forfeited
Outstanding as at 31 December 2018
Weighted average remaining contractual life
Weighted average fair value at date of grant during the year
Total number of
restricted stock
597,520
699,251
(10,025)
1,286,746
1,018,951
(205,500)
2,100,197
2018
2017
Total
restricted stock
Total
restricted stock
8.4 years
$7.96
8.7 years
$8.49
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.
of RSS options that vest.
Outstanding as at 31 December 2016
Outstanding as at 31 December 2017
Granted
Exercised
Forfeited
Lapsed
Granted
Exercised
Forfeited
Lapsed
Outstanding as at 31 December 2018
Exercisable as at 31 December 2017
Exercisable as at 31 December 2018
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
138 Lancashire Holdings Limited
Annual Report & Accounts 2018
Total number of
restricted stock
3,363,157
1,018,933
(509,524)
(156,461)
(257,894)
3,458,211
1,041,567
(381,359)
(47,260)
(1,090,376)
2,980,783
249,112
183,141
2017
Total
$7.56
$8.82
restricted stock
restricted stock
8.0 years
7.8 years
2018
Total
$6.96
$8.14
Outstanding as at 31 December 2016
Granted
Exercised
Forfeited
Outstanding as at 31 December 2017
Granted
Exercised
Forfeited
Outstanding as at 31 December 2018
Exercisable as at 31 December 2017
Exercisable as at 31 December 2018
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
139
Total number of
restricted stock
526,118
244,523
(220,448)
(2,555)
547,638
31,941
(220,047)
(18,943)
340,589
78,295
73,963
2018
2017
Total
restricted stock
Total
restricted stock
7.7 years
$7.95
$8.25
8.3 years
$8.58
$8.73
www.lancashiregroup.com
www.lancashiregroup.com
139
Financial statements
Notes to the accounts: continued
7. Employee benefits continued
RSS – Cathedral acquisition
The Cathedral acquisition RSS options vesting periods range from three to five years and are dependent on certain performance criteria.
A maximum of 75.0 per cent of the Cathedral acquisition RSS options will vest on the achievement of a Cathedral combined ratio below a
required amount. A maximum of 25.0 per cent of the Cathedral acquisition RSS options vest on the achievement of an LHL RoE in excess
of a required amount. An amount equivalent to the dividends paid between the grant date and the exercise date accrues and is paid at the
time of exercise, pro-rata according to the number of RSS options that vest. The first tranche of awards were exercisable in 2017.
Outstanding as at 31 December 2016
Exercised
Forfeited
Lapsed
Outstanding as at 31 December 2017
Exercised
Forfeited
Outstanding as at 31 December 2018
Exercisable as at 31 December 2017
Exercisable as at 31 December 2018
Weighted average remaining contractual life
Weighted average fair value at date of grant
Weighted average share price at date of exercise during the year
8. Financing costs
Interest expense on long-term debt
Net (gains) losses on interest rate swaps
Other financing costs
Total
Refer to note 18 for details of long-term debt and financing arrangements.
Total number of
restricted stock
1,356,250
(400,166)
(556,768)
(29,838)
369,478
(199,370)
(1,850)
168,258
205,955
168,258
2018
2017
Total
restricted stock
Total
restricted stock
4.9 years
$13.01
$7.99
5.9 years
$13.01
$8.84
2018
$m
18.1
(0.9)
2.9
20.1
2017
$m
16.4
–
1.1
17.5
Lancashire Holdings Limited
Annual Report & Accounts 2018
140 Lancashire Holdings Limited
Annual Report & Accounts 2018
140
Notes to the accounts: continued
Outstanding as at 31 December 2016
Exercised
Forfeited
Lapsed
Exercised
Forfeited
Outstanding as at 31 December 2017
Outstanding as at 31 December 2018
Exercisable as at 31 December 2017
Exercisable as at 31 December 2018
Weighted average remaining contractual life
Weighted average fair value at date of grant
Weighted average share price at date of exercise during the year
8. Financing costs
Interest expense on long-term debt
Net (gains) losses on interest rate swaps
Other financing costs
Total
Refer to note 18 for details of long-term debt and financing arrangements.
Total number of
restricted stock
1,356,250
(400,166)
(556,768)
(29,838)
369,478
(199,370)
(1,850)
168,258
205,955
168,258
2018
Total
2017
Total
restricted stock
restricted stock
4.9 years
5.9 years
$13.01
$7.99
$13.01
$8.84
2018
$m
18.1
(0.9)
2.9
20.1
2017
$m
16.4
–
1.1
17.5
7. Employee benefits continued
RSS – Cathedral acquisition
The Cathedral acquisition RSS options vesting periods range from three to five years and are dependent on certain performance criteria.
A maximum of 75.0 per cent of the Cathedral acquisition RSS options will vest on the achievement of a Cathedral combined ratio below a
required amount. A maximum of 25.0 per cent of the Cathedral acquisition RSS options vest on the achievement of an LHL RoE in excess
of a required amount. An amount equivalent to the dividends paid between the grant date and the exercise date accrues and is paid at the
time of exercise, pro-rata according to the number of RSS options that vest. The first tranche of awards were exercisable in 2017.
9. Tax
Bermuda
LHL, LICL, LUK and KCML 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. From 1 January 2019 LHL will cease to be a tax
resident in the UK and subject to UK corporation tax.
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 (loss) before tax
Corporation tax at 19.0% (2017 – 19.3%)
Non-taxable (income) loss
Adjustments in respect of prior period
Differences related to equity based compensation
Other expense permanent differences
Tax rate change adjustment
Total tax credit
1. All tax reconciling balances have been classified as recurring items.
2018
$m
2.9
(1.9)
(5.1)
–
0.1
(4.0)
2018
$m
33.6
6.4
(13.3)
(1.8)
0.4
4.3
–
(4.0)
2017
$m
3.3
(2.3)
(4.1)
(0.6)
1.4
(2.3)
2017
$m
(72.9)
(14.1)
10.1
(0.9)
(0.6)
3.8
(0.6)
(2.3)
The current tax credit as a percentage of the Group’s profit (2017 – loss) before tax is 11.9 per cent (2017 – negative 3.2 per cent). Non-taxable
income (loss) relates to profits (losses) of companies within the Group that are non-tax resident in the UK and the share of loss of associate.
Refer to note 11 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.
10. Cash and cash equivalents
Cash at bank and in hand
Cash equivalents
Total cash and cash equivalents
2018
$m
97.5
57.1
154.6
2017
$m
107.0
149.5
256.5
Cash equivalents have an original maturity of three months or less. The carrying amount of these assets approximates their fair value. Refer to
note 18 for the cash and cash equivalent balances on deposit as collateral. Cash and cash equivalents include managed cash of $83.7 million
(31 December 2017 – $188.1 million).
140 Lancashire Holdings Limited
Annual Report & Accounts 2018
141
www.lancashiregroup.com
www.lancashiregroup.com
141
Financial statements
Notes to the accounts: continued
11. Investments
As at 31 December 2018
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
– Agency commercial mortgage backed securities
– Non-agency commercial mortgage backed securities
– Bank loans
– Corporate bonds
Total fixed maturity securities – AFS
Fixed maturity securities – at FVTPL
Equity securities – AFS
Hedge funds – at FVTPL
Other investments
Total investments
Cost or
amortised cost
$m
Unrealised
gains
$m
Unrealised
losses
$m
Estimated
fair value1
$m
225.5
11.4
187.5
59.8
5.4
88.2
131.1
82.2
21.3
5.3
0.5
114.7
528.8
1,461.7
45.7
20.0
143.0
–
1,670.4
–
–
0.3
0.1
–
0.4
1.0
0.2
–
–
–
0.1
1.0
3.1
–
2.7
9.3
0.1
15.2
–
–
(1.2)
(1.2)
–
(0.5)
(2.8)
(2.5)
(0.2)
(0.1)
–
(5.7)
(8.2)
(22.4)
(0.7)
–
(3.1)
(0.4)
(26.6)
225.5
11.4
186.6
58.7
5.4
88.1
129.3
79.9
21.1
5.2
0.5
109.1
521.6
1,442.4
45.0
22.7
149.2
(0.3)
1,659.0
1. When IFRS 9, Financial Instruments: Classification and Measurement is implemented, all investments held above will be classified as at FVTPL (mandatory), with no resulting
changes in the estimated fair value.
As at 31 December 2017
Fixed maturity securities – AFS
– Short-term investments
– Fixed maturity funds
– U.S. treasuries
– Other government bonds
– U.S. municipal bonds
– U.S. government agency debt
– Asset backed securities
– U.S. government agency mortgage backed securities
– Non-agency mortgage backed securities
– Non-agency commercial mortgage backed securities
– Bank loans
– Corporate bonds
Total fixed maturity securities – AFS
Fixed maturity securities – at FVTPL
Equity securities – AFS
Hedge funds – at FVTPL
Other investments
Total investments
Cost or
amortised cost
$m
Unrealised
gains
$m
Unrealised
losses
$m
111.2
31.2
237.4
71.2
6.0
71.2
139.5
142.4
13.2
0.2
106.5
520.1
1,450.1
25.7
20.0
144.6
–
1,640.4
–
–
0.1
0.8
–
–
4.9
0.4
0.2
–
0.8
3.6
10.8
–
3.2
9.8
–
23.8
(0.1)
(0.2)
(1.8)
(0.6)
–
(0.7)
(0.4)
(1.8)
(0.2)
–
(0.6)
(2.3)
(8.7)
–
–
(0.4)
(0.5)
(9.6)
Estimated
fair value1
$m
111.1
31.0
235.7
71.4
6.0
70.5
144.0
141.0
13.2
0.2
106.7
521.4
1,452.2
25.7
23.2
154.0
(0.5)
1,654.6
1. When IFRS 9, Financial Instruments: Classification and Measurement is implemented, all investments held above will be classified as at FVTPL (mandatory), with no resulting
changes in the estimated fair value.
Lancashire Holdings Limited
Annual Report & Accounts 2018
142 Lancashire Holdings Limited
Annual Report & Accounts 2018
142
Notes to the accounts: continued
1. When IFRS 9, Financial Instruments: Classification and Measurement is implemented, all investments held above will be classified as at FVTPL (mandatory), with no resulting
1,670.4
15.2
Cost or
amortised cost
$m
Unrealised
Unrealised
– U.S. government agency mortgage backed securities
– Non-agency mortgage backed securities
– Agency commercial mortgage backed securities
– Non-agency commercial mortgage backed securities
11. Investments
As at 31 December 2018
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
– Bank loans
– Corporate bonds
Total fixed maturity securities – AFS
Fixed maturity securities – at FVTPL
Equity securities – AFS
Hedge funds – at FVTPL
Other investments
Total investments
changes in the estimated fair value.
As at 31 December 2017
Fixed maturity securities – AFS
– Short-term investments
– Fixed maturity funds
– U.S. treasuries
– Other government bonds
– U.S. municipal bonds
– U.S. government agency debt
– Asset backed securities
– Bank loans
– Corporate bonds
Total fixed maturity securities – AFS
Fixed maturity securities – at FVTPL
Equity securities – AFS
Hedge funds – at FVTPL
Other investments
Total investments
changes in the estimated fair value.
142 Lancashire Holdings Limited
Annual Report & Accounts 2018
– U.S. government agency mortgage backed securities
– Non-agency mortgage backed securities
– Non-agency commercial mortgage backed securities
Cost or
amortised cost
$m
Unrealised
Unrealised
gains
$m
losses
$m
Estimated
fair value1
$m
225.5
11.4
187.5
59.8
5.4
88.2
131.1
82.2
21.3
5.3
0.5
114.7
528.8
1,461.7
45.7
20.0
143.0
–
111.2
31.2
237.4
71.2
6.0
71.2
139.5
142.4
13.2
0.2
106.5
520.1
25.7
20.0
144.6
–
1,450.1
1,640.4
–
–
0.3
0.1
–
0.4
1.0
0.2
–
–
–
0.1
1.0
3.1
–
2.7
9.3
0.1
gains
$m
–
–
0.1
0.8
–
–
4.9
0.4
0.2
–
0.8
3.6
10.8
–
3.2
9.8
–
23.8
–
–
–
(1.2)
(1.2)
(0.5)
(2.8)
(2.5)
(0.2)
(0.1)
–
(5.7)
(8.2)
(22.4)
(0.7)
–
(3.1)
(0.4)
(26.6)
losses
$m
(0.1)
(0.2)
(1.8)
(0.6)
–
(0.7)
(0.4)
(1.8)
(0.2)
–
(0.6)
(2.3)
(8.7)
–
–
(0.4)
(0.5)
(9.6)
225.5
11.4
186.6
58.7
5.4
88.1
129.3
79.9
21.1
5.2
0.5
109.1
521.6
1,442.4
45.0
22.7
149.2
(0.3)
1,659.0
Estimated
fair value1
$m
111.1
31.0
235.7
71.4
6.0
70.5
144.0
141.0
13.2
0.2
106.7
521.4
1,452.2
25.7
23.2
154.0
(0.5)
1,654.6
Accumulated other comprehensive loss in relation to the Group’s AFS fixed maturity and equity securities is as follows:
Unrealised gains
Unrealised losses
Net unrealised foreign exchange losses (gains) on fixed maturity securities – AFS
Tax provision
Accumulated other comprehensive loss
2018
$m
5.8
(22.4)
2.1
0.2
(14.3)
2017
$m
14.0
(8.7)
(6.9)
0.1
(1.5)
Fixed maturity securities are presented in the risk disclosures section on page 129. Refer to note 18 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.
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 modelled 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.
1. When IFRS 9, Financial Instruments: Classification and Measurement is implemented, all investments held above will be classified as at FVTPL (mandatory), with no resulting
143
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143
Financial statements
Notes to the accounts: continued
11. Investments continued
The Group determines securities classified as Level (ii) to include short-term and fixed maturity investments and certain derivatives such as:
• Short-term investments;
• Fixed maturity funds;
• Other government bonds;
• U.S. municipal bonds;
• U.S. government agency debt;
• Asset backed securities;
• U.S. government agency mortgage backed securities;
• Non-agency mortgage backed securities;
• Agency commercial 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.
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 techniques incorporate 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.
Lancashire Holdings Limited
Annual Report & Accounts 2018
144 Lancashire Holdings Limited
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144
Notes to the accounts: continued
11. Investments continued
• Short-term investments;
• Fixed maturity funds;
• Other government bonds;
• U.S. municipal bonds;
• U.S. government agency debt;
• Asset backed securities;
• U.S. government agency mortgage backed securities;
• Non-agency mortgage backed securities;
• Agency commercial mortgage backed securities;
• Non-agency commercial mortgage backed securities;
• Bank loans;
• Corporate bonds; and
Level (iii)
• OTC derivatives, such as options, forward foreign exchange contracts, interest rate swaps and credit default swaps.
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 techniques incorporate 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 Group determines securities classified as Level (ii) to include short-term and fixed maturity investments and certain derivatives such as:
The fair value hierarchy of the Group’s investment holdings is as follows:
As at 31 December 2018
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
– Agency commercial mortgage backed securities
– Non-agency commercial mortgage backed securities
– Bank loans
– Corporate bonds
Total fixed maturity securities – AFS
Fixed maturity securities – at FVTPL
Equity securities – AFS
Hedge funds – at FVTPL
Other investments
Total investments
As at 31 December 2017
Fixed maturity securities – AFS
– Short-term investments
– Fixed maturity funds
– U.S. treasuries
– Other government bonds
– U.S. municipal bonds
– U.S. government agency debt
– Asset backed securities
– U.S. government agency mortgage backed securities
– Non-agency mortgage backed securities
– Non-agency commercial mortgage backed securities
– Bank loans
– Corporate bonds
Total fixed maturity securities – AFS
Fixed maturity securities – at FVTPL
Equity securities – AFS
Hedge funds – at FVTPL
Other investments
Total investments
There have been no transfers between Levels (i) and (ii).
Level (i)
$m
Level (ii)
$m
Level (iii)
$m
Total
$m
216.8
–
186.6
–
–
–
–
–
–
–
–
–
–
403.4
–
22.7
–
–
426.1
8.7
11.4
–
58.7
5.4
88.1
129.3
79.9
21.1
5.2
0.5
109.1
521.6
1,039.0
45.0
–
–
(0.3 )
1,083.7
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
149.2
–
149.2
225.5
11.4
186.6
58.7
5.4
88.1
129.3
79.9
21.1
5.2
0.5
109.1
521.6
1,442.4
45.0
22.7
149.2
(0.3)
1,659.0
Level (i)
$m
Level (ii)
$m
Level (iii)
$m
Total
$m
104.6
–
235.7
–
–
–
–
–
–
–
–
–
340.3
–
23.2
–
–
363.5
6.5
31.0
–
71.4
6.0
70.5
144.0
141.0
13.2
0.2
106.7
521.4
1,111.9
25.7
–
–
(0.5 )
1,137.1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
154.0
–
154.0
111.1
31.0
235.7
71.4
6.0
70.5
144.0
141.0
13.2
0.2
106.7
521.4
1,452.2
25.7
23.2
154.0
(0.5)
1,654.6
144 Lancashire Holdings Limited
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145
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145
Financial statements
Notes to the accounts: continued
11. Investments continued
The table below analyses the movements in investments classified as Level (iii) investments:
As at 31 December 2016
Purchases
Sales
Total net realised and unrealised gains recognised in profit or loss
As at 31 December 2017
Purchases
Sales
Total net realised and unrealised losses recognised in profit or loss
As at 31 December 2018
12. Interests in structured entities
Consolidated structured entities
The Group’s two consolidated structured entities are the EBT and the Orange Fund.
Hedge funds
$m
129.4
149.7
(136.5)
11.4
154.0
17.6
(21.5)
(0.9)
149.2
• 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 (see note 23).
• the Orange Fund was opened during 2017 and holds short duration high quality cash equivalents and fixed maturity securities. The Lancashire
Group companies are the only investors in the Orange Fund. The primary objectives of the fund are to preserve capital and provide liquidity to
support the Group’s operations.
Unconsolidated structured entities in which the group has an interest
As part of its investment activities, the Group invests in unconsolidated structured entities. The Group does not sponsor any of the
unconsolidated structured entities.
A summary of the Group’s interest in consolidated and unconsolidated structured entities is as follows:
As at 31 December 2018
Fixed maturity securities
– Asset backed securities
– U.S. government agency mortgage backed securities
– Non-agency mortgage backed securities
– Agency commercial mortgage backed securities
– Non-agency commercial mortgage backed securities
Total fixed maturity securities
Investment funds
– Hedge funds
Total investment funds
Specialised investment vehicles
– KHL (note 16)
Total
Orange
Fund
$m
Investments
$m
Interest in
associate
$m
12.5
–
4.9
–
0.5
17.9
–
–
–
17.9
116.8
79.9
16.2
5.2
–
218.1
149.2
149.2
–
367.3
–
–
–
–
–
–
–
–
67.1
67.1
Total
$m
129.3
79.9
21.1
5.2
0.5
236.0
149.2
149.2
67.1
452.3
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Annual Report & Accounts 2018
146 Lancashire Holdings Limited
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146
Notes to the accounts: continued
11. Investments continued
The table below analyses the movements in investments classified as Level (iii) investments:
As at 31 December 2016
Purchases
Sales
Purchases
Sales
Total net realised and unrealised gains recognised in profit or loss
As at 31 December 2017
Total net realised and unrealised losses recognised in profit or loss
As at 31 December 2018
12. Interests in structured entities
Consolidated structured entities
The Group’s two consolidated structured entities are the EBT and the Orange Fund.
• the Group provides capital contributions to the EBT to enable it to meet its obligations to employees under the equity based compensation
plans. The Group has a contractual agreement which may require it to provide financial support to the EBT (see note 23).
• the Orange Fund was opened during 2017 and holds short duration high quality cash equivalents and fixed maturity securities. The Lancashire
Group companies are the only investors in the Orange Fund. The primary objectives of the fund are to preserve capital and provide liquidity to
support the Group’s operations.
Unconsolidated structured entities in which the group has an interest
As part of its investment activities, the Group invests in unconsolidated structured entities. The Group does not sponsor any of the
unconsolidated structured entities.
A summary of the Group’s interest in consolidated and unconsolidated structured entities is as follows:
As at 31 December 2018
Fixed maturity securities
– Asset backed securities
– U.S. government agency mortgage backed securities
– Non-agency mortgage backed securities
– Agency commercial mortgage backed securities
– Non-agency commercial mortgage backed securities
Total fixed maturity securities
Investment funds
– Hedge funds
Total investment funds
Specialised investment vehicles
– KHL (note 16)
Total
Orange
Fund
$m
Investments
$m
Interest in
associate
$m
12.5
4.9
–
–
0.5
17.9
–
–
–
17.9
116.8
79.9
16.2
5.2
–
218.1
149.2
149.2
–
367.3
–
–
–
–
–
–
–
–
67.1
67.1
Total
$m
129.3
79.9
21.1
5.2
0.5
236.0
149.2
149.2
67.1
452.3
Hedge funds
$m
129.4
149.7
(136.5)
11.4
154.0
17.6
(21.5)
(0.9)
149.2
As at 31 December 2017
Fixed maturity securities
– Asset backed securities
– U.S. government agency mortgage backed securities
– Non-agency mortgage backed securities
– Non-agency commercial mortgage backed securities
Total fixed maturity securities
Investment funds
– Hedge funds
Total investment funds
Specialised investment vehicles
– KHL (note 16)
Total
Orange
Fund
$m
Investments
$m
Interest in
associate
$m
8.1
3.1
–
–
11.2
–
–
–
11.2
135.9
137.9
13.2
0.2
287.2
154.0
154.0
–
441.2
–
–
–
–
–
–
–
59.4
59.4
Total
$m
144.0
141.0
13.2
0.2
298.4
154.0
154.0
59.4
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 disclosures for these financial instruments and
other investments is provided on pages 120 to 131. 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 2018 and 31 December 2017. Generally, default rates would have to increase substantially from their current level before the Group
would suffer a loss and this assessment is made prior to investing and regularly through the holding period for the security. The Group has not
provided any other financial or other support in addition to that described above as at the reporting date, and there is no intention to provide
support in relation to any other unconsolidated structured entities in the foreseeable future.
As at 31 December 2018 the Group has a commitment of $100.0 million (31 December 2017 – $100.0 million) in respect of two credit facility
funds. The Group, via the funds, provides collateral for revolving credit facilities purchased at a discount from financial institutions and is at risk
for its portion of any defaults on those revolving credit facilities. The Group’s proportionate share of these revolving credit facilities purchased
by the funds as at 31 December 2018 is $54.4 million (31 December 2017 – $64.4 million), which currently remains unfunded. The maximum
exposure to the credit facility funds is $100.0 million and as at 31 December 2018 there have been no defaults under these facilities.
146 Lancashire Holdings Limited
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147
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147
Financial statements
Notes to the accounts: continued
13. Losses and loss adjustment expenses
As at 31 December 2016
Net incurred losses for:
Prior years
Current year
Exchange adjustments
Incurred losses and loss adjustment expenses
Net paid losses for:
Prior years
Current year
Paid losses and loss adjustment expenses
As at 31 December 2017
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 2018
Losses and
loss adjustment
expenses
$m
Reinsurance
recoveries
$m
Net losses and
loss adjustment
expenses
$m
679.8
(136.7)
543.1
(40.1 )
578.1
18.8
556.8
231.1
72.0
303.1
933.5
(124.4 )
431.8
(7.2 )
300.2
261.5
57.2
318.7
915.0
(25.0)
(177.6)
(0.7)
(203.3)
(50.2)
(5.7)
(55.9)
(284.1)
(2.5)
(139.5)
0.6
(141.4)
(99.1)
(3.5)
(102.6)
(322.9)
(65.1)
400.5
18.1
353.5
180.9
66.3
247.2
649.4
(126.9)
292.3
(6.6)
158.8
162.4
53.7
216.1
592.1
Further information on the calculation of loss reserves and the risks associated with them is provided in the risk disclosures section from page
117. 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 $183.0 million (31 December 2017 – $186.7
million) increase in gross loss reserves. There was no change to the Group’s reserving methodology during the year. The split of losses and
loss adjustment expenses between notified outstanding losses, ACR assessed by management and IBNR is shown below:
As at 31 December
Outstanding losses
Additional case reserves
Losses incurred but not reported
Total
2018
$m
315.2
210.5
389.3
915.0
%
34.4
23.0
42.6
100.0
2017
$m
300.4
186.5
446.6
933.5
%
32.2
20.0
47.8
100.0
The Group’s reserve for unpaid losses and loss adjustment expenses as at 31 December 2018 and 2017 had an estimated duration of
approximately two years.
148 Lancashire Holdings Limited
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Annual Report & Accounts 2018
Annual Report & Accounts 2018
148
Notes to the accounts: continued
Incurred losses and loss adjustment expenses
Paid losses and loss adjustment expenses
As at 31 December 2016
Net incurred losses for:
Prior years
Current year
Exchange adjustments
Net paid losses for:
Prior years
Current year
As at 31 December 2017
Net incurred losses for:
Prior years
Current year
Exchange adjustments
Net paid losses for:
Prior years
Current year
Incurred losses and loss adjustment expenses
Paid losses and loss adjustment expenses
As at 31 December 2018
As at 31 December
Outstanding losses
Additional case reserves
Losses incurred but not reported
Total
approximately two years.
Further information on the calculation of loss reserves and the risks associated with them is provided in the risk disclosures section from page
117. 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 $183.0 million (31 December 2017 – $186.7
million) increase in gross loss reserves. There was no change to the Group’s reserving methodology during the year. The split of losses and
loss adjustment expenses between notified outstanding losses, ACR assessed by management and IBNR is shown below:
The Group’s reserve for unpaid losses and loss adjustment expenses as at 31 December 2018 and 2017 had an estimated duration of
Losses and
loss adjustment
expenses
$m
679.8
Reinsurance
recoveries
$m
(136.7)
Net losses and
loss adjustment
expenses
$m
543.1
(40.1 )
578.1
18.8
556.8
231.1
72.0
303.1
933.5
(124.4 )
431.8
(7.2 )
300.2
261.5
57.2
318.7
915.0
(25.0)
(177.6)
(0.7)
(203.3)
(50.2)
(5.7)
(55.9)
(284.1)
(2.5)
(139.5)
0.6
(141.4)
(99.1)
(3.5)
(102.6)
(322.9)
(65.1)
400.5
18.1
353.5
180.9
66.3
247.2
649.4
(126.9)
292.3
(6.6)
158.8
162.4
53.7
216.1
592.1
2018
$m
315.2
210.5
389.3
915.0
%
34.4
23.0
42.6
100.0
2017
$m
300.4
186.5
446.6
933.5
%
32.2
20.0
47.8
100.0
13. Losses and loss adjustment expenses
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
Current estimate of
cumulative liability
Paid
Total Group gross liability
2008
and prior
$m
2009
$m
2010
$m
2011
$m
2012
$m
2013
$m
2014
$m
2015
$m
2016
$m
2017
$m
2018
$m
Total
$m
429.7
276.0 298.5 580.1
214.6 310.7 547.1
196.2 274.4
189.6
274.8
226.7
206.0
196.5
193.4
280.0
259.8
224.0
224.4
222.1
218.4
250.3
350.4
338.8
326.9
313.3
308.7
299.5
397.0
371.9
447.0
450.4
460.0
450.7
452.6
446.9
836.4 163.3 297.4
548.5 107.8 209.4
73.1 204.2
499.5
66.0 235.8
453.0
89.1 229.4
445.8
81.7 231.4
503.8
72.9 229.8
497.3
90.8 229.6
496.7
89.6 228.3
494.9
65.4
493.7
487.3
487.3
(455.2 )
32.1
446.9
65.4 228.3
189.6 274.4 547.1
218.4
(61.9 ) (217.7) (424.4) (270.3) (202.4) (172.0) (161.2) (181.0 ) (261.7 )
93.4 285.4
16.0
28.4
299.5
193.4
3.5
22.5
21.4
29.2
10.6
429.7
(57.2)
372.5
3,380.0
(2,465.0)
915.0
1. Adjusted for revaluation of foreign currencies at the exchange rate as at 31 December 2018.
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
2008
and prior
$m
2009
$m
2010
$m
2011
$m
2012
$m
2013
$m
2014
$m
2015
$m
2016
$m
2017
$m
2018
$m
Total
$m
139.3
73.1 177.6
98.5 185.0
96.7
15.3
12.2
12.6
13.0
17.8
14.1
13.1
11.5
11.9
9.9
8.9
8.8
8.0
8.0
8.0
48.9
121.8
122.0
121.2
121.2
121.2
120.9
56.2
52.6
92.4
88.9
103.3
102.8
106.1
105.4
33.8
23.6
24.1
33.5
34.4
34.6
35.7
36.2
36.5
1.6
1.3
0.7
0.7
10.0
7.0
2.5
2.5
1.3
1.1
50.5
51.1
46.6
44.2
41.2
69.8
69.0
69.2
68.7
67.6
64.2
64.2
(46.8 )
17.4
1.1
0.5
1.6
120.9
105.4
36.5
(35.1) (101.6) (117.9)
3.0
3.8
1.4
8.0
(7.5)
0.5
11.9
(8.4)
3.5
13.0
(12.6)
0.4
96.7 185.0
(49.4 )
(76.8 )
47.3 108.2
139.3
(3.5)
135.8
782.0
(459.1)
322.9
1. Adjusted for revaluation of foreign currencies at the exchange rate as at 31 December 2018.
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Financial statements
Notes to the accounts: continued
13. Losses and loss adjustment expenses continued
Accident year
Net Group losses
Estimate of ultimate liability1
At end of accident year
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Current estimate of
cumulative liability
Paid
Total Group net liability
2008
and prior
$m
2009
$m
2010
$m
2011
$m
2012
$m
2013
$m
2014
$m
2015
$m
2016
$m
2017
$m
2018
$m
Total
$m
225.4 402.5 290.4
212.2 362.1
177.7
260.7
202.4
183.6
176.6
257.0
212.6
192.9
185.0
181.5
270.1
250.9
215.2
216.4
214.1
210.4
201.4
228.6
216.8
205.7
192.1
187.5
178.6
340.8
319.3
354.6
361.5
356.7
347.9
346.5
341.5
785.9 161.7 263.6
497.4 106.5 185.8
72.4 180.1
452.9
65.3 202.3
408.8
79.1 195.0
404.6
74.7 196.8
434.0
70.4 194.1
428.3
88.3 193.4
427.5
88.3 191.8
426.2
426.1
64.3
423.1
423.1
(408.4 )
14.7
341.5
210.4
64.3 191.8
(62.4 ) (182.6) (322.8) (152.4) (194.9) (163.6) (148.6) (131.6 ) (184.9 )
15.5
177.7 362.1 290.4
(53.7)
46.1 177.2 236.7
176.6
181.5
178.6
1.9
18.7
26.2
28.0
17.9
9.2
1. Adjusted for revaluation of foreign currencies at the exchange rate as at 31 December 2018.
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:
2008 accident year and prior
2009 accident year
2010 accident year
2011 accident year
2012 accident year
2013 accident year
2014 accident year
2015 accident year
2016 accident year
2017 accident year
Total favourable development
2018
$m
3.1
23.9
1.6
4.7
8.8
3.5
3.4
6.6
33.3
38.0
126.9
2,598.0
(2,005.9)
592.1
2017
$m
0.1
0.1
1.8
8.8
5.0
3.5
9.2
20.3
16.3
–
65.1
The favourable prior year development in both 2018 and 2017 was primarily due to general IBNR releases across most lines of business due to a
lack of reported claims. 2018 also included reductions on some prior accident year property and energy reserves. In 2017, the Group experienced
some adverse development on prior accident year property and energy claims.
There were no individually significant net loss events for the year ended 31 December 2018. In September 2017, hurricanes Harvey, Irma and
Maria made landfall in the Caribbean and U.S., causing significant damage and destruction to property. These events were followed by wildfires
in California during October 2017 and December 2017. Management’s current best estimates in relation to each of these events are shown in the
table below.
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Notes to the accounts: continued
13. Losses and loss adjustment expenses continued
The Group’s estimated ultimate net losses, after reinstatement premiums, for these significant events are as follows:
2008
and prior
$m
2009
$m
2010
$m
2011
$m
2012
$m
2013
$m
2014
$m
2015
$m
2016
$m
2017
$m
2018
$m
Total
$m
225.4 402.5 290.4
212.2 362.1
177.7
260.7
202.4
183.6
176.6
257.0
212.6
192.9
185.0
181.5
270.1
250.9
215.2
216.4
214.1
210.4
201.4
228.6
216.8
205.7
192.1
187.5
178.6
340.8
319.3
354.6
361.5
356.7
347.9
346.5
341.5
785.9 161.7 263.6
497.4 106.5 185.8
452.9
408.8
404.6
434.0
428.3
427.5
426.2
426.1
423.1
72.4 180.1
65.3 202.3
79.1 195.0
74.7 196.8
70.4 194.1
88.3 193.4
88.3 191.8
64.3
Change in insurance losses and loss adjustment expenses
Change in insurance losses and loss adjustment expenses recoverable
Change in reinstatement premiums
Net ultimate losses as at 31 December 2017
Change in insurance losses and loss adjustment expenses
Change in insurance losses and loss adjustment expenses recoverable
Change in reinstatement premiums
Net ultimate losses as at 31 December 2018
Harvey
$m
66.3
(18.5)
(3.3)
44.5
(23.8)
3.7
1.4
25.8
Irma
$m
108.9
(55.1 )
(1.7 )
52.1
14.8
(4.9 )
0.1
62.1
Combined 2017
California
Wildfires
$m
75.9
(41.4)
(0.4)
34.1
(13.1)
6.0
(1.3)
25.7
Maria
$m
78.5
(43.1)
(2.3)
33.1
(1.2)
(5.2)
0.8
27.5
14. Insurance, reinsurance and other receivables
All receivables are considered current other than $54.1 million (31 December 2017 – $53.7 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.
423.1
64.3 191.8
341.5
178.6
210.4
181.5
176.6
177.7 362.1 290.4
2,598.0
(408.4 )
(62.4 ) (182.6) (322.8) (152.4) (194.9) (163.6) (148.6) (131.6 ) (184.9 )
(53.7)
(2,005.9)
15. Provision for deferred tax
Total Group net liability
14.7
1.9
9.2
18.7
26.2
15.5
17.9
28.0
46.1 177.2 236.7
592.1
1. Adjusted for revaluation of foreign currencies at the exchange rate as at 31 December 2018.
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:
2018
$m
3.1
23.9
1.6
4.7
8.8
3.5
3.4
6.6
33.3
38.0
126.9
2017
$m
0.1
0.1
1.8
8.8
5.0
3.5
9.2
20.3
16.3
–
65.1
Equity based compensation
Claims equalisation reserves
Syndicate underwriting profits
Syndicate participation rights
Other temporary differences
Tax losses carried forward
Net deferred tax liability
2018
$m
(2.5)
6.2
(3.6)
12.7
(1.6)
–
11.2
2017
$m
(2.9)
8.3
0.1
12.7
(1.2)
(0.5)
16.5
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 2019 and subsequent years to utilise the deferred tax assets recognised when the
underlying temporary differences reverse.
For the years ended 31 December 2018 and 2017, the Group had no uncertain tax positions.
Changes to the UK main rate of corporation tax have been enacted under the Finance Act 2016 reducing the rate to 17.0 per cent from
1 April 2020.
All deferred tax assets and liabilities are classified as non-current.
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
Current estimate of
cumulative liability
Paid
2008 accident year and prior
2009 accident year
2010 accident year
2011 accident year
2012 accident year
2013 accident year
2014 accident year
2015 accident year
2016 accident year
2017 accident year
Total favourable development
The favourable prior year development in both 2018 and 2017 was primarily due to general IBNR releases across most lines of business due to a
lack of reported claims. 2018 also included reductions on some prior accident year property and energy reserves. In 2017, the Group experienced
some adverse development on prior accident year property and energy claims.
There were no individually significant net loss events for the year ended 31 December 2018. In September 2017, hurricanes Harvey, Irma and
Maria made landfall in the Caribbean and U.S., causing significant damage and destruction to property. These events were followed by wildfires
in California during October 2017 and December 2017. Management’s current best estimates in relation to each of these events are shown in the
table below.
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Financial statements
Notes to the accounts: continued
16. 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 2018, the carrying value of the Group’s investment in KHL was $67.1 million (31 December 2017 – $59.4
million). The Group’s share of comprehensive loss for KHL for the period was $7.1 million (2017 – $9.4 million). Key financial information for
KHL is as follows:
Assets
Liabilities
Shareholders’ equity
Gross premium earned
Comprehensive loss
2018
$m
905.2
234.2
671.0
81.9
(71.2)
2017
$m
736.4
141.9
594.5
71.7
(94.3)
The Group has the power to participate in the 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.
When IFRS 9, Financial Instruments: Classification and Measurement is implemented, KHL will continue to classify all its financial assets at
FVTPL. There will therefore be no impact on the estimated fair value of the assets disclosed in the table above.
Refer to note 23 for details of transactions between the Group and its associate.
17. Intangible assets
Net book value as at 31 December 2018 and 2017
Syndicate
participation
rights
$m
82.6
Goodwill
$m
71.2
Total
$m
153.8
Indefinite life intangible assets are tested annually for impairment. For the purpose of impairment testing, the syndicate participation rights and
goodwill have been allocated to the Lloyd’s CGU.
The recoverable amount of the Lloyd’s CGU is determined based on value in use. Value in use is calculated using projected cash flows of the
Lloyd’s 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 6.4 per cent (2017 – 6.2 per cent) has been used to discount the projected cash flows, which reflects a combination of factors
including the Group’s expected cost of equity and cost of borrowing. The growth rate used to extrapolate the cash flows is 3.0 per cent
(2017 – 3.0 per cent) based on historical growth rates and management’s best estimate of future growth rates.
The results of this exercise indicate that the recoverable amount exceeds the syndicate participation rights and the goodwill’s carrying values and
would not be sensitive to any reasonably possible changes in assumptions. No impairment has been recognised for the years ending 31 December
2018 and 2017.
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152
Notes to the accounts: continued
16. 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 2018, the carrying value of the Group’s investment in KHL was $67.1 million (31 December 2017 – $59.4
million). The Group’s share of comprehensive loss for KHL for the period was $7.1 million (2017 – $9.4 million). Key financial information for
KHL is as follows:
Assets
Liabilities
Shareholders’ equity
Gross premium earned
Comprehensive loss
2018
$m
905.2
234.2
671.0
81.9
(71.2)
2017
$m
736.4
141.9
594.5
71.7
(94.3)
The Group has the power to participate in the 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.
When IFRS 9, Financial Instruments: Classification and Measurement is implemented, KHL will continue to classify all its financial assets at
FVTPL. There will therefore be no impact on the estimated fair value of the assets disclosed in the table above.
Refer to note 23 for details of transactions between the Group and its associate.
17. Intangible assets
Net book value as at 31 December 2018 and 2017
goodwill have been allocated to the Lloyd’s CGU.
Indefinite life intangible assets are tested annually for impairment. For the purpose of impairment testing, the syndicate participation rights and
The recoverable amount of the Lloyd’s CGU is determined based on value in use. Value in use is calculated using projected cash flows of the
Lloyd’s 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 6.4 per cent (2017 – 6.2 per cent) has been used to discount the projected cash flows, which reflects a combination of factors
including the Group’s expected cost of equity and cost of borrowing. The growth rate used to extrapolate the cash flows is 3.0 per cent
(2017 – 3.0 per cent) based on historical growth rates and management’s best estimate of future growth rates.
The results of this exercise indicate that the recoverable amount exceeds the syndicate participation rights and the goodwill’s carrying values and
would not be sensitive to any reasonably possible changes in assumptions. No impairment has been recognised for the years ending 31 December
2018 and 2017.
Syndicate
participation
rights
$m
82.6
Goodwill
$m
71.2
Total
$m
153.8
18. Long-term debt and financing arrangements
Long-term debt
On 5 October 2012, LHL 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, LHL 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.
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 loan note issued on 26 November 2004 and repayable in September 2034, paying interest quarterly
based on a set margin, 3.75 per cent, above 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 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 notes
issued by CCHL.
As at all reporting dates the Group was in compliance with all covenants under these facilities.
The carrying values of the notes are shown below:
As at 31 December
Long-term debt $130.0 million
Long-term debt $97.0 million
Long-term debt €24.0 million
Long-term debt €12.0 million
Long-term debt $10.0 million
Long-term debt $25.0 million
Long-term debt $25.0 million
Carrying value
2018
$m
130.0
97.0
27.5
12.4
10.0
23.7
23.7
324.3
2017
$m
130.0
97.0
28.8
13.1
10.0
23.7
23.7
326.3
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 pages 126 to 127.
The fair value of the long-term debt is estimated as $359.2 million (31 December 2017 – $369.3 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 $2.4 million (31 December 2017 – $2.3 million) at the balance sheet date and is included in
other payables.
Refer to note 8 for details of the interest expense for the year included in financing costs.
152 Lancashire Holdings Limited
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153
Financial statements
Notes to the accounts: continued
18. Long-term debt and financing arrangements continued
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 126 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 $0.4 million (31 December 2017 – $2.0 million). Further information
is provided on pages 124 to 127. Cash settlements are completed on a quarterly basis and the total of the next cash settlements in the first quarter
of 2019 on these instruments is $nil. 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 8 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
These LOCs are required to be fully collateralised.
2018
$m
30.2
2017
$m
31.0
LHL and LICL have 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 which will expire on 24 March 2021. There was no outstanding debt under this facility as at 31 December 2018 and 2017.
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, which require
certain covenants to be adhered to. These include the following:
• an A.M. Best financial strength rating of at least B++;
• a maximum debt to capital ratio of 30.0 per cent, where the subordinated loan notes are excluded from this calculation;
• a maximum indebtedness regarding the subordinated loan notes of $250.0 million; and
• a maximum indebtedness regarding the Syndicate 2010 and 3010 catastrophe facilities of $150.0 million.
A $130.0 million syndicated uncollateralised facility had been in place since 3 October 2017 and was cancelled during December 2018. It was
available for utilisation by LICL and guaranteed by LHL for FAL purposes. As at 31 December 2018 $nil (31 December 2017 – $130.0 million)
of LOCs were issued under this facility.
The terms of the $130.0 million syndicated uncollateralised facility included standard default and cross-default provisions and require certain
covenants to be adhered to. These include the following:
• an A.M. Best financial strength rating of at least B++;
• a maximum debt to capital ratio of 30.0 per cent, where the subordinated loan notes are excluded from this calculation;
• a maximum indebtedness regarding the subordinated loan notes of $250.0 million; and
• maintenance of a minimum net worth requirement.
As at all reporting dates the Group was in compliance with all covenants under these facilities.
Syndicate bank facilities
As at 31 December 2018 and 2017, Syndicate 2010 had in place an $80.0 million catastrophe facility. The facility is available to assist in paying
claims and the gross funding of catastrophes for Syndicate 2010. Up to $80.0 million can be utilised by way of an LOC or an RCF to assist
Syndicate 2010’s gross funding requirements.
There are no balances outstanding under the Syndicate bank facility as at 31 December 2018 or 2017. The Syndicate bank facility is not available
to the Group other than through its participation on the syndicates it supports.
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Annual Report & Accounts 2018
154 Lancashire Holdings Limited
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154
Notes to the accounts: continued
18. Long-term debt and financing arrangements continued
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 126 for further details. The Group has the right to net settle
The net fair value position owed by the Group on the swap agreements is $0.4 million (31 December 2017 – $2.0 million). Further information
is provided on pages 124 to 127. Cash settlements are completed on a quarterly basis and the total of the next cash settlements in the first quarter
of 2019 on these instruments is $nil. 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
Refer to note 8 for the net impact from cash settlement and changes in estimated fair value included in financing costs.
Interest rate swaps
these instruments.
in the fair value hierarchy.
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
These LOCs are required to be fully collateralised.
2018
$m
30.2
2017
$m
31.0
LHL and LICL have 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 which will expire on 24 March 2021. There was no outstanding debt under this facility as at 31 December 2018 and 2017.
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, which require
certain covenants to be adhered to. These include the following:
• an A.M. Best financial strength rating of at least B++;
• a maximum debt to capital ratio of 30.0 per cent, where the subordinated loan notes are excluded from this calculation;
• a maximum indebtedness regarding the subordinated loan notes of $250.0 million; and
• a maximum indebtedness regarding the Syndicate 2010 and 3010 catastrophe facilities of $150.0 million.
A $130.0 million syndicated uncollateralised facility had been in place since 3 October 2017 and was cancelled during December 2018. It was
available for utilisation by LICL and guaranteed by LHL for FAL purposes. As at 31 December 2018 $nil (31 December 2017 – $130.0 million)
of LOCs were issued under this facility.
The terms of the $130.0 million syndicated uncollateralised facility included standard default and cross-default provisions and require certain
covenants to be adhered to. These include the following:
• an A.M. Best financial strength rating of at least B++;
• a maximum debt to capital ratio of 30.0 per cent, where the subordinated loan notes are excluded from this calculation;
• a maximum indebtedness regarding the subordinated loan notes of $250.0 million; and
• maintenance of a minimum net worth requirement.
As at all reporting dates the Group was in compliance with all covenants under these facilities.
Syndicate bank facilities
As at 31 December 2018 and 2017, Syndicate 2010 had in place an $80.0 million catastrophe facility. The facility is available to assist in paying
claims and the gross funding of catastrophes for Syndicate 2010. Up to $80.0 million can be utilised by way of an LOC or an RCF to assist
Syndicate 2010’s gross funding requirements.
There are no balances outstanding under the Syndicate bank facility as at 31 December 2018 or 2017. The Syndicate bank facility is 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 2018 and 2017, LICL had been granted accredited or trusteed reinsurer status in all U.S. 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 2018 and 2017, 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 133 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 133 for more information regarding the capital requirements for Syndicate 2010 and Syndicate 3010.
The following cash and cash equivalent and investment balances were held in trust, other collateral accounts in favour of third parties, or are
otherwise restricted:
As at 31 December
MBRT accounts
FAL
Syndicate accounts
In favour of LOCs
In trust accounts for policyholders
In favour of derivative contracts
Total
19. Share capital
Authorised common shares of $0.50 each
As at 31 December 2018 and 2017
Allocated, called up and fully paid
As at 31 December 2017 and 2016
Shares issued
As at 31 December 2018
2018
Cash and cash
equivalents
$m
Fixed maturity
securities
$m
1.4
6.2
15.9
2.3
3.4
1.4
30.6
174.7
306.7
90.4
38.7
24.9
–
635.4
2017
Cash and cash
equivalents
$m
Fixed maturity
securities
$m
50.7
18.4
21.0
5.4
0.8
3.0
99.3
132.4
132.5
78.3
35.7
24.6
0.3
403.8
Total
$m
176.1
312.9
106.3
41.0
28.3
1.4
666.0
Number
3,000,000,000
Number
201,341,918
600,000
201,941,918
The new common shares issued during 2018 were to fund future RSS exercises.
Own shares
As at 31 December 2016
Shares distributed
Shares donated to trust
As at 31 December 2017
Shares distributed
Shares purchased by trust
As at 31 December 2018
Number held
in treasury
1,415,058
–
(1,415,058)
–
–
–
–
$m
14.0
–
(14.0)
–
–
–
–
Number held
in trust
1,048,969
(1,130,800)
1,415,058
1,333,227
(800,776)
600,000
1,132,451
$m
9.2
(9.9 )
12.8
12.1
(7.3 )
4.6
9.4
Total number
of own shares
2,464,027
(1,130,800)
–
1,333,227
(800,776)
600,000
1,132,451
The number of common shares in issue with voting rights (allocated share capital less shares held in treasury) as at 31 December 2018 was
201,941,918 (31 December 2017 – 201,341,918).
Total
$m
183.1
150.9
99.3
41.1
25.4
3.3
503.1
$m
1,500
$m
100.7
0.3
101.0
$m
23.2
(9.9)
(1.2)
12.1
(7.3)
4.6
9.4
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155
Financial statements
Notes to the accounts: continued
19. Share capital continued
Share repurchases
At the AGM held on 2 May 2018, LHL’s shareholders approved a renewal of the Repurchase Programme authorising the repurchase of a
maximum of 20,134,192 shares, with such authority to expire on the conclusion of the 2019 AGM or, if earlier, 15 months from the date the
resolution approving the Repurchase Programme was passed. There were no share repurchases during either 2018 or 2017.
Dividends
The Board of Directors have authorised the following dividends:
Type
Final
Interim
Final
Interim
Special
20. Other reserves
Other reserves consist of the following:
As at 31 December 2016
Shares donated to the trust
Distributed by the trust
Equity based compensation – exercises
Equity based compensation – credit
As at 31 December 2017
Shares purchased by the trust
Distributed by the trust
Purchase of shares from non-controlling interest
Equity based compensation – exercises
Equity based compensation – expense
As at 31 December 2018
Per share amount
Record date
Payment date
$0.10
$0.05
$0.10
$0.05
$0.20
24 Feb 2017
11 Aug 2017
23 Feb 2018
17 Aug 2018
9 Nov 2018
22 Mar 2017
6 Sep 2017
21 Mar 2018
12 Sep 2018
12 Dec 2018
$m
19.9
10.0
20.0
10.1
40.1
Contributed
surplus
$m
Equity based
compensation
$m
Total other
reserves
$m
839.5
(1.2 )
(13.8 )
14.6
–
839.1
4.3
(9.9 )
(0.1 )
10.3
–
843.7
42.1
–
–
(14.6)
(0.4)
27.1
–
–
–
(10.3)
8.5
25.3
881.6
(1.2)
(13.8)
–
(0.4)
866.2
4.3
(9.9)
(0.1)
–
8.5
869.0
2017
$m
3.6
10.0
28.3
41.9
21. Commitments and contingencies
Lease commitments
The Group has payment obligations in respect of operating leases for certain items of office equipment and office space. Operating lease
expenses for the year were $3.4 million (2017 – $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
2018
$m
3.5
13.9
24.4
41.8
During 2014, the Group entered into a new lease agreement for larger office premises in the UK and assigned the leases in relation to the
existing office premises in the UK to a third party who assumed responsibility for payments. Under the terms of the lease assignment the Group
retains liability for lease payments in the event that the assignee and the assignee’s guarantor fail to meet their obligations under the assignment
agreements. The new lease agreement contains a break date of April 2029 and a lease end date of April 2034. The lease is guaranteed by LHL.
In December 2018, the Group committed to a new five-year lease agreement for its existing office premises in Bermuda. The new lease
agreement is effective 1 January 2019.
Lancashire Holdings Limited
Annual Report & Accounts 2018
156 Lancashire Holdings Limited
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156
Notes to the accounts: continued
Per share amount
Record date
Payment date
$0.10
$0.05
$0.10
$0.05
$0.20
24 Feb 2017
22 Mar 2017
11 Aug 2017
6 Sep 2017
23 Feb 2018
21 Mar 2018
17 Aug 2018
12 Sep 2018
9 Nov 2018
12 Dec 2018
$m
19.9
10.0
20.0
10.1
40.1
881.6
(1.2)
(13.8)
–
(0.4)
866.2
4.3
(9.9)
(0.1)
–
8.5
869.0
2017
$m
3.6
10.0
28.3
41.9
surplus
$m
839.5
(1.2 )
(13.8 )
14.6
–
839.1
4.3
(9.9 )
(0.1 )
10.3
–
843.7
–
–
–
–
–
(14.6)
(0.4)
27.1
(10.3)
8.5
25.3
2018
$m
3.5
13.9
24.4
41.8
The Group has payment obligations in respect of operating leases for certain items of office equipment and office space. Operating lease
expenses for the year were $3.4 million (2017 – $3.4 million).
Future minimum lease payments under non-cancellable operating leases are as follows:
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 a lease end date of April 2034. The lease is guaranteed by LHL.
In December 2018, the Group committed to a new five-year lease agreement for its existing office premises in Bermuda. The new lease
agreement is effective 1 January 2019.
Dividends
Type
Final
Interim
Final
Interim
Special
20. Other reserves
Other reserves consist of the following:
As at 31 December 2016
Shares donated to the trust
Distributed by the trust
Equity based compensation – exercises
Equity based compensation – credit
As at 31 December 2017
Shares purchased by the trust
Distributed by the trust
Purchase of shares from non-controlling interest
Equity based compensation – exercises
Equity based compensation – expense
As at 31 December 2018
21. Commitments and contingencies
Lease commitments
Due in less than one year
Due between one and five years
Due in more than five years
Total
156 Lancashire Holdings Limited
Annual Report & Accounts 2018
19. Share capital continued
Share repurchases
At the AGM held on 2 May 2018, LHL’s shareholders approved a renewal of the Repurchase Programme authorising the repurchase of a
maximum of 20,134,192 shares, with such authority to expire on the conclusion of the 2019 AGM or, if earlier, 15 months from the date the
resolution approving the Repurchase Programme was passed. There were no share repurchases during either 2018 or 2017.
The Board of Directors have authorised the following dividends:
Credit facility fund
As at 31 December 2018 the Group has a commitment of $100.0 million (31 December 2017 – $100.0 million) relating to two credit facility funds
(refer to note 12).
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.
22. Earnings per share
The following reflects the profit and share data used in the basic and diluted earnings per share computations:
Profit (loss) for the year attributable to equity shareholders of LHL
Contributed
Equity based
compensation
$m
42.1
Total other
reserves
$m
Basic weighted average number of shares
Dilutive effect of RSS
Diluted weighted average number of shares
Earnings (loss) per share
Basic
Diluted1
2018
$m
37.5
2017
$m
(71.1)
2018
Number
of shares
200,655,440
1,960,322
202,615,762
2017
Number
of shares
199,723,434
1,780,368
201,503,802
2018
$0.19
$0.19
2017
($0.36)
($0.36)
1. Diluted EPS excludes dilutive effect of RSS when in a loss making position.
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.
157
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Financial statements
Notes to the accounts: continued
23. Related party disclosures
The consolidated financial statements include LHL and the entities listed below:
Name
Subsidiaries1
CCHL
CCL
CCL 1998
CCL 1999
CCSL
CUL
KCML2
KCMMSL
LICL
LIHL
LIMSL
LISL
LMSCL
LUK
ORANGE FUND
Associate
KHL3
Other controlled entities
EBT
LHFT
Principal Business
Domicile
Investment company
Holding company
Lloyd’s corporate member
Non trading
Dormant
Lloyd’s managing agent
Insurance management services
Support services
General insurance business
Holding company
Insurance mediation activities
Support services
Support services
General insurance business
Investment fund
Holding company
Trust
Trust
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Bermuda
United Kingdom
Bermuda
United Kingdom
United Kingdom
United Kingdom
Canada
United Kingdom
United States
Bermuda
Jersey
United States
1. Unless otherwise stated, the Group owns 100 per cent of the ordinary share capital and voting rights in its subsidiaries listed below.
2. 93.5 per cent (2017 – 92.7 per cent) owned by the Group.
3. 10.0 per cent interest in the preference shares of each segregated account of KHL.
The Group has issued subordinated loan notes via a trust vehicle – LHFT, refer to note 18. The Group effectively has 100.0 per cent of the voting
rights in LHFT. These rights are subject to the property trustee’s obligations to seek the approval of the holders of LHFT’s preferred securities in
case of default and other limited circumstances where the property trustee would enforce its rights. While the ability of the Group to influence
the actions of LHFT is limited by the trust agreement, LHFT was set up by the Group with the sole purpose of issuing the subordinated loan
notes, and is in essence controlled by the Group, and is therefore consolidated.
The EBT was established to assist in the administration of the Group’s employee equity based compensation schemes. While the Group does not
have legal ownership of the EBT and the ability of the Group to influence the actions of the EBT is limited by the trust deed, the EBT was set up
by the Group with the sole purpose of assisting in the administration of these schemes, and is in essence controlled by the Group, and is therefore
consolidated.
The Group has a Loan Facility Agreement (the ‘Facility’) with RBC Cees Trustee Limited, the trustee of the EBT. The Facility is an interest free
revolving credit facility under which the trustee can request advances on demand, within the terms of the Facility, up to a maximum aggregate
amount of $80.0 million. The Facility may only be used by the trustee for the purpose of achieving the objectives of the EBT. During the year
ended 31 December 2018, the Group had made advances of $1.5 million (2017 – $6.0 million) to the EBT under the terms of the Facility.
During the year ended 31 December 2018, the Group issued 600,000 shares to the EBT at a par value of $0.3 million and a total value of
$4.6 million at the prevailing market rate. During the year ended 31 December 2017, the Group donated 1,415,058 treasury shares to the EBT
at the prevailing market rate. The total value of the treasury share donation was $12.8 million.
LICL holds $191.9 million (31 December 2017 – $245.3 million) of cash and cash equivalents, fixed maturity securities and accrued interest in
trust for the benefit of LUK relating to intra-group reinsurance agreements. In addition, LICL is required to provide 85.0 per cent of the required
FAL to support the underwriting activities of Syndicate 2010 and 3010 and holds $267.9 million (31 December 2017 – $109.2 million) of cash and
cash equivalents and fixed maturity securities in FAL in relation to intra-group reinsurance agreements.
Lancashire Holdings Limited
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158 Lancashire Holdings Limited
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158
Notes to the accounts: continued
23. Related party disclosures
The consolidated financial statements include LHL and the entities listed below:
Principal Business
Domicile
Name
Subsidiaries1
CCHL
CCL
CCL 1998
CCL 1999
CCSL
CUL
KCML2
KCMMSL
LICL
LIHL
LIMSL
LISL
LMSCL
LUK
Associate
KHL3
EBT
LHFT
ORANGE FUND
Other controlled entities
Investment company
Holding company
Lloyd’s corporate member
Non trading
Dormant
Lloyd’s managing agent
Insurance management services
Support services
General insurance business
Holding company
Insurance mediation activities
Support services
Support services
General insurance business
Investment fund
Holding company
Trust
Trust
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Bermuda
United Kingdom
Bermuda
United Kingdom
United Kingdom
United Kingdom
Canada
United Kingdom
United States
Bermuda
Jersey
United States
1. Unless otherwise stated, the Group owns 100 per cent of the ordinary share capital and voting rights in its subsidiaries listed below.
2. 93.5 per cent (2017 – 92.7 per cent) owned by the Group.
3. 10.0 per cent interest in the preference shares of each segregated account of KHL.
The Group has issued subordinated loan notes via a trust vehicle – LHFT, refer to note 18. The Group effectively has 100.0 per cent of the voting
rights in LHFT. These rights are subject to the property trustee’s obligations to seek the approval of the holders of LHFT’s preferred securities in
case of default and other limited circumstances where the property trustee would enforce its rights. While the ability of the Group to influence
the actions of LHFT is limited by the trust agreement, LHFT was set up by the Group with the sole purpose of issuing the subordinated loan
notes, and is in essence controlled by the Group, and is therefore consolidated.
The EBT was established to assist in the administration of the Group’s employee equity based compensation schemes. While the Group does not
have legal ownership of the EBT and the ability of the Group to influence the actions of the EBT is limited by the trust deed, the EBT was set up
by the Group with the sole purpose of assisting in the administration of these schemes, and is in essence controlled by the Group, and is therefore
consolidated.
The Group has a Loan Facility Agreement (the ‘Facility’) with RBC Cees Trustee Limited, the trustee of the EBT. The Facility is an interest free
revolving credit facility under which the trustee can request advances on demand, within the terms of the Facility, up to a maximum aggregate
amount of $80.0 million. The Facility may only be used by the trustee for the purpose of achieving the objectives of the EBT. During the year
ended 31 December 2018, the Group had made advances of $1.5 million (2017 – $6.0 million) to the EBT under the terms of the Facility.
During the year ended 31 December 2018, the Group issued 600,000 shares to the EBT at a par value of $0.3 million and a total value of
$4.6 million at the prevailing market rate. During the year ended 31 December 2017, the Group donated 1,415,058 treasury shares to the EBT
at the prevailing market rate. The total value of the treasury share donation was $12.8 million.
LICL holds $191.9 million (31 December 2017 – $245.3 million) of cash and cash equivalents, fixed maturity securities and accrued interest in
trust for the benefit of LUK relating to intra-group reinsurance agreements. In addition, LICL is required to provide 85.0 per cent of the required
FAL to support the underwriting activities of Syndicate 2010 and 3010 and holds $267.9 million (31 December 2017 – $109.2 million) of cash and
cash equivalents and fixed maturity securities in FAL in relation to intra-group reinsurance agreements.
The senior management team shareholding in KCML represents a minority interest of 6.5 per cent (2017 – 7.3 per cent). This investment
represents the non-controlling interest listed in the Group’s consolidated balance sheet. During the year ended 31 December 2018, dividends
of $nil (31 December 2017 – $0.6 million) were paid to minority interest holders.
As at 31 December 2018 and 2017, Mr Alex Maloney, a director of LHL, had a 1.2 per cent interest in KCML. During the year ended
31 December 2018, Mr Maloney received a dividend of $nil (31 December 2017 – $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
2019 year of account (2018 year of account – $0.2 million). Mr Maloney receives a proportionate share of the underwriting results of Syndicate
2010 to which he is contractually entitled through his participation.
Key management compensation
Remuneration for key management, the Group’s Executive and Non-Executive Directors, was as follows:
For the year ended 31 December
Short-term compensation
Equity based compensation
Directors’ fees and expenses
Total
2018
$m
2.3
1.2
1.9
5.4
2017
$m
2.9
0.2
2.1
5.2
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 2018,
the Group recognised $6.6 million (2017 – $11.7 million) of service fees and profit commissions in other income (refer to note 5) in relation
to this agreement.
During 2018, the Group committed an additional $35.8 million (31 December 2017 – $57.5 million) of capital to KHL. During 2018, KHL
returned $21.0 million (31 December 2017 – $38.4 million) of capital to the Group.
Refer to note 16 for further details on the Group’s investment in associate.
Transactions with subsidiary of KHL
During 2017, the Group entered into a reinsurance agreement with KRL, which was not renewed during 2018. All reinsurance recoveries due as
at 31 December 2017 were fully settled during 2018. The following balances were included in the Group’s consolidated financial statements for
the year ended 31 December 2017:
Consolidated balance sheet
Reinsurance recoveries
Consolidated statement of comprehensive income (loss)
Outwards reinsurance premiums
Insurance losses and loss adjustment expenses recoverable
Insurance acquisition expenses ceded
2017
$m
22.1
2017
$m
3.8
22.1
0.1
24. Subsequent events
Dividend
On 13 February 2019, the Board of Directors declared the payment of an ordinary dividend of $0.10 per common share to shareholders of
record on 22 February 2019, with a settlement date of 27 March 2019. The ordinary dividend payable will be approximately $20.1 million.
An amount equivalent to the dividend accrues on all RSS awards and is paid at the time of exercise, pro-rata according to the number of RSS
options that vest.
158 Lancashire Holdings Limited
Annual Report & Accounts 2018
159
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159
Financial statements
Shareholder information
Annual General Meeting
The Company’s AGM is scheduled for 1 May 2019 and is to be held
at the Company’s registered and head office at Power House, 7 Par-la-
Ville Road, Hamilton HM 11, Bermuda. Notice of this year’s AGM
and forms of proxy and direction accompany this Annual Report.
If you have any queries regarding the notice or return of the
proxy please contact Chris Head, Company Secretary, using Tel:
+ 44 (0) 20 7264 4000 and email: chris.head@lancashiregroup.com.
Further information
Lancashire Holdings Limited is registered in Bermuda under
company number EC 37415 and has its registered office at
Power House, 7 Par-la-Ville Road, Hamilton HM 11, Bermuda.
Further information about the Group including this Annual Report,
press releases and the Company’s share price is available on our
website at www.lancashiregroup.com. Please address any enquiries
to info@lancashiregroup.com.
Note regarding forward-looking statements
Some of the statements in this document include forward-looking
statements which reflect the Directors’ current views with respect
to financial performance, business strategy, plans and objectives of
management for future operations (including development plans
relating to the Group’s products and services). These statements
include forward-looking statements both with respect to the Group
and the sectors and industries in which the Group operates.
Statements containing the words ‘believes’, ‘anticipates’, ‘plans’,
‘projects’, ‘forecasts’, ‘guidance’, ‘intends’, ‘expects’, ‘estimates’,
‘predicts’, ‘may’, ‘can’, ‘likely’, ‘will’, ‘seeks’, ‘should’ or, in each case,
their negative or comparable terminology and similar statements are
of a future or forward-looking nature. All forward-looking statements
address matters that involve known and unknown risks and
uncertainties. Accordingly, there are or will be important factors
that could cause the actual results, performance or achievements
of the Group to be materially different from future results,
performance or achievements expressed or implied by such
forward-looking statements.
These factors include, but are not limited to: the actual development
of losses and expenses impacting estimates for the Californian
wildfires and hurricane Michael which occurred in the fourth quarter
of 2018, hurricane Florence, the typhoons and marine losses that
occurred in the third quarter of 2018, hurricanes Harvey, Irma and
Maria and the earthquakes in Mexico, that occurred in the third
quarter of 2017 and the wildfires which impacted parts of California
during 2017; the impact of complex and unique causation and
coverage issues associated with attribution of losses to wind or
flood damage or other perils such as fire or business interruption
relating to such events; potential uncertainties relating to reinsurance
recoveries, reinstatement premiums and other factors inherent in
loss estimations; the Group’s ability to integrate its business and
personnel; the successful retention and motivation of the Group’s
key management; the increased regulatory burden facing the Group;
the number and type of insurance and reinsurance contracts that
the Group writes or the Group may write; the Group’s ability to
successfully implement its business strategy during ‘soft’ as well as
‘hard’ markets; the premium rates which may be available at the time
of such renewals within its targeted business lines; the possible low
frequency of large events; potentially unusual loss frequency; the
impact that the Group’s future operating results, capital position
and rating agency and other considerations may have on the
execution of any capital management initiatives or dividends; the
possibility of greater frequency or severity of claims and loss activity
than the Group’s underwriting, reserving or investment practices
have anticipated; the reliability of, and changes in assumptions
to, catastrophe pricing, accumulation and estimated loss models;
increased competition from existing alternative capital providers and
insurance-linked funds and collateralised special purpose insurers, and
the related demand and supply dynamics as contracts come up for
renewal; the effectiveness of its loss limitation methods; the potential
loss of key personnel; a decline in the Group’s operating subsidiaries’
rating with A.M. Best, S&P Global Ratings, Moody’s or other rating
agencies; increased competition on the basis of pricing, capacity,
coverage terms or other factors; cyclical downturns of the industry;
Lancashire Holdings Limited
Annual Report & Accounts 2018
148
Lancashire Holdings Limited | Annual Report & Accounts 2018
160
Shareholder information
Annual General Meeting
The Company’s AGM is scheduled for 1 May 2019 and is to be held
at the Company’s registered and head office at Power House, 7 Par-la-
Ville Road, Hamilton HM 11, Bermuda. Notice of this year’s AGM
and forms of proxy and direction accompany this Annual Report.
If you have any queries regarding the notice or return of the
proxy please contact Chris Head, Company Secretary, using 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
These factors include, but are not limited to: the actual development
of losses and expenses impacting estimates for the Californian
wildfires and hurricane Michael which occurred in the fourth quarter
of 2018, hurricane Florence, the typhoons and marine losses that
occurred in the third quarter of 2018, hurricanes Harvey, Irma and
Maria and the earthquakes in Mexico, that occurred in the third
quarter of 2017 and the wildfires which impacted parts of California
during 2017; the impact of complex and unique causation and
coverage issues associated with attribution of losses to wind or
flood damage or other perils such as fire or business interruption
relating to such events; potential uncertainties relating to reinsurance
recoveries, reinstatement premiums and other factors inherent in
loss estimations; the Group’s ability to integrate its business and
personnel; the successful retention and motivation of the Group’s
key management; the increased regulatory burden facing the Group;
the number and type of insurance and reinsurance contracts that
the Group writes or the Group may write; the Group’s ability to
successfully implement its business strategy during ‘soft’ as well as
‘hard’ markets; the premium rates which may be available at the time
of such renewals within its targeted business lines; the possible low
Some of the statements in this document include forward-looking
frequency of large events; potentially unusual loss frequency; the
statements which reflect the Directors’ current views with respect
impact that the Group’s future operating results, capital position
to financial performance, business strategy, plans and objectives of
and rating agency and other considerations may have on the
management for future operations (including development plans
execution of any capital management initiatives or dividends; the
relating to the Group’s products and services). These statements
possibility of greater frequency or severity of claims and loss activity
include forward-looking statements both with respect to the Group
than the Group’s underwriting, reserving or investment practices
and the sectors and industries in which the Group operates.
have anticipated; the reliability of, and changes in assumptions
Statements containing the words ‘believes’, ‘anticipates’, ‘plans’,
to, catastrophe pricing, accumulation and estimated loss models;
‘projects’, ‘forecasts’, ‘guidance’, ‘intends’, ‘expects’, ‘estimates’,
increased competition from existing alternative capital providers and
‘predicts’, ‘may’, ‘can’, ‘likely’, ‘will’, ‘seeks’, ‘should’ or, in each case,
insurance-linked funds and collateralised special purpose insurers, and
their negative or comparable terminology and similar statements are
the related demand and supply dynamics as contracts come up for
of a future or forward-looking nature. All forward-looking statements
renewal; the effectiveness of its loss limitation methods; the potential
address matters that involve known and unknown risks and
loss of key personnel; a decline in the Group’s operating subsidiaries’
uncertainties. Accordingly, there are or will be important factors
rating with A.M. Best, S&P Global Ratings, Moody’s or other rating
that could cause the actual results, performance or achievements
agencies; increased competition on the basis of pricing, capacity,
coverage terms or other factors; cyclical downturns of the industry;
of the Group to be materially different from future results,
performance or achievements expressed or implied by such
forward-looking statements.
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 in the United Kingdom; the impact of the change
in tax residence on stakeholders of the Group; and the impact of
‘Brexit’ (following the UK’s notification to the European Council
under Article 50 of the Treaty on European Union on 29 March
2017) and future negotiations regarding the UK’s relationship
with the European Union on the Group’s business, regulatory
relationships, underwriting platforms or the industry generally.
Any estimates relating to loss events involve the exercise of
considerable judgement and reflect a combination of ground-up
evaluations, information available to date from brokers and insureds,
market intelligence, initial and/or tentative loss reports and other
sources. Judgements in relation to loss arising from natural catastrophe
and man-made events are influenced by complex factors. The Group
cautions as to the preliminary nature of the information used to
prepare such estimates as subsequently available information may
contribute to an increase in these types of losses.
These forward-looking statements speak only as at the date of
this document. The Company expressly disclaims any obligation or
undertaking (save as required to comply with any legal or regulatory
obligations including the rules of the LSE) to disseminate any updates
or revisions to any forward-looking statement to reflect any changes
in the Group’s expectations or circumstances on which any such
statement is based. All subsequent written and oral forward-looking
statements attributable to the Group or individuals acting on behalf of
the Group are expressly qualified in their entirety by this paragraph.
Prospective investors should specifically consider the factors identified
in this document which could cause actual results to differ before
making an investment decision.
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Financial statements
Glossary
ABS
Asset backed securities
Accident year loss ratio
The accident year loss ratio is calculated using the accident year
ultimate liability revalued at the current balance sheet date,
divided by net premiums earned
Active Underwriter
The individual at a Lloyd’s syndicate with principal authority to
accept insurance and reinsurance risk on behalf of the syndicate
Additional case reserves (ACR)
Additional reserves deemed necessary by management
AFS
Available for sale
Aggregate
Accumulations of insurance loss exposures which result from
underwriting multiple risks that are exposed to common causes
of loss
AGM
Annual General Meeting
AIM
A sub-market of the LSE
AIR
AIR Worldwide
A.M. Best Company (A.M. Best)
A.M. Best is a full-service credit rating organisation dedicated
to serving the financial services industries, focusing on the
insurance sector
APM
Alternative performance measures
Best Lancashire Assessment of Solvency over Time (BLAST)
The Group’s economic internal capital model
BMA
Bermuda Monetary Authority
Board of Directors; Board
Unless otherwise stated refers to the LHL Board of Directors
Book value per share (BVS)
Calculated by dividing the value of the total shareholders’ equity by
the sum of all common voting shares outstanding
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
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
CFO
Chief Financial Officer
CGU
Cash generating unit
CIO
Chief Investment Officer
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
BREEAM
Building Research Establishment Environmental
Assessment Method
Consolidated financial statements
Includes the independent auditors report, consolidated primary
statements, accounting policies, risk disclosures and related notes
Lancashire Holdings Limited
Annual Report & Accounts 2018
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162
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
D&F
Direct and facultative (re)insurance
Deferred acquisition costs
Costs incurred for the acquisition or the renewal of insurance
policies (e.g. brokerage and premium taxes) which are deferred
and amortised over the term of the insurance contracts to which
they relate
DEFRA
Department for Environment, Food and Rural Affairs
Delegated authorities
Arrangements under which a managing agent or (re)insurer
delegates its authority to another to enter into contracts of
insurance on its behalf
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
Directors’ fees and expenses
Unless otherwise stated includes fees and expenses of all Directors
across the Group
Dividend yield
Calculated by dividing the annual dividends per share by the share
price on the last day of the given year
Duration
Duration is the weighted average maturity of a security’s cash flows,
where the present values of the cash flows serve as the weights. The
effect of the convexity, or sensitivity, of the portfolio’s response to
changes in interest rates is also factored in to the calculation
Earnings per share (EPS)
Calculated by dividing net profit for the year attributable to
shareholders by the weighted average number of common shares
outstanding during the year, excluding treasury shares and shares
held by the EBT
EBT
Lancashire Holdings Employee Benefit Trust
ECA
Economic Capital Assessment
EEA
European Economic Area
ERM
Enterprise Risk Management
EU
European Union
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
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)
FTE
Full-Time Employee
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Financial statements
Glossary: continued
Fully converted book value per share (FCBVS)
Calculated based on the value of the total shareholders’ equity
attributable to the Group and dilutive restricted stock units as
calculated under the treasury method, divided by the sum of all
shares and dilutive restricted stock units, assuming all are exercised
FVTPL
Fair value through profit or loss
G10
Belgium, Canada, Germany, France, Italy, Japan, the Netherlands,
Sweden, the United Kingdom, and the United States
GHG
Greenhouse gas emissions covers carbon dioxide (CO2),
methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFC),
perfluorocarbons (PFC), nitrogen trifluoride (NF3) and sulphur
hexafluoride (SF6)
Gross premiums written
Amounts payable by the insured, excluding any taxes or duties
levied on the premium, including any brokerage and commission
deducted by intermediaries
The Group or the Lancashire Group
LHL and its subsidiaries
ICM
International Care Ministries
IFRIC
International Financial Reporting Interpretations Committee
IFRS
International Financial Reporting Standard(s)
ILS
Insurance Linked Securities
Incurred but not reported (IBNR)
These are anticipated or likely losses that may result from insured
events which have taken place, but for which no losses have yet
been reported. IBNR also includes a reserve for possible adverse
development of previously reported losses
Industry loss warranty (ILW)
A type of reinsurance or derivative contract through which
one party will purchase protection based on the total loss arising
from an event to the entire insurance industry rather than their
own losses
Internal Audit Charter
A formal written document that sets out the mission,
scope, responsibilities, authority, professional standards and
the relationship with the external auditors and regulatory bodies of
the internal audit function with the Company and its subsidiaries
International Accounting Standard(s) (IAS)
Standards, created by the IASB, for the preparation and
presentation of financial statements
International Accounting Standards Board (IASB)
An international panel of accounting experts responsible for
developing IAS and IFRS
IRR
Internal rate of return
IRRC
Investment Risk and Return Committee
ISA
International Standards on Auditing (UK)
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
KPI
Key performance indicator
KRL (Kinesis Re)
Kinesis Reinsurance I Limited
Lancashire companies
Refers to the Group excluding Cathedral and Kinesis
Lancashire Foundation or Foundation
The Lancashire Foundation is a charity registered in England
and Wales
LHFT
Lancashire Holdings Financing Trust I Limited
LHL (The Company)
Lancashire Holdings Limited
LIBOR
London Interbank Offered Rate
LICL
Lancashire Insurance Company Limited
Lancashire Holdings Limited
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LIHL
Lancashire Insurance Holdings (UK) Limited
LIMSL
Lancashire Insurance Marketing Services Limited
LISL
Lancashire Insurance Services Limited
Listing Rules
The listing rules made by the FCA under part VI of FSMA
(as amended from time to time)
Lloyd’s
The Society of Lloyd’s
Lloyd’s Brussels
Lloyd’s Insurance Company SA, the insurer that Lloyd’s has
established in Brussels
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
Managed cash
Managed cash includes both cash managed by external investment
managers and non-operating cash managed internally
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
Nameco
Nameco (No. 801) Ltd
Names
An individual member underwriting at Lloyd’s with unlimited
liability. Since 6 March 2003 no person has been admitted as a new
member to underwrite on an unlimited basis
NAV
Net asset value
Net acquisition cost ratio
Ratio, in per cent, of net insurance acquisition expenses to net
premiums earned
Net expense ratio
Ratio, in per cent, of other operating expenses, excluding
restricted stock expenses, to net premiums earned
Net loss ratio
Ratio, in per cent, of net insurance losses to net premiums earned
Net premiums earned
Net premiums earned is equal to net premium written less the
change in unearned premiums and change in unearned premiums
on premiums ceded
Net premiums written
Net premiums written is equal to gross premiums written less
outwards reinsurance premiums written
Official List
The official list of the UK Listing Authority
Orange Fund
A Series of Payden Active Cash Management, LLC
ORSA
Own Risk and Solvency Assessment
OTC
Over the counter
PML
Probable maximum loss. The Group’s exposure to certain peak
zone elemental losses
PRA
Prudential Regulation Authority
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
RCCC
Risk Capital and Compliance Committee
RCF
Revolving credit facility
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3
Financial statements
Glossary: continued
RDS
Realistic Disaster Scenarios
Retrocession
The insurance of a reinsurance account
Return on Equity (RoE)
The IRR of the change in FCBVS in the period plus
accrued dividends
Risk Free Rate of Return (RFRoR)
Being the 13 week U.S. Treasury bill rate, unless otherwise stated
RMBS
Residential mortgage backed securities
RMF
Risk Management Framework
RMS
Risk Management Solutions
RPI
Renewal Price Index
RRC
Risk and Return Committee
RSC
Reinsurance Security Committee
RSS
Restricted share scheme
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
SATEC
SATEC Underwriting, a privately owned insurance underwriting
agency operating at national and international level in specialty
classes of business. SATEC Underwriting is a coverholder at Lloyd’s
SCR
Solvency Capital Requirement
SHARP
Lancashire’s in house aggregation system
Syndicate 2010
Lloyd’s Syndicate 2010, managed by CUL. The Group provides
capital to support 57.8 per cent of the stamp
Syndicate 3010
Lloyd’s Syndicate 3010, managed by CUL. The Group provides
capital to support 100.0 per cent of the stamp
The syndicates
Syndicate 2010 and 3010
TOBA
Terms of business agreements
Total Investment Return
Total investment return measures investment income and net
realised and unrealised gains and losses produced by the Group’s
managed investment portfolio
Total Shareholder Return (TSR)
The IRR of the increase/(decrease) in share price in the period,
measured in U.S. dollars, adjusted for dividends
Treaty reinsurance
A reinsurance contract under which the reinsurer agrees to offer
and to accept all risks of a certain size within a defined class
UK
United Kingdom
UMCC
Underwriting and Marketing Conference Call
Unearned premiums
The portion of premium income that is attributable to periods after
the balance sheet date that is deferred and amortised to future
accounting periods
UNL
Ultimate net loss
uSCR
Ultimate solvency capital requirement
U.S.
United States of America
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
Lancashire Holdings Limited
Annual Report & Accounts 2018
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Alternative Performance Measures
Alternative Performance Measures (‘APMs’)
As is customary in the insurance industry, the Group also utilises certain non GAAP measures in order to evaluate, monitor and manage the
business and to aid users’ understanding of the Group. In compliance with the Guidelines on APMs of the European Securities and Markets
Authority, we give information on APMs in the table below. This information has not been audited.
Management believes that the APMs included in the Annual Report and Accounts are important for understanding the Group’s overall
results of operations and may be helpful to investors and other interested parties who may benefit from having a consistent basis for
comparison with other companies within the industry. However, these measures may not be comparable to similarly labelled measures
used by companies inside or outside the insurance industry. In addition, the information contained herein should not be viewed as superior
to, or a substitute for, the measures determined in accordance with the accounting principles used by the Group for its audited consolidated
financial statements or in accordance with GAAP.
The following APMs included in the Annual Report and Accounts have not been prepared in accordance with the accounting principles
used by the Group for its audited consolidated financial statements. Refer to pages 162 to 166 of the Glossary for definitions on each of the
below APMs.
Below is an explanation of the APMs as well as information regarding their relevance:
APM
Net loss ratio
Relevance
This ratio gives an indication of the amount of claims expected to be paid out per $1.00 of net premium
earned in the financial year.
Net acquisition cost ratio
This ratio gives an indication of the amount expected to be paid out to insurance brokers and other
insurance intermediaries per $1.00 of net premium earned in the financial year.
Net expense ratio
Combined ratio (KPI)
Accident year loss ratio
Fully converted book value per
share (‘FCBVS’) attributable to
the Group
Return on equity (‘RoE’) (KPI)
(RoE is also sometimes
referred to as the change in
FCBVS adjusted for dividends)
Total investment return (KPI)
Total shareholder return (KPI)
Comprehensive income
returned to shareholders (KPI)
Dividend yield (KPI)
This ratio gives an indication of the amount of operating expenses expected to be paid out per $1.00 of net
premium earned in the financial year.
The Group aims to price its business to ensure that the combined ratio across the cycle is significantly less
than 100 per cent.
This ratio shows the amount of claims expected to be paid out per $1.00 of net premium earned in an
accident year.
Shows the Group net asset value on a diluted per share basis for comparison to the market value per share.
The Group’s aim is to maximise risk-adjusted returns for shareholders across the cycle.
The Group’s primary investment objectives are to preserve capital and provide adequate liquidity to support
the Group’s payment of claims and other obligations. Within this framework we aim for a degree of
investment portfolio return.
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
RoE in the immediate term.
The Group aims to carry the right level of capital to match attractive underwriting opportunities, utilising an
optimal mix of capital tools. Over time, through proactive and flexible capital management across the cycle,
we aim to maximise risk-adjusted returns for shareholders.
The Group aims to maintain a strong balance sheet whilst maximising risk-adjusted return for shareholders
across the cycle. Lancashire’s dividend yield demonstrates our ability to operate nimbly through the cycle
through the active capital management that underpins our business model. We aim to pay annual ordinary
dividends, and when we decide not to retain our profits as additional underwriting capital we return them to
shareholders by way of special dividends.
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165
Financial statements
Registered and Head 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
Contact information
Kinesis
Kinesis Capital Management Limited
Power House
7 Par-la-Ville Road
Hamilton HM 11
Bermuda
Phone: + 1 441 278 8950
Fax: + 1 441 278 8951
Legal counsel to the Company
As to English and U.S. law:
Willkie Farr & Gallagher (UK) LLP
City Point
1 Ropemaker Street
London EC2Y 9AW
United Kingdom
As to Bermuda law:
Conyers Dill & Pearman Limited
Clarendon House
2 Church Street
Hamilton HM 11
Bermuda
Auditors
KPMG LLP
15 Canada Square
London E14 5GL
United Kingdom
Registrar
Link Market Services (Jersey) Limited
12 Castle Street
St Helier
Jersey JE2 3RT
Channel Islands
Depositary
Link Market Services Trustees Limited
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
United Kingdom
Lancashire Holdings Limited
Annual Report & Accounts 2018
168
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