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9
Holdings Limited
Understanding risk.
Seeing the opportunity.
Annual Report & Accounts 2019
O U R P U R P O S E I S T O …
• Deliver bespoke risk solutions that protect our clients
and support economies, businesses and communities
in the face of uncertain loss events;
• Manage our risk exposures and capital resources
to generate returns for our investors; and
• Support our people and work with our stakeholders;
fostering a positive, sustainable and open business
culture to the benefit of society.
S T R A T E G I C R E P O R T
Overview
1
8
10
Lancashire Group at a glance
Chairman’s statement
Business model
Strategy
12 Chief Executive’s review
14 Our strategy
Financial review
Key performance indicators
Performance
16
18
20 Underwriting review
24 Business review
30
33
40
Enterprise risk management
Principal risks
Engagement and sustainability
G O V E R N A N C E
48
50
52
Chairman’s introduction
Board of Directors
Principles for Sustainable
Insurance
Corporate governance report
55
Committee reports
59
Directors’ Remuneration Report
74
96
Directors’ report
100 Statement of Directors’
responsibilities
Independent auditor’s report
Consolidated primary statements
F I N A N C I A L S T A T E M E N T S
101
107
111 Accounting policies
Risk disclosures
118
143
Notes to the accounts
A D D I T I O N A L I N F O R M A T I O N
170 Shareholder information
171 Glossary
176 Alternative performance measures
177 Contact information
2005: Inception
$1bn
LHL was incorporated in
Bermuda on 12 October
2005 and raised over
$1 billion via an initial
public offering on AIM
on 16 December 2005.
Our focus has always
been that ‘underwriting
comes first’ as we seek
to capitalise on the
opportunities of
the market.
F R O M O U R B E G I N N I N G
2009: Listing on the LSE
Our listing on the main
market of the LSE was
built on four years of
strong performance
and the indication of
pricing improvements
across our business lines.
With opportunities and
capital, we began to grow,
and others withdrew from
the market.
2008: LHL profitable in a
year of significant market
losses
In 2008 there were very
substantial losses to the
(re)insurance markets, both
from insured events and the
impact of the financial crisis,
testing Lancashire on both
sides of the balance sheet.
Even in such challenging
circumstances we delivered
a combined ratio of 86.3%
and a positive total
investment return of 3.1%.
2012: Focusing our
core portfolio
In a year of flat demand
and ample industry capacity,
Lancashire optimised its
portfolio, in order to better
balance our exposure and
focus on more profitable
areas. We launched the
client-facing third-party
capital reinsurance facility,
Saltire, and issued $130m of
senior debt.
2011: Resilience in
the face of volatility
With the insurance sector
reeling from record breaking,
$100 billion losses,
Lancashire’s focus on
fundamentals over
diversification paid off, with
superior combined ratios
compared to competitors
reflecting our exceptional
risk management. Our
nimble approach to capital
allowed us to take advantage
of this post-loss market.
We launched the Accordion
third-party capital
reinsurance facility.
W E H A V E U N D E R S T O O D T H E C Y C L E
2014: Returning capital
to shareholders
$346.0m
returned to shareholders
With low rates making investment of capital into
the market unattractive, the Group delivered on
its commitment to instead return excess capital
to our shareholders. Over time we have a proven
record of doing so, actively managing our capital
to adjust to conditions.
2013: Broadening capital
base
Against a backdrop of
capital oversupply and
market softening, Lancashire
broadened its base to access
different kinds of capital
through the purchase of
Cathedral (now Lancashire
Syndicates) and the
establishment of Kinesis
(now LCM).
2018: Lloyd’s review
An overdue review by Lloyd’s
of underperforming classes
leads to a number of (re)
insurance businesses leaving
the market, reducing the
supply of risk capital and
contributing to the
improvement in rates.
2017: Loss events stress
test Lancashire
2017 saw three major
hurricanes, Harvey, Irma
and Maria, two earthquakes
in Mexico, and wildfires
in California. Lancashire’s
careful balancing of risk
and return managed its
exposures, where others
with higher exposure were
forced to leave the market.
W E C A P T U R E O U R O P P O R T U N I T I E S
O
v
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Total
shareholder
return
34.3%
2018: -12.7%
Dividend
yield
1.5%
2018: 4.5%
Total
investment
return
4.9%
2018: 0.8%
Profit
after tax
$117.9m
2018: $37.5m
Combined
ratio
80.9%
2018: 92.2%
Return
on equity
14.1%
2018: 2.4%
For APMs refer to page 176
www.lancashiregroup.com
1
T O D E L I V E R B E S P O K E R I S K S O L U T I O N S
Protecting
against uncertainty
2
Lancashire Holdings Limited
Annual Report & Accounts 2019
Five business segments
Our focus is on short-tail, specialty (re)insurance
risks within five general segments: Property, Energy,
Marine, Aviation and Lancashire Syndicates.
O
v
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v
e
w
i
$223.8m
$297.5m
Total: $706.7m
$53.2m
$37.3m
$94.9m
2019 gross premium written
by segment:
Property
Lancashire covers property catastrophe
excess of loss, terrorism, property political
risk, property risk excess of loss, property
retrocession and other property.
Energy
Lancashire covers worldwide offshore
energy, Gulf of Mexico offshore energy,
onshore energy, energy liabilities,
construction energy and other energy.
Marine
Lancashire covers marine hull and total
loss, marine builders’ risk, marine excess
of loss, marine P&I clubs, marine hull war
and other marine.
Aviation
Lancashire covers AV52, aviation
deductible and other aviation.
Lancashire Syndicates
Syndicates 2010 and 3010 cover
property reinsurance, property direct
and facultative, aviation deductible,
other aviation and satellite, marine cargo,
energy and terrorism.
www.lancashiregroup.com
3
M A N A G I N G O U R C A P I T A L
Focusing on managing
risk and generating
investor returns
4
Lancashire Holdings Limited
Annual Report & Accounts 2019
Our investment case
To generate meaningful returns for our
investors across the insurance cycle.
O
v
e
r
v
e
w
i
Producing a solid performance
across the insurance cycle
Lancashire has a proven record of returning
excess capital to shareholders over time.
Proven record of capital management
)
m
$
(
500
400
300
200
100
0
300
250
200
150
100
50
(
%
)
10
11
12
13
14
15
16
17
18
19
Share repurchases
Ordinary dividends
Special dividends
Percentage of IPO capital returned
Delivering across the cycle
Since our inception, we have a history
of delivering shareholder returns across
the cycle.
Total shareholder return
(£)
500
400
300
200
100
09
10
11
12
13
14
15
16
17
18
19
Lancashire Holdings
FTSE 250 Index
Experienced underwriters
producing higher returns
Group management and our underwriters have
decades of experience in rated companies,
Lloyd’s and collateralised markets.
Combined ratio
125
100
75
50
25
0
)
%
(
o
i
t
a
r
d
e
n
b
m
o
C
i
10
11
12
13
14
15
16
17
18
19
Lancashire
Sector2 average
Lancashire – 10-year average1
Sector average – 10-year average1
1. Ten-year average based on 2010-2019 reporting periods. Sector ratios are weighted by net premiums earned.
2. Sector includes Arch, Argo, Axis, Beazley, Everest, Greenlight, Hanover, Hiscox, Renaissance Re and Third Point Re.
The 2019 results for Argo, Greenlight, Hiscox and Third Point Re are not available at the time of the report.
Source: Company reports
www.lancashiregroup.com
5
E N G A G I N G W I T H S T A K E H O L D E R S
There for those
who rely on us
6
Lancashire Holdings Limited
Annual Report & Accounts 2019
Our core stakeholders
The Group values its relations with, and works to support, its
stakeholders to ensure the success of the business. We engage
constructively with our people, our stakeholders and in society.
O
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i
Society and the
environment
Through the
Lancashire
Foundation, we
utilise the talent
and energy of our
staff in helping
others, positively
impacting society
and creating a
more sustainable
environment.
Our
policyholders
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.
Our shareholders
Lancashire values
the views of all of
its shareholders
and maintains open
and transparent
communication
channels with them.
Our people
We believe the
talents of our
people and our
distinctive culture
continue to set us
apart from our
competitors.
Since its foundation in 2005, the Group has focused on
fostering relations with a broad range of stakeholders.
Our people
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.
See page 42 for further details.
Our 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.
See page 43 for further details.
Our shareholders
As a premium-listed company on the
LSE, LHL 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.
See page 44 for further details.
Lancashire
Society and the environment
Our insurance products deliver social benefits in
helping businesses and communities manage and
mitigate the risks they face.
Lancashire is strongly committed to giving back to the
communities within which it operates 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.
See page 44 for further details.
www.lancashiregroup.com
7
C H A I R M A N ’ S S T A T E M E N T
How did the business perform during 2019?
Lancashire has generated a strong return on equity of 14.1% for 2019
and an impressive combined ratio of 80.9% which, in view of the
challenge of another year impacted by catastrophe and risk losses, are
a tribute to the Group’s underwriting and risk management expertise.
How does the Board expect strategy to develop
in 2020?
The Board regularly monitors business performance to ensure that
we maintain Lancashire’s record of nimble risk monitoring and capital
management. This has meant that over several recent years the Board
has returned some of our capital to shareholders in circumstances
where it has not been required to meet the risk capital requirements
of our business. As Alex notes in his introductory comments (see page
12), after many years of a downward pricing trend across those
property catastrophe and specialty classes in which we underwrite,
there is currently an expectation of an improved pricing environment
during 2020, which may afford the Group the opportunity to assume
more underwriting risk.
How does the Board view the capital requirements
of the business?
The Board regularly considers the balance of risk and return when setting
our capital levels, using capital for underwriting when the opportunity
presents itself and returning capital to shareholders when it is not needed.
As we enter 2020, 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 eight years to issue up to 15% of Lancashire’s shares on a non
pre-emptive basis. The best opportunities in the insurance and
reinsurance sectors typically arise following major loss events, and
the flexibility to issue shares and raise capital quickly is a central
pillar of our business strategy and will help the Group maximise
underwriting opportunities for the business. Once again, the Group
is seeking shareholder support for resolutions at the 2020 AGM,
allowing this capital management flexibility, and I would encourage
all shareholders to vote in favour.
Peter Clarke
Non-Executive Chairman
The Board pays particular attention
to the Group’s purpose of delivering
insurance solutions for our clients
and managing our risk and capital
resources across the insurance cycle.
We aim to generate meaningful
returns for our investors whilst
fostering a positive, sustainable and
socially beneficial business and culture.
8
Lancashire Holdings Limited
Annual Report & Accounts 2019
A strategic approach to risk, capital and returns “As we enter 2020, 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.”
Return on equity
)
%
(
y
t
i
u
q
e
n
o
n
r
u
t
e
R
30
20
10
0
-10
10
11
12
13
14
15
16
17
18
19
How has the Board developed its dividend strategy?
Our dividend and capital management strategy has not changed and
in view of the anticipation of an improving underwriting environment
the Board has decided not to declare a special dividend in respect
of the 2019 financial year. In addition, for the first time, we propose
to make our final ordinary dividend subject to a shareholder vote of
approval at the April 2020 AGM which 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.
Assuming such shareholder approval, the aggregate of all dividends for
the 2019 year will amount to $0.15 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 96 of
this Annual Report and Accounts.
What risk factors have most affected the Board’s
thinking in 2019?
The fundamental risk which we consider as a Board is the underwriting
risk which we assume as a Group. In this regard, readers will be
interested in the work which we carry out in setting capital risk
tolerances for underwriting risk and in monitoring those risks, which
are described in more detail in the risk section of this Annual Report
and Accounts (see pages 30 to 39) and in the summary of the Group’s
probable maximum losses (PMLs), which are monitored by the Board
on at least a quarterly basis. In his report on page 13, Alex mentions
how we think about climate change risk within the business. This is
increasingly a topic of debate within the Board and its various
Committees (see the Risk and Governance sections of this report
commencing respectively on pages 30 and 48 for further discussion
of these issues).
The Board has also monitored the risk arising from the UK’s Brexit
process during the year. We are satisfied that measures are in place
to mitigate some of the adverse effects on the Group’s business,
although this matter will be kept under review during the coming
year. For a further discussion please see the Risk section at page 38.
Other areas of focus for the Board during the year have included
oversight of business culture within the Group as well as issues of staff
development, retention and succession. Please see my introduction to
the Governance section of this report on page 48 for an account of the
work of the Board in these and other areas and our governance
arrangements for the 2019 year.
Peter Clarke
Non-Executive Chairman
The Board announced the appointment of Natalie
Kershaw as an Executive Director and Group CFO
on 5 December 2019. Natalie will assume her new
roles on 1 March 2020.
“I look forward to welcoming Natalie to
our Board and to the fresh insights that
she will bring to her role.”
– Peter Clarke
“Natalie has been an insightful and
dedicated team member for nearly
10 years. Her appointment is testimony
to the strength of our management
team and our succession planning.”
– Alex Maloney
www.lancashiregroup.com
9
Overview
B U S I N E S S M O D E L
Our strengths
Customer focus
• Long-term established relationships with
clients and brokers
• Continuous support across the cycle
• Prompt payment of valid claims
Expert people
• Experienced management team with
proven ability
• A lean business operation allows us to remain
nimble and make decisions efficiently
• Highly specialised multi-class products
with barriers to entry in terms of data and
modelling expertise
Disciplined risk and capital
management
• Rigorous systems for risk monitoring
and management
• Strong record of capital management
• Manage volatility by optimising capital and the
underwriting portfolio through the market cycles
A diverse offering
• Three established platforms: Lancashire,
Lancashire Syndicates and Lancashire Capital
Management
• Access to multiple markets providing clients
with versatility and ourselves with underwriting
opportunities
• A stable core book of business and
disciplined underwriting
We leverage our deep
underwriting expertise with
efficient management of risk
and capital and resources across
our three platforms to provide
our clients and brokers with
bespoke solutions for their
insurance and reinsurance needs.
We always focus on the risk-
adjusted return.
10
Lancashire Holdings Limited
Annual Report & Accounts 2019
A model for success Our responsibility
We recognise that our responsibility as a company and as individuals
reaches wider than our shareholders and our clients. We strive to be
a good employer, a good corporate citizen and a responsible preserver
of resources. Through the Lancashire Foundation, we make financial
contributions and provide human support to a number of good causes
in the places we operate around the world (for further details see
pages 45 to 47).
Our strategy
The value we create for
Underwriting
comes first
Effectively
balance risk
and return
Operate
nimbly through
the cycle
Find out more on page 14.
Our people
85%
of our employees felt positively engaged with
the business based on a recent staff survey
Our policyholders
$310.3m
gross paid losses
Our shareholders
34.3%
Total shareholder return
Society and the environment
46%
of staff volunteering time to the
Lancashire Foundation
www.lancashiregroup.com
11
Overview C H I E F E X E C U T I V E ’ S R E V I E W
Alex Maloney
Group Chief Executive Officer
Our purpose as a business is to deliver
bespoke risk solutions which help
protect our clients in the face of
uncertain loss events. It is therefore
central to our strategy to develop and
retain underwriters and other experts
in risk management with the expertise
to appraise and price risk properly and
to ensure that we use our capital to
support our business whilst delivering
sustainable returns to our investors.
12
Lancashire Holdings Limited
Annual Report & Accounts 2019
Did Lancashire perform as you expected in 2019?
We have generated a strong return on equity of 14.1% and a combined
ratio of 80.9%. The return comes from a combination of underwriting
and investment returns and represents a good outcome for our
shareholders. For me, one of the most pleasing outcomes of these
results is that they illustrate that the Lancashire Group has not been
materially impacted by the catastrophe reserve deterioration on
prior year losses, which has affected some in our industry.
Lancashire has the expertise, the capital, the commercial long-term
relationships and the nimble business culture to succeed, and the results
for 2019 are testament to the open, honest and sustainable approach we
take to underwriting and risk management across the insurance cycle.
How was the Group impacted by the catastrophe
losses which occurred in 2019?
With the occurrence during 2019 of typhoons Faxai and Hagibis
in Japan and hurricane Dorian in the Caribbean and along the U.S.
south-east coastline, we saw the tragic results of catastrophe loss
activity. These events once again caused disruption to lives and
livelihoods. There were also significant large aviation, energy and
political risk losses during the year which have impacted those
specialty lines which form a major part of our underwriting portfolio.
As a Group we established aggregate net loss reserves in respect of
typhoons Faxai and Hagibis, and hurricane Dorian of $52.1 million.
But the 2019 losses must be viewed within the context of the catastrophe
losses of 2017 and 2018, which taken together produced the largest
aggregate losses to the global insurance market in recent memory.
So, while in economic terms the 2019 losses should be considered
relatively unremarkable, the fact that they amount to another
sequence of mid-sized catastrophe losses serves to demonstrate
the continuing need within the insurance industry for a re-rating
of pricing in many traditional property and specialty lines.
What challenges and opportunities do you see over
the coming year?
The pressure on insurance risk capital has been further heightened by
the recent industry reappraisal of many of the reserving assumptions
within the longer-tail casualty classes, and the need to strengthen
reserves. Whilst Lancashire has not traditionally operated in the
casualty space in any meaningful way, the combination of reserving
and pricing pressure across international (re)insurance markets in
short-tail catastrophe and specialty lines and in the longer-tail
casualty classes has produced an appreciation across our sector
that the products we sell need to be sufficiently priced to attract
the risk capital on which our industry relies.
Providing risk solutions in a changing world “During 2019, I was pleased to see
controlled top-line growth in our
premium income, which was a
measured response to an improving
market environment. As things stand,
we believe the positive pricing trend is
likely to continue in many of our core
specialty and catastrophe lines in a
move towards better pricing.”
Although we are still in the early stages of a necessary market correction,
developments over the past year or so have illustrated once again that
our industry is cyclical in nature and that the key to long-term sustainable
success is to show underwriting discipline across that market cycle.
At Lancashire we have taken the difficult decision over the recent
years of the soft market phase of the cycle to shrink our top-line
income, which reflected the challenging pricing environment. During
2019, I was pleased to see controlled top-line growth in our premium
income, which was a measured response to an improving market
environment. As things stand, we believe the positive pricing trend
is likely to continue in many of our core specialty and catastrophe
lines in a move towards better pricing. However, this cautious
optimism should be tempered by the knowledge that in many
insurance and reinsurance classes pricing still sits below a level which
we consider to be sustainable. So, in what remains a competitively
priced market, there will be some opportunities for organic growth.
It is central to our strategy to develop and retain underwriters and
other experts in risk management with the expertise to appraise and
price risk properly, to structure and manage our outwards reinsurance
protections and to ensure that we use our capital to support our
business whilst delivering sustainable returns to our investors.
Paul Gregory discusses the underwriting environment in more detail
in his underwriting review on page 20.
How does climate change affect the longer-term
prospects of the Group’s business?
As a business we have a relatively small headcount of a little over
200 people and our own carbon footprint (which we offset through
the purchase of carbon credits) is small relative to many listed
businesses of our market capitalisation (see page 44). Perhaps even
more important is the trend over the last three years of the increased
frequency and severity of weather-related loss events, which I
mentioned above. Such a trend will ultimately be understood and
managed over longer time frames. What this illustrates is the value
of our insurance and reinsurance products to our clients in managing
their climate change risks and exposures, in particular through the
catastrophe-exposed property insurance and reinsurance products
which we underwrite. Our purpose as a business is to deliver bespoke
risk solutions which help our clients manage the threats they face
from unpredictable perils. It follows as a central pillar of our strategy
and its operation that we monitor and manage our own risk exposures
to both weather-related and other catastrophic loss events.
Our investment portfolio is conservative in nature and has limited
exposure to climate-related risk. As a business, we are a long-term
partner of many clients operating in the oil and gas exploration and
development sectors and within power generation and distribution.
We recognise the potential environmental effects of carbon emissions,
and in a global commercial and political environment, which currently
remains reliant on carbon-based forms of energy production, we will
work with our clients through a period of global energy transition to
help manage their operational and catastrophe-exposure risks in a
controlled and responsible way. We also insure many clients in the
renewable energy sector, and in this regard please see Paul Gregory’s
introduction to the underwriting review on page 20. We have also
decided to become signatories to the UN Principles for Sustainable
Insurance (see pages 52 to 54). Our strategy is to respond nimbly to
the demands of a changing world, and we believe this flexibility will
help guarantee viability over the longer term.
How has the Group developed the Lancashire
brand recently?
We have made a few name changes to our Lloyd’s and reinsurance
third-party capital management platforms. Our Lloyd’s managing
agent, Cathedral Underwriting Limited, has changed its name to
Lancashire Syndicates Limited (LSL), and our third-party capital
management operation, Kinesis Capital Management Limited, has
changed its name to Lancashire Capital Management (LCM). There
has been no change to the ownership or operation of these businesses.
This helps clearly align the ‘Lancashire’ name and brand across all
platforms within the Lancashire Group of companies.
Can you tell us about the developments in the Group
executive team and business over the last year?
We announced in May 2019 that, after slightly more than 13 years of
service at Lancashire, Elaine Whelan decided to retire from the Group
and will step down as our Group CFO and from the LHL Board at the
end of February 2020. Personally, I would like to thank Elaine for her
years of support and advice to me and to our business. Elaine has
been one of the architects of our successful strategy over many years,
in particular in the area of our nimble capital management and the
delivery of strong cross-cycle returns to our shareholders.
As we say farewell to Elaine, I am pleased to welcome Natalie Kershaw
as Elaine’s successor to the role of Group CFO and a member of the LHL
Board (see page 49 for more details). During the year we have also seen
the progression of other colleagues within the Group. Emma Woolley
became CEO at LSL, John Cadman (our Group General Counsel) became
CEO at LUK, and Hayley Johnston will become our Bermuda CEO at LICL,
replacing Elaine in that role. James Flude will assume the role of our LUK
CUO, replacing Hayley, subject to regulatory approval.
I would like to thank these and all our staff across our businesses in
London and Bermuda, for having contributed to a strong performance
for the year. I look forward to leading our excellent team in meeting
the challenges and developing the opportunities in the year ahead,
which has the potential to be a more interesting phase of the
insurance and reinsurance market cycle.
Alex Maloney
Group Chief Executive Officer
www.lancashiregroup.com
13
Strategy S T R A T E G Y
Our goal
Maximising risk-adjusted
returns for shareholders
Our strategic priorities
Effectively balance
risk and return
Not seeking top-line growth for
the sake of it in markets where
we do not believe the right
opportunities exist and rigorously
monitoring and managing our risk
exposures.
Peak-zone PML limits
of 25% of capital
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.
Maximise
risk-adjusted returns
Underwriting
comes first
Maintaining the right balance
between discipline and creativity is
key for success, coupled with a
strong focus on profitability
and risk selection.
Delivering bespoke risk
solutions in a sustainable
framework
How we serve clients and brokers
Significant capacity
across the cycle
allowing us to provide
consistent support
A lean structure
allowing resources to
be refocused quickly
when needed
Strong processes
and structures
supply challenge
and assurance
Our culture
The bedrock of our strategy is a culture of co-operation and respect based on open challenge
14
Lancashire Holdings Limited
Annual Report & Accounts 2019
Our strategy Underwriting
comes first
Description
Effectively balance
risk and return
Operate nimbly
through the cycle
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 LCM, the platforms that accept
larger net exposures, and post-underwriting at
LSL, with its smaller net exposures.
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 tailor our
reinsurance programmes to manage our exposures
and we stress test our business plans and gauge
where we can be most effective without undue
volatility. Management reports our risk exposures
and management to the Board.
As capital supply fluctuates in the (re)insurance
market, the need to be nimble is more important
than ever. This means being ready to deploy
capital quickly when it is needed, and having
the discipline to return it when it is not.
Achievements
Successfully embedded the new underwriting
teams in downstream energy, power & utilities
and aviation, which we hired during 2018. We
have grown the funds raised and capital deployed
from LCM investors and grown LCM’s client base
for the second consecutive year. LUK has decided
to re-enter the D&F class of business.
Performance
Combined ratio
80.9%
A strong combined ratio, even in a
loss-impacted year, evidences our continued
focus on underwriting, our general appetite
for less attritional exposures, our superior risk
selection and our portfolio construction.
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.
Profits for 2019 have largely been retained for
2020 underwriting opportunities. Lancashire
renewed its 15% disapplication of pre-emption
rights at the 2019 AGM to assist potential future
capital raises.
Return on equity
14.1%
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 and investments.
Percentage of comprehensive income
returned to shareholders
20.7%
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.
Gross premiums written
Probable maximum loss
Dividend yield
$706.7m
With an improving rating environment in the
majority of our classes, plus business generated by
new teams hired in 2018, premiums have grown
year on year. We maintain the discipline to decline
or restructure our participation on under-priced
or poorly-performing business but are willing to
accept more risk if the market opportunity allows.
Associated strategic risk
The key risk in the current market phase is the
potential loss of relevance to brokers and clients.
While there is still some surplus capacity in the
market, 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.
$152.0m*
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 2020.
1.5%
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.
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.
Lancashire has developed an expectation among
its shareholders that it will produce a consistent
return and pay ordinary dividends with
supplementary 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
15
Strategy F I N A N C I A L R E V I E W
Elaine Whelan
Group Chief Financial Officer
While Lancashire has clearly picked up
losses from the 2019 events, our share
was very manageable and well within
our expectations. Our predominantly
fixed maturity investment portfolio
also performed well in a declining yield
environment, supported by strong
performance from our risk asset
allocation. All that has meant a
welcome change to the relative
battering of the last two years
and a return to strong profitability.
16
16
Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
How has the Group performed in 2019 within the
market environment?
Compared to 2017 and 2018, 2019 saw much lower annual global
insured losses. While insured losses from man-made and natural
catastrophes were below the 10-year average, it wasn’t a benign year
by any stretch of the imagination with the significant windstorms
Dorian, Faxai and Hagibis occurring and wreaking havoc in their
respective regions. There was also significant adverse development
for the industry as a whole on the 2018 typhoon Jebi. There have been
some meaningful industry risk losses as well and we also saw a general
uptick in attritional losses across the industry this year. That all sounds
a bit bleak, but I think what we have seen is a reaction by the industry
to the losses of the last few years and the recognition that pricing
had to move. While that’s not where it needs to be yet, Lancashire
has been adding new teams to the business over the last few years,
positioning ourselves for the improving market that we hoped to see.
Our patience has paid off in that regard and we have, for the first time
in a long time, been able to add a meaningful amount of new business
to our top line. While we have yet to see that factor through to the
bottom line – it takes a little while for the timing impacts of the new
business to flow through to earnings – that has been all about putting
ourselves in the best possible position for the pricing improvement we
are expecting. While Lancashire has clearly picked up losses from the
2019 events I have mentioned, our share was very manageable and
well within our expectations. Our predominantly fixed maturity
investment portfolio also performed well in a declining yield
environment, supported by strong performance from our risk asset
allocation. All that has meant a welcome change to the relative
battering of the last two years and a return to strong profitability.
We are pleased to have produced an RoE of 14.1% and a combined
ratio of 80.9%.
Do you anticipate needing to raise more capital in
2020 to take advantage of an improving market?
The short answer is no. Or not yet. While it’s great to finally see the
market turning, it’s from a low base and still has some way to go
before we get too excited about it. We’re probably back to around
2014/2015 pricing levels now and we’d like to see that move more
before we think the economics make sense to raise more capital. We
have enough existing capital to take advantage of what we are seeing
in terms of opportunities, and also remember that many of the new
lines of business we have added are in specialty lines and not too
capital intensive. I think we would say the current market is
“interesting”. Which means we will be watching how it develops
closely rather than jumping in. If there are more opportunities,
A solid underwriting performance combined with positive investment returns with the right economics, then we will certainly be ready to
go to market. Our shareholders remain supportive of our capital
management approach. That is greatly appreciated, and also
comforting to know that they are ready to support a capital
raise if there are good reasons to do so.
What does that mean for special dividend
expectations?
Given my comments above on an improving market, we chose not to
declare a special dividend with our November 2019 trading statement.
There was also a fair amount of uncertainty heading into the January
renewals, particularly around the retro markets. It seemed prudent
for us to keep the capital while we see how that develops. With the
1 January 2020 renewal season behind us now, we do expect the
market to continue to improve through 2020 and we have therefore
again chosen to retain our capital. We have always said our special
dividends are indeed special, and most of our shareholders understand
that and see it as good news in the context of improved future returns.
How does the U.S. Federal Reserve’s recent pivot
impact Lancashire’s investment portfolio?
We are back in a lower yielding environment. Although we hadn’t
actually really left it! But rates will be lower going forward across
the majority of our portfolio. We have already had the initial benefit
of rate reductions on the valuation of the fixed income portfolio.
We don’t expect to see any significant benefit there going forward
and there isn’t much more benefit to be had from future spread
compression either. We do continue to look for ways to add yield to
the portfolio, without adding too much risk, and we will continue to
do that. We have recently decided to redeem about half of our hedge
fund portfolio in 2020. While the volatility remained low and it acted
as a good diversifier to the rest of the portfolio, we weren’t seeing the
returns we had hoped for there. Those funds will be redeployed and
hopefully produce a better risk-adjusted return.
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 gains (losses) 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.
2019
$m
706.7
424.7
421.7
129.8
186.5
37.7
8.9
117.9
27.8
145.7
30.2
$0.58
$5.84
14.1%
14.1%
30.8%
25.0%
25.1%
80.9%
51.3%
4.9%
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%
www.lancashiregroup.com
17
PerformancePerformance
K E Y P E R F O R M A N C E I N D I C A T O R S
Return on equity
Combined ratio
Total investment return
Total shareholder
Comprehensive income
returned to shareholders
Dividend yield
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 net loss ratio,
the net 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.
Total shareholder return is measured in terms of
The percentage of comprehensive income
Dividend yield is measured by dividing the annual
the internal rate of return of the increase/decrease
returned to shareholders equals the total capital
dividends per share by the share price on the last
in share price in the period, measured in U.S.
returned to shareholders through dividends and
day of the given year.
dollars and adjusted for dividends.
share repurchases paid in a given year, divided
by the Group’s comprehensive income.
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%.
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
14.1%
80.9%
4.9%
Given the sequence of mid-sized catastrophe and
risk losses during the year we were pleased to
generate a strong RoE for the year, reflecting a
solid underwriting performance combined with
positive investment returns.
The combined ratio reflects the impact of
hurricane Dorian and typhoons Faxai and Hagibis.
Despite these events our focus on high quality
underwriting allowed us to generate an
underwriting profit for the year.
In 2019, 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 in the rising
rate environment in the first half of 2019.
13.5
13.5
14.1
124.9
2.4
72.1
76.5
92.2
80.9
-5.9
17
15*
16
Risk management
18
19
15
16
17
18
19
0.7
15
2.1
16
2.5
17
0.8
18
4.9
19
5
year
average
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 74 for further details.
* RoE including the impact of warrants was 10.9% in
2015. 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.
18
18
Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
return
Measurement
Aim
Performance
34.3%
The Group’s aim is to maximise RoE over the
The Group aims to carry the right level
The Group aims to maintain a strong balance
longer term, and we would expect that to be
of capital to match attractive underwriting
sheet whilst maximising risk-adjusted return for
reflected in our share price and multiple. This is
opportunities, utilising an optimal mix of capital
shareholders across the cycle. Lancashire’s
a long-term goal, recognising that the cyclicality
tools. Over time, through proactive and flexible
dividend yield demonstrates our ability to operate
and volatility of both the insurance market and
capital management across the cycle, we aim to
nimbly through the cycle, through the active
maximise risk-adjusted returns for shareholders.
capital management that underpins our business
the financial markets in general will impact
management’s ability to maximise the RoE
in the immediate term.
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.
20.7%
1.5%
Our shares traded well through 2019, reflecting
In view of the current market outlook the Group
We declared annual ordinary dividends of $0.15
some investor optimism around the improvement
took the decision not to return surplus capital to
per share in respect of 2019. The final payment
in pricing in the insurance market. Towards the
shareholders in 2019 by way of a special dividend
of $0.10 is subject to shareholder approval at
end of the year, our shares also benefited from
as we position ourselves for the improving market
the 2020 AGM.
a modest relief rally of all UK assets. In addition,
that we hope to see in 2020. Our ordinary
our regular ordinary dividend supplemented
dividend payments were unchanged.
the overall TSR.
Risk management
The Lancashire remuneration structure and RSS
Risk tolerances are set at a level that aims
As capital continues to accumulate in the (re)
ensure that staff are highly motivated and closely
to prevent the Group incurring losses that would
insurance market, the need to be nimble is more
aligned to the Group’s goals, and therefore with
impair its ability to operate. The Group’s key
important than ever. This means being ready to
shareholders. Permanent staff are all eligible
capital measure is its A.M. Best rating, and a
deploy capital quickly when it is needed and having
to receive RSS awards. The participation of
employees in the RSS ensures that there is
a strong focus on sustainable long-term
shareholder value.
minimum rating of A– is considered necessary to
the discipline to return it when it is not. The Group
attract business. In 2019, Lancashire maintained
has to ensure that all shareholders understand that
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.
in harder markets the Group will want to retain, and
potentially even raise, capital to take full advantage
of underwriting opportunities.
Return on equity
Combined ratio
Total investment return
The return on equity is measured by management
The combined ratio is the ratio of costs to
Total investment return measures investment
as the internal rate of return of the change in fully
net premiums earned and is a measure of an
income and net realised and unrealised gains
converted book value per share in the period,
insurance company’s operating performance.
and losses produced by the Group’s managed
adjusted for dividends.
It is calculated as the sum of the net loss ratio,
investment portfolio.
the net acquisition cost ratio and the expense
ratio. These ratios are defined in our glossary.
The Group’s aim is to maximise risk-adjusted
The Group aims to price its business to ensure that
The Group’s primary investment objectives are to
returns for our shareholders across the cycle.
the combined ratio across the cycle is significantly
preserve capital and provide adequate liquidity to
less than 100%.
support the Group’s payment of claims and other
obligations. Within this framework we aim for a
degree of investment portfolio return.
Measurement
Aim
Performance
14.1%
80.9%
4.9%
Given the sequence of mid-sized catastrophe and
The combined ratio reflects the impact of
In 2019, the Group continued to manage its most
risk losses during the year we were pleased to
hurricane Dorian and typhoons Faxai and Hagibis.
significant investment risk, interest rate risk, via
generate a strong RoE for the year, reflecting a
Despite these events our focus on high quality
floating rate assets and risk assets. This helped to
solid underwriting performance combined with
underwriting allowed us to generate an
manage the risk on/risk off volatility in the rising
positive investment returns.
underwriting profit for the year.
rate environment in the first half of 2019.
Risk management
The stated aim is a long-term goal, acknowledging
The Group’s underwriters assess likely losses
The investment strategy places an emphasis on
that management expects both high and low
using models, their experience and knowledge
the preservation of invested assets and provision
results in the shorter term. The cyclicality and
of past loss experience, industry trends and
of sufficient liquidity for the prompt payment of
volatility of the insurance market is expected
current circumstances. This allows them to
claims, in conjunction with providing a reasonably
to be the largest driver of this pattern. We
estimate the premiums sufficient to meet likely
stable income stream. These objectives are
seek to align our variable remuneration
to shareholders’ interests by having an
RoE component in this.
losses and expenses. Peer reviews of risks are
reflected in the Group’s investment guidelines
conducted through the daily underwriting call
and its relatively conservative asset allocation.
or peer review, depending on risk impact, enabling
Management reviews the composition, duration
Please refer to the Directors’ Remuneration
Report on page 74 for further details.
* RoE including the impact of warrants was 10.9% in
2015. The five-year average was 7.0%.
the Group to ensure careful risk selection,
limits on concentration and appropriate
portfolio diversification. The RRC then
monitors performance at a portfolio level.
and asset allocation of the investment portfolio
on a regular basis in order to respond to changes
in interest rates and other market conditions.
KPI linked to Executive Directors’ remuneration.
For more information see pages 74 to 95.
APMs refer to page 176.
Total shareholder
return
Measurement
Comprehensive income
returned to shareholders
Dividend yield
Total shareholder return is measured in terms of
the internal rate of return of the increase/decrease
in share price in the period, measured in U.S.
dollars and adjusted for dividends.
The percentage of comprehensive income
returned to shareholders equals the total capital
returned to shareholders through dividends and
share repurchases paid in a given year, divided
by the Group’s comprehensive income.
Dividend yield is measured by dividing the annual
dividends per share by the share price on the last
day of the given year.
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.
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.
Performance
34.3%
20.7%
1.5%
Our shares traded well through 2019, reflecting
some investor optimism around the improvement
in pricing in the insurance market. Towards the
end of the year, our shares also benefited from
a modest relief rally of all UK assets. In addition,
our regular ordinary dividend supplemented
the overall TSR.
In view of the current market outlook the Group
took the decision not to return surplus capital to
shareholders in 2019 by way of a special dividend
as we position ourselves for the improving market
that we hope to see in 2020. Our ordinary
dividend payments were unchanged.
We declared annual ordinary dividends of $0.15
per share in respect of 2019. The final payment
of $0.10 is subject to shareholder approval at
the 2020 AGM.
25.9
9.4
2.4
5
year
average
34.3
-12.7
187.0
113.3
15
16
17
18
19
15
16
284.2
17.3
10.5
20.7
18
19
15
16
n/a
17*
1.6
17
4.5
18
1.5
19
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 2019, 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.
www.lancashiregroup.com
19
PerformancePerformance
U N D E R W R I T I N G R E V I E W
Paul Gregory
Group Chief Underwriting Officer
Insurance is an often-underestimated
product in the global economy and its
value is rarely appreciated until such
time as there are losses. Our job is to
pay our clients’ valid claims promptly
whilst also ensuring the premium we
receive is adequate to pay these claims
and provide appropriate shareholder
returns over the long term.
20
20
Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
Introduction
The dynamics of our market are very simple. The basic concepts
of demand and supply are the principal drivers of the pricing in
the marketplace. From 2013 to 2017, the market for almost all our
products experienced a period of oversupply and as such the pricing
of those products reduced. This reduction in pricing varied by product
line as the dynamics of each area are always slightly different, but the
downward trend was consistent. Our response to this environment
was to take less risk, by reducing our inwards risk and protecting our
portfolio with more reinsurance. Our goal has always been to match
risk and return as best we can and ignore pressures to simply grow
the top line irrespective of pricing adequacy. We took this approach
most importantly because we think this is the right way to manage
a business that doesn’t sell widgets but sells units of risk protection;
and secondly to ensure that when better times did arrive, we were
well positioned to maximise the opportunity.
In 2018, we started to see the demand and supply balance begin to tip
in our favour, albeit slowly. It was the first year since 2012 that we saw
a positive rate movement across our portfolio as a whole. In line with
our underwriting philosophy, we grew our premium and added new
underwriting teams and products to the Group.
2019 saw a continuation of this trend across most of our product
lines, as the demand and supply shift continued to move in our favour.
Supply across the market was restricted by various factors including:
large carriers reducing risk appetite in underperforming classes; the
ILS sector of the property retrocessional reinsurance market wrestling
with consecutive years of natural catastrophe losses and significant
loss creep on certain catastrophe events; a number of large risk losses;
and the Lloyd’s performance review starting to take effect. Running
adjacent to this, throughout 2019, was the developing story of a
creaking casualty market, with several carriers having to bolster
reserves on historic underwriting years. As a predominantly short-tail
underwriter this casualty development does not directly impact us,
but could help further improve broader market conditions should this
trend continue, as it may require additional insurance risk capital,
which will further restrict supply.
Given these improved market conditions it should come as no surprise
that our gross premiums written increased again in 2019. Most of our
product lines saw rate increases of varying degrees. As rates improved,
we grew our core portfolio and wrote new business in these product
lines. Our new teams, added in 2018, have continued to build out and
mature whilst also benefiting from the improved rating environments.
Our disciplined approach in the softer part of the cycle has meant that
our focus for the past two years has been on growing existing and new
Seeing the opportunity “2018 was the first year that we
started to see the demand and
supply balance begin to tip in our
favour, albeit slowly. 2019 has seen
a continuation of this trend across
most of our product lines, as the
demand and supply shift has
continued to move in our favour.”
Renewal price index (%)
106 106
106
103
115
111
110
109
106
105
99
99
100
18 19
Property
18 19
18 19
Energy Marine
18 19
18 19
Aviation Lancashire
Syndicates
18 19
Total
classes and we have not had to shut down or cut back in poor
performing product lines, as a number of our peers have had to do.
2019 again had several mid-sized natural catastrophe losses and
several large risk losses in areas in which we specialise such as aviation,
marine and political risk. It is therefore pleasing to be able to produce
a combined ratio of 80.9%. Our clients buy our products for exactly
these types of events and this shows the value of the (re)insurance
that we provide. Our products help support economies and
communities to rebuild after natural catastrophe events, and
companies to continue to operate safely and profitably after major
loss incidents. Our partnership with our clients helps encourage a good
risk management culture, which aids prevention of future major loss
incidents. Insurance is an often-underestimated product in the global
economy and its value is rarely appreciated until such time as there
are losses. Our job is to pay our clients’ valid claims promptly, whilst
also ensuring that the premium we receive is adequate to pay these
claims and provide appropriate shareholder returns over the
long term.
For all our natural catastrophe lines of business we are acutely aware
of the impact of climate change. The vendor models we use to both
assess and price risk are regularly updated to include changing
patterns and data. We use this information alongside our own view
of risk to measure the frequency and severity of natural catastrophe
events across the world. Clearly over the past three years we have
seen an increase in frequency as compared to the previous five years.
Our role is to assess how the risks we underwrite are changing over
time and if we are getting sufficiently well paid for the risks we take
onto our balance sheet.
Our outlook for 2020 is more of the same. We anticipate an
improving market across most of our product lines. As ever, the
dynamics of each market will be subtly different, but the positive
pricing trend looks to continue.
Whilst this is pleasing, we are always aware of where we sit in
the pricing cycle and the soft market conditions between 2013
and 2017 took a lot of rate and premium out of the system. Although
increases in rating in the last two years move us in the right direction,
we would not classify the current market as a ‘hard market’; it is an
improving market.
With this improving underwriting environment in mind, we have
chosen not to declare a special dividend to give us maximum flexibility
with our capital in order to allow us to grow and take more risk. This
aligns fully with our historic capital management philosophy. When
there are limited opportunities to deploy excess capital, we will return
this to shareholders. When the opportunities improve, and we feel we
can deploy it, we retain capital and aim to produce an improved return
for shareholders. If the market were to become markedly dislocated,
we would seek to raise more capital from our shareholders. Our
approach to underwriting and capital management are fully aligned
and simply linked with the market environment we see before us. Our
actions during each part of the cycle will change, but our philosophy
remains constant.
www.lancashiregroup.com
21
PerformancePerformance U N D E R W R I T I N G R E V I E W C O N T I N U E D
Property
Our property offering across the Group is split into four principal
classes of business: retrocession, property reinsurance, property D&F
insurance, and terrorism and political risks. The demand and supply
dynamics of each of these classes were very different throughout the
course of 2019.
The retrocession market faced two challenging years in 2017 and 2018
with the worst consecutive insured loss years on record. To further
add to that challenge, large losses such as hurricane Irma (2017),
hurricane Michael (2018) and typhoon Jebi (2018) experienced
significant loss creep.
2019 continued to increase pressure on this market with more
typhoons in Japan (Faxai and Hagibis) as well as hurricane Dorian
impacting the Caribbean and U.S. The losses in 2019, in aggregate,
were not of the same magnitude as the previous two years but once
again impacted the market, causing billions of dollars of insured loss.
Over recent years the retrocession market has been dominated by
the growing ILS market and after years of a benign loss environment
the past three years have been a real challenge for this sector. 2019
was the first year that we started to witness supply in the ILS market
coming under downward pressure as capital providers started to
question the risk-reward metrics they had historically received,
given they now understand the potential volatility of the product
sold. As supply tightened, pricing firmed as the year progressed.
The Group offers retrocession capacity from all three of our platforms,
albeit the majority is sold via our ILS vehicle, LCM. During the softer
part of the cycle we deliberately kept LCM relatively small as we were
not able to find enough products to sell at the required return metrics
of our capital providers. We also did our best to be as transparent as
possible with our capital providers, particularly regarding the volatility
of the portfolio being underwritten.
Whilst the LCM underwriting result was negatively impacted by the
natural catastrophe losses of 2017 and 2018, we were still able to
grow LCM in both 2018 and 2019, which is the opposite direction of
travel to most ILS vehicles in the market. We believe this is because
of our underwriting discipline and transparency. The most important
thing is that when the opportunity has improved, we have been able
to grow with that opportunity. Our expectation for 2020 is that this
market will continue to improve, and we aim to maximise this
opportunity across our platforms.
The property reinsurance market has experienced the same natural
catastrophe losses as the retrocession market. However, the demand
and supply dynamics of this market have not shifted to the same
extent. As a result, the pricing environment (whilst still positive) has
not moved as much as the retrocession market. Prior to the start of
2019, our expectation was that outside of loss impacted territories
such as Japan and Florida, rates would be broadly static with only
those loss-impacted territories seeing positive rate movement.
The reason for this is that supply of capacity into this sector of the
reinsurance market remained relatively stable, so the only drivers of
rate movement were the increased cost of retrocession and market
sentiment. The market reacted in line with our expectations. Our
response was to grow in those areas getting rate increases. We
broadened our core relationships with Japanese cedants and started
to write a Florida property catastrophe portfolio via our Bermuda
office. Moving into 2020 we expect positive pricing in the property
catastrophe market, but once again it is unlikely to be to the same
extent as we expect to see in the retrocession market. Albeit the more
dislocated the retrocession market becomes, the more impact on the
property catastrophe market we would anticipate seeing. Dependent
upon market conditions, it is likely we will look to grow in certain
territories where there is the opportunity to do so.
The property D&F insurance market developed as the year progressed.
Similarly impacted by the natural catastrophe events of recent years,
the market had seen several capacity withdrawals through the course
of the year. The Lloyd’s Decile 10 performance review included D&F
and as such some markets withdrew from the class and others cut
back on their exposure. Just as significantly, some of the larger
carriers in this market made substantial reductions to the capacity
they offered in the product line. As the effect of this was felt, the
pricing began to increase as the year progressed. The Group writes
the vast majority of D&F via Lancashire Syndicates and has benefitted
from these pricing improvements. The Group also decided to re-enter
this class of business through LUK as the market continued to harden
into 2020.
The only part of our property offering that did not experience rate
increases in 2019 was our terrorism and political risk portfolio. The
reason for this is simple. There remained an ample supply of capacity,
which outstripped the demand. The world remains a volatile place
with incidents of terrorism and political unrest across the globe.
However, ultimately, the pricing of our products is driven by demand
and supply and unlike our other lines this has not tipped in the
underwriters’ favour. The product line remains profitable for most
carriers and, as such, no one has cut back. Our view is that pricing
remains adequate for our risk profile and the product line continues
to be profitable for us, so we continue to support our core clients.
Absent any shift in demand/supply dynamics, our view is that
market conditions for 2020 will be broadly like 2019.
22
22
Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
Energy
Our energy portfolio has a number of components: upstream
(offshore) energy, downstream (onshore) energy, renewable energy
and power. It is underwritten across our company and Lloyd’s
platforms. Much like our other classes of business we are seeing
different dynamics across the sub-classes.
Downstream energy and power saw supply continue to retract in
2019. Large carriers have reduced their risk appetite following several
large losses and increasing attrition. Additionally, these classes fell
under the Lloyd’s performance review microscope. As a result pricing
accelerated through 2019, albeit coming from a historically low base.
We entered both these sub-classes during 2018, so our timing had
been favourable with the market moving in the right direction. As
others retract from these sub-classes we look to grow (whilst always
mindful of rating adequacy). We expect pricing to continue to improve
in 2020 which will provide us with the opportunity to further build out
these portfolios.
Within our power and energy portfolios we support a range of
renewable projects around the world. As this industry continues to
develop during this period of a global transition to a lower-carbon
future, the insurance community helps to provide valuable insurance
products that allow such projects to be viable. Renewable energy rates
increased during 2019 and we expect this trend to continue into 2020.
Our upstream portfolio saw no supply of capital restrictions. This was
primarily because the loss environment, driven by low levels of activity
due to oil price levels, has been very benign over the past few years.
Therefore, this sector has delivered good underwriting profits and,
as such, no one is exiting the class. That said, there is a broad
acknowledgement that rating levels are relatively low, so market
sentiment had seen pricing improve slowly in both 2018 and 2019,
but not to the levels where we would want to broaden our portfolio
too much. Our belief is that this market is finely balanced, and it will
not take too much loss activity to see rates start to improve more
materially. We will remain patient until such time and maintain
our core portfolio of risk that has historically performed very well.
Aviation
The Group underwrites both an aviation insurance and reinsurance
portfolio across our company and Lloyd’s platforms.
The aviation insurance market saw some historically large losses
in 2019. Capacity withdrew from the market due to historical
unprofitability and the Lloyd’s performance management initiative.
Therefore, rates improved throughout the year in all parts of our
aviation insurance portfolio.
Our aviation insurance offering was broadened at the end of 2018,
with a new team specialising in a niche area of the aviation market.
This complemented our existing aviation offering to clients and
brokers, and as a result our aviation premium grew in 2019 from
both rate improvement and new business.
There remain areas of the aviation insurance market where we still do
not have a significant market share given current pricing levels. Should
rates change, we have the team and the platforms to increase our
market share quickly.
The aviation reinsurance market also improved during 2019, albeit to
a lesser extent than the insurance market. The simple reason for this
is that less capacity exited this sector. Our portfolio shrank during the
soft cycle to a core portfolio of risk, and 2019 was the first year where
we have been able to cautiously grow as rates started to improve.
Our general outlook for 2020 is for continued pricing momentum in
aviation insurance, allowing us the opportunity to continue to increase
our footprint in this class.
Marine
We underwrite various sub-classes of marine across our company
and through Lancashire Syndicates. All our marine classes saw pricing
improvement throughout 2019.
Like many of the specialty lines of business we write, marine has
been under scrutiny from the Lloyd’s performance review which has
seen numerous syndicates exit or significantly reduce their marine
portfolios. Consequently, market conditions have improved.
Cargo has seen the greatest degree of dislocation. Withdrawal of
capacity started in 2018 and continued into 2019 and underwriting
conditions have continued to improve. Most of our cargo portfolio is
written by Lancashire Syndicates and we have grown with the market
opportunity – with the discipline shown in the soft cycle allowing us
the platform to grow into the better market.
Most of our remaining marine sub-classes such as hull, builders’ risks
and liability are underwritten from our company platform. Whilst not
at the same level as cargo, these sub-classes have also seen pricing
improvement during 2019 as supply restrictions manifest themselves.
Our outlook for marine in 2020 is for continued rating improvement.
Depending upon the extent of this improvement we will look to
develop our marine portfolio further.
Overall
In summary, the rating environment seen in 2019 played out broadly
as we predicted at the start of the year. We have been able to grow
into the improving market and our new teams have benefited from
an improved rating environment, allowing them to develop their
portfolios. We are very pleased to produce a combined ratio of 80.9%
in a year with several mid-sized natural catastrophe losses as well as
some large risk losses. This demonstrates our rigorous approach to
risk selection and portfolio management. If the market continues
to improve in 2020, as we expect it will, then our aim would be to
maximise the underwriting opportunity and deliver appropriate
risk-adjusted returns.
www.lancashiregroup.com
23
PerformancePerformance B U S I N E S S R E V I E W
Protecting our clients, balancing risk,
and generating returns
Hayley Johnston
Chief Underwriting Officer,
LUK
James Irvine
Chief Underwriting Officer,
LICL
Jon Barnes
Active Underwriter,
Syndicate 2010
John Spence
Active Underwriter,
Syndicate 3010
Underwriting results
2019
2018
Gross premiums written
Net premiums earned
Net loss ratio
Net acquisition cost
ratio
Expense ratio
Combined ratio
Property
$m
223.8
121.7
8.8%
Energy
$m
94.9
66.5
14.1%
Marine
$m
37.3
28.4
13.0%
Aviation
$m
53.2
23.6
36.4%
18.6%
–
27.4%
33.1%
–
47.2%
30.6%
–
43.6%
23.3%
–
59.7%
Lancashire
Syndicates
$m
Marine
Property
Total
$m
$m
$m
297.5 706.7
31.1
214.6
181.5 421.7
21.5
131.9
53.7% 30.8% 34.0% (27.1%) 102.3%
Energy
$m
103.0
75.9
Aviation
$m
33.0
17.8
2.2%
Lancashire
Syndicates
$m
Total
$m
256.8 638.5
166.4 413.5
71.4% 40.0%
25.7% 25.0% 23.9% 44.3% 55.8% 47.2%
–
79.4% 80.9% 57.9% 17.2% 158.1% 49.4%
– 25.1%
–
–
–
24.6% 30.6%
– 21.6%
96.0% 92.2%
Premiums
Gross premiums written increased by 10.7% in 2019 compared
to 2018. The Group’s five principal segments, and the key market
factors impacting them, are discussed below.
Property
Property gross premiums written increased by 4.3% for the year
ended 31 December 2019 compared to the year ended 31 December
2018. The property segment experienced new business growth along
with rate and exposure-related premium increases across all classes
of business, particularly in the property catastrophe and political
risk classes. Business flow in the political risk class is generally less
predictable than other classes of business due to the lead time and
specific nature of each deal. The new business was partially offset
by the impact of multi-year contracts written in the prior year that
were not yet due to renew.
Energy
Energy gross premiums written decreased by 7.9% for the year ended
31 December 2019 compared to the year ended 31 December 2018.
While there was more new business in the worldwide offshore and
onshore energy classes in 2019 compared to 2018, the prior year
24
24
Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
benefited from the restructuring of an existing Gulf of Mexico multi-
year deal in addition to premium adjustments that were made to prior
underwriting year risk-attaching business in the worldwide offshore
energy class.
Marine
Marine gross premiums written increased by 19.9% for the year ended
31 December 2019 compared to the year ended 31 December 2018.
The growth reflects rate and exposure increases and favourable prior
underwriting year premium adjustments in the marine builders’ risk
class. In the prior year there was a reduction in exposure on prior
underwriting year risk-attaching business in the other marine
class and less pro-rata business.
Aviation
Aviation gross premiums written increased by 61.2% for the year
ended 31 December 2019 compared to the year ended 31 December
2018. The growth was primarily driven by new and renewal business
in the aviation deductible and other aviation classes of business as
that underwriting team continues to build their book. The increase
was only partially offset by exposure decreases in the AV52 and
satellite classes.
Lancashire Syndicates
In our Lancashire Syndicates segment, our Lloyd’s platform, gross
premiums written increased by 15.8% for the year ended 31 December
2019 compared to the year ended 31 December 2018. The increase
was primarily due to new business in the energy, aviation, marine
and terrorism classes of business, offset slightly by lower premiums
in the property classes.
Ceded
Ceded premiums increased by $61.2 million, or 27.7%, for the
year ended 31 December 2019 compared to the year ended
31 December 2018. The increase was primarily due to a combination
of additional cover purchased, including some quota share cover
for some of the new lines of business we have entered into, and
the timing of renewals.
Earned
Net premiums earned as a proportion of net premiums written were
99.3% for the year ended 31 December 2019, compared to 99.0%
for the year ended 31 December 2018.
Losses
The Group’s net loss ratio for 2019 was 30.8% compared to 40.0%
for the same period in 2018. The accident year loss ratio for 2019,
including the impact of foreign exchange revaluations, was 51.3%
compared to 70.0% for the same period in 2018.
2019 was impacted by catastrophe activity in the form of hurricane
Dorian and typhoons Faxai and Hagibis. Our net losses recorded for
these events, excluding the impact of inwards and outwards
reinstatement premiums, was $52.1 million. In 2018, our net losses
from marine and natural catastrophe events, excluding the impact of
inwards and outwards reinstatement premiums, was $104.9 million.
While reserves have been recorded, uncertainty exists on the eventual
ultimate net loss estimates in relation to hurricanes, typhoons and
wildfires as loss information after these types of events can take
some time to obtain. The Group’s ultimate net loss estimates for
these natural catastrophe events 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 net
losses may vary, perhaps materially, from the current estimates. The
final settlement of all claims is likely to take place over a considerable
period of time.
Excluding the impact of foreign exchange revaluations, the table
below shows the impact of current accident year catastrophe events
on the Group’s loss ratio for the year ended 31 December 2019:
Reported at 31 December 2019
Absent all catastrophe events
Losses
$m
129.8
77.7
Loss ratio
%
30.8
18.5
As reported in the Group’s results for the year ended 31 December
2018 and excluding the impact of foreign exchange revaluations,
the impact of marine and natural catastrophe loss events on the
Group’s 2018 loss ratio was as follows:
Reported at 31 December 2018
Absent natural catastrophe events
Absent large marine losses
Absent the combined 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.
The total estimated ultimate net loss, excluding the impacts of
inwards and outwards reinstatement premiums for the 2018 reported
marine and natural catastrophe losses were as follows:
2018 loss events1
As at
31 December
2019
$m
100.6
As at
31 December
2018
$m
104.9
1. The 2018 loss events include hurricanes Florence and Michael, typhoons Jebi,
Mangkhut and Trami and the California wildfires, plus loss events within our
marine portfolio.
Prior year favourable development for 2019 was $88.0 million,
compared to $126.9 million of favourable development for the same
period in 2018. The favourable development in both periods was
primarily due to general IBNR releases across most lines of business
due to a lack of reported claims. In 2019, the Group also benefited
from favourable development on the 2017 catastrophe loss events
partially offset by 2018 accident year claims in the energy and
Lancashire Syndicates’ segments. In the prior period, the Group
benefited from a reduction 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
Lancashire
Syndicates
Total
2019
$m
37.3
20.2
11.1
1.1
2018
$m
46.5
55.0
12.1
1.4
18.3
88.0
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
2015
$m
26.4
35.2
13.8
2.9
26.1
85.8
29.4
107.7
Note: Positive numbers denote favourable development.
www.lancashiregroup.com
25
PerformancePerformance
B U S I N E S S R E V I E W C O N T I N U E D
Excluding the impact of foreign exchange revaluations, previous
accident years’ ultimate losses developed as follows during 2019
and 2018:
Ultimate loss development by accident year
2019
$m
3.3
(0.9)
1.4
6.6
4.2
(1.3)
5.7
19.3
30.8
18.9
88.0
2009 accident year and prior
2010 accident year
2011 accident year
2012 accident year
2013 accident year
2014 accident year
2015 accident year
2016 accident year
2017 accident year
2018 accident year
Total
2018
$m
27.0
1.6
4.7
8.8
3.5
3.4
6.6
33.3
38.0
–
126.9
Note: Positive numbers denote favourable development.
The ratio of IBNR to total net loss reserves was 30.9% as at
31 December 2019 compared to 39.3% as at 31 December 2018.
Accident year loss ratios
Current accident year
loss ratio
Initial accident year
loss ratio
Change in loss ratio
post-accident year
2019
%
2018
%
2017
%
2016
%
2015
%
51.3
65.6
77.6
32.5
30.2
n/a
70.0
94.2
46.2
46.0
n/a
4.4
16.6
13.7
15.8
Note: Adjusted for revaluation of foreign currencies at the exchange rate as at
31 December 2019.
Other operating expenses
Other operating expenses were $106.0 million in 2019 compared
to $89.2 million in the same period last year. The increase was driven
primarily by the underlying performance of the Group which has
resulted in a higher variable compensation element of employee
remuneration costs compared to 2018. Employment costs have
also increased due to general salary increases. This was only
partially offset by the impact of the depreciation in Sterling
relative to the prior period.
The equity-based compensation expense was $9.6 million in 2019
compared to $7.9 million in the same period last year. 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 in 2018 as required
return thresholds for performance award vesting were not met.
Third-party capital management
The total contribution from third-party capital activities consists of
the following items:
LCM underwriting fees
LCM profit commission
LSL fees & profit commission
Total other income
Share of profit (loss) of associate
Total third-party capital management
income
2019
$m
7.9
1.0
2.5
11.4
5.9
2018
$m
6.6
–
5.8
12.4
(7.1)
17.3
5.3
The LCM profit commission is driven by the timing of loss experience,
settlement of claims and collateral release and therefore varies year
on year. Following the significant catastrophe loss activity during
2017 and 2018, and the resulting loss experience, there was no profit
commission for any of the 2017 or 2018 underwriting cycles.
The higher underwriting fees in 2019 reflect the increased level of
premiums under management compared to 2018.
The LSL fees and profit commission were driven by the relative
profitability of the underwriting years impacting the profit commission
in each period.
The share of profit (loss) of associate reflects Lancashire’s 10% equity
interest in the LCM managed vehicle.
26
26
Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
Denise O’Donoghue
Group Chief Investment Officer
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 the
first half of 2019, our focus was on managing our interest rate risk, and
as such we continued to hold short duration high quality assets. With
the Federal Reserve’s pivot in June, interest rates declined, however
with the very flat yield curve, we did not see a large benefit from
increasing duration much. 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 diversify from interest rate volatility.
Our portfolio mix illustrates our conservative philosophy, as shown
in the table below. With the composition regulated by the Group’s
investment guidelines, we have three investment portfolio categories:
‘core’, ‘core plus’ and ‘surplus’. The core 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 127.
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 $37.7 million for the year ended 31 December 2019,
an increase of 8.6% compared to 2018. Total investment return,
including net investment income, net realised gains and losses,
impairments and net change in unrealised gains and losses, was
$83.2 million for the year ended 31 December 2019 compared
to $12.5 million for 2018.
The Group’s investment portfolio generated a strong total return
of 4.9% in 2019 with positive returns from all asset classes, driven
primarily by the three 25 basis point rate cuts by the Federal Reserve.
Credit spreads also tightened during the year. This was in contrast to
2018 which saw an increase in treasury yields and the widening of
credit spreads, resulting in an annual return of 0.8%.
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
Private debt fund – at FVTPL
Hedge funds – at FVTPL
Total
2019
%
11.4
4.9
0.7
12.7
3.5
5.8
8.2
34.4
5.9
2.9
–
0.9
8.7
100.0
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
www.lancashiregroup.com
27
PerformancePerformance B U S I N E S S R E V I E W C O N T I N U E D
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 yield 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 (including LCM), the distribution of dividends
and the repurchasing of shares.
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
over the long-term we will return capital where this offers the
best returns for our shareholders. We have returned 105.0% of
comprehensive income generated via dividends or share repurchases
since inception.
The Group actively reviews the level and composition of capital on
an ongoing basis. Internal methods have been developed to review
the profitability of classes of business and their estimated capital
requirements plus the capital requirements of the combination
of a wide range of other risk categories. The key aim of the capital
management process is to maintain a strong balance sheet, whilst:
• maintaining sufficient capital for underwriting opportunities and
to meet obligations to policyholders;
• maximising the risk-adjusted return to shareholders within
predetermined risk tolerances;
• maintaining adequate financial strength ratings; and
• meeting internal, regulatory and rating agency requirements.
The subsidiary operating entities also conduct capital requirement
assessments under internal measures and in compliance with local
regulatory and Lloyd’s requirements.
Capital raising can include debt or equity, and returns of capital may
be made through dividends, share repurchases, a redemption of debt
or any combination thereof. All capital actions require approval by
the Board of Directors. The retention of earnings generated also leads
to an increase in capital.
The composition of capital is driven by management’s appetite for
leverage, amongst other factors, including the cost and availability
of different types of capital. Maintaining a strong balance sheet will
be the overriding factor in all capital management decisions.
28
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Lancashire Holdings Limited
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Annual Report & Accounts 2019
Annual Report & Accounts 2019
Letters of credit
Lancashire has a 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 a RCF to assist Syndicate 2010’s gross funding requirements. With
effect from 1 January 2020, while up to $80.0 million in aggregate
can be utilised by way of an LOC or an RCF to assist Syndicate 2010’s
gross funding requirements, only $40.0 million of this amount can
be utilised by way of an RCF. Furthermore, a $44.0 million
uncollateralised facility is available for utilisation by LICL and
guaranteed by LHL for FAL purposes.
There was no outstanding debt under the above facilities at any
reporting date. There are no off-balance sheet forms of capital.
Capital
As at 31 December 2019, total capital available to the Group was
$1.517 billion, comprising shareholders’ equity of $1.193 billion and
$323.5 million of long-term debt. Tangible capital was $1.363 billion.
Leverage was 21.3% on total capital and 23.7% on total tangible
capital. Total capital and total tangible capital as at 31 December 2018
were $1.391 billion and $1.238 billion respectively.
Dividends
During 2019, the Lancashire Board declared a final dividend of $0.10
per common share in respect of the 2018 financial year and an interim
dividend of $0.05 per common share in respect of 2019. The Board of
Directors has declared a final dividend for 2019 of $0.10 per common
share, subject to a shareholder vote of approval at the AGM to be held
on 29 April 2020. On the basis that the final dividend of $0.10 per
common share is approved by the shareholders at the 2020 AGM the
total capital returns since inception amount to $2.8 billion or 288%
of initial capital raised. The final dividend will be paid on 5 June 2020
to shareholders of record on 11 May 2020.
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% 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 2020 AGM to be held on 29 April 2020.
www.lancashiregroup.com
29
PerformancePerformance E N T E R P R I S E R I S K M A N A G E M E N T
Risk strategy
Our risk strategy is the starting point for the development and
evolution of our Risk Management Framework and is therefore
refreshed on an annual basis in line with the 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’s financial performance is exposed to risks from several
sources. These include insurance risk, strategic risk, market risk,
liquidity risk, credit risk, operational risk, group risk and regulatory
and legal risk. The primary risk to the Group is insurance risk, which
can be subdivided into the core risk of underwriting and the 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.
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 risk and
seeing the opportunity enables us
to deliver for our clients; additionally,
balancing the risk and managing our
volatility enables us to maximise
the return to our shareholders over
the cycle. As a result, ensuring we
have continuous and consistent risk
management embedded across the
Group through the Risk Management
Framework is a key focus.
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Annual Report & Accounts 2019
Annual Report & Accounts 2019
Continuous and consistent risk management Risk Management 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 the controls that
mitigate against these risks 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. LSL’s
CRO provides formal reports to the LSL Board and its RCCC. The third
line of defence is the internal audit function, which works closely with
the risk management team in providing risk assurance by assessing the
operating effectiveness of the controls and the culture.
We continue to perform a quarterly risk and control 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 that their risks
remain appropriately documented and scored. The risks are scored
on both a gross basis (i.e. inherent risk pre-controls) and a net basis
(i.e. residual risk post the application of controls). 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 2019, all Group entities were operating within their
board-approved risk tolerances.
The quarterly ORSA reports prepared by the Group CRO to the main
Board provide a timely analysis of current and potential or emerging
ERM & ORSA
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 internal model
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
l ture &
u
C
Board
RRC
G
overn a n
c e
Risk
identification
& assessment
Risk appetite &
tolerances
Risk
solvency &
assessment
Capital
management
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
Framework maturity
• Integrated assurance
assessment
• Emerging risk assessment
• Review and approval of
business plan by the Board
• Stress and scenario testing
(business plan)
• Assessment of management
actions
Key elements of ORSA
Board sign off and embedding
Risks
Stress and scenario testing
Business strategy
Capital and solvency
www.lancashiregroup.com
31
PerformancePerformance E N T E R P R I S E R I S K M A N A G E M E N T C O N T I N U E D
risks, compared against risk tolerances, along with their associated
capital requirements.
transitional and physical risk factors) and the results of the quarterly
affirmation process and related controls testing.
Our annual ORSA report is now prepared under the requirements
of the BMA’s regulatory regime which has been recognised as being
Solvency II equivalent. The 2020 ORSA will be presented to the Board
for review, challenge and approval at the Q1 2020 Board meeting.
As a Lloyd’s managing agent, LSL falls within the Society of Lloyd’s
for Solvency II reporting, preparing ORSA reports for each syndicate.
LSL has its own ERM framework to ensure adherence to Lloyd’s
minimum standards.
The diagram on the previous page 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. Culture is also driven from the ‘bottom up’
through the risk and control affirmation process. The primary role of
the Group CRO is to facilitate the effective operation of ERM and the
ORSA processes throughout the Group at all levels. The role includes,
but is not limited to, the following responsibilities:
• overall management of the risk management system;
• to drive ERM culture, ownership and execution on three levels:
Board, executive management and operational within the business;
• to facilitate the identification, assessment, evaluation and
management of existing and emerging risks by management
and the Board, including the articulation of risk preferences
and the adoption of formal risk tolerances;
• to ensure that these risks are given due consideration and
are embedded within management’s and the Board’s oversight
and decision-making process; 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 the Group’s internal models, including
considering their effectiveness. It ensures that all key areas of risk are
discussed according to a schedule that covers fortnightly, monthly,
quarterly, semi-annual and annual reviews. The RRC meets fortnightly
and is responsible for coordinating and overseeing ERM activities
within the risk profile, appetites and tolerances set by the Group and
individual entity boards of directors. The RRC includes the Group CEO,
members from the finance, actuarial, modelling, operations, treasury
and underwriting functions and both the Group CRO and LSL CRO.
The Group CRO reports on the RRC’s activities to the Group and
individual entity boards of directors and via the LSL CRO to the RCCC
of LSL. Through the Group CRO the RRC considers recommendations
to the Board and its Committees with regard to the adoption of formal
risk tolerances.
Examples of specific items considered by the RRC during 2019 include:
the Group strategy and business plan, risk appetite statements, capital
and solvency appetite, ERM framework, stress and scenario tests
(including the addition of a climate change scenario covering
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Lancashire Holdings Limited
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Annual Report & Accounts 2019
Annual Report & Accounts 2019
Capital models
We continue to challenge the assumptions used in the individual
capital models and make changes where appropriate.
Changes in risk
From an insurance risk perspective, the business has written just
over 10% more Gross Written Premium (GWP) than in 2018. This
increase reflects an increased appetite to write business as we have
seen improving rates across most of our classes of business and
increases in business in downstream energy, power and aviation
deductible following recruitment of new underwriting teams in these
areas in 2018. In addition, as is the case every year, our underwriters
have reviewed and refined our purchasing of reinsurance cover. This
is designed to ensure our reinsurance buying is aligned to our latest
strategy and is targeted to be as responsive as possible, thereby
helping to reduce net insurance risk exposures or enabling additional
risk taking.
From an operational risk perspective, there have also been a number
of important risk and control changes during the year, for example
the change of regulatory and tax domicile of the Group from the
UK to Bermuda in January 2019. Following this change, the business
has documented related controls to help ensure that there is a good
understanding of how and where key decisions are to be taken in order
to mitigate associated corporate governance and tax risks arising from
this change.
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 executive committees, 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 2019 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.
Much of the focus in 2019 was on the continued development of
previously reported emerging risks including Brexit, climate change
risks (physical, financial, transitional and liability), global tax reform
and geopolitical instability. Climate change risk has risen to the top
of many political agendas internationally over the last year and has
remained an area of risk monitoring and management for us at both
management and Board level. The threat which catastrophic weather
events poses to individuals, communities and businesses illustrates
the social and economic value which our risk management products
generate. This is therefore a key area both of strategic opportunity
for our business and one of the key drivers of our underwriting risk
exposure management. In particular, management and the Board
set tolerances for, and monitor, the Group’s probable maximum
losses for major catastrophe events and in particular weather-related
exposures. Please see page 120 for a list of the Group’s current PML
risk exposures. Climate change risk also informs the way we manage
our investment portfolio and associated risk. During 2019, the Group
once again participated in the Carbon Disclosure Project, which is
aligned with the recommendations of the Task Force on Climate-
P R I N C I P A L R I S K S
related Financial Disclosures, which are promoted by the Financial
Stability Board and the Bank of England.
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 99.
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
(represents the potential to generate a return as well as a loss)
or non-core (offers no direct potential for return); (b) Operational
Risk: which can be independent or correlated; and (c) Other Risk:
the non-financial category of risks which cannot necessarily be
Risk universe
Type Category
Description
Underwriting
Investment
e
r
o
C
c
i
s
n
i
r
t
n
I
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.
c
i
s
n
i
r
t
n
I
e Reserving
r
o
c
-
n
o
N
(Re)Insurance
counterparty
Liquidity
l Operational
a
n
o
i
t
a
r
e
p
O
Intrinsic risks to which we are inevitably exposed as a result of conducting our day-to-day business operations, yet offer
no direct potential for return.
They are quantified insofar as practicable for the purposes of capital and risk management and avoided or minimised
insofar as is economically justifiable.
These are risks arising as a result of inadequate or failed internal processes, personnel, systems or (non-insurance)
external events.
They have the potential either to magnify the adverse impacts of intrinsic risks, 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.
www.lancashiregroup.com
33
PerformancePerformance
P R I N C I P A L R I S K S C O N T I N U E D
Balancing our risks
and opportunities
As described under our review of the risk
universe on page 33, 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 119 to 142. Within the capital models, insurance risk
accounts for over 80% 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, 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.
Type
Intrinsic risk: Core
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 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.
34
34
Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
Mitigation
Trend
Impact
Appetite
Link to strategy Opportunities
How the Board reviews this risk
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.
Governance: Board and capital management: We set our internal
capital requirements at a level that allows for buffers above
accumulations of extreme events and, further to recommendations,
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
2020 to ensure it remained aligned to our strategy and risk profile.
Underwriting
As market dynamics change so too do the
Unsurprisingly, the Board views underwriting
comes first
opportunities available to the Group. We
as the Group’s key risk. As such, the Board
remain creative in being able to provide
continues to focus on underwriting expertise
tailored insurance and reinsurance
products and solutions to our core
and discipline to effectively balance the
equation of risk and return, and operate
clients across the three platforms of our
nimbly through the cycle. The Board is
business. 2019 saw some opportunity for
actively engaged in the development and
organic growth and there are signs that
implementation of the Group’s underwriting
2020 will provide further opportunities.
strategy, plus the articulation of, and
adherence to, formal underwriting risk
tolerances. Quarterly risk data on this
is both received and reviewed by the
Board’s Underwriting and Underwriting
Risk Committee (UURC) to ensure that good
risk selection and disciplined underwriting
remain at the core of the Group’s underwriting
strategy. The UURC and Board also review and
approve the structure of the Group’s outwards
reinsurance programme.
Risk trend key:
Risk impact key:
Risk appetite key:
Increased
Stable
Decreased
High
Moderate
Low
Acceptable
Reassess
Unacceptable
Mitigation
Trend
Impact
Appetite
Link to strategy Opportunities
How the Board reviews this risk
Underwriting
comes first
As market dynamics change so too do the
opportunities available to the Group. 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. 2019 saw some opportunity for
organic growth and there are signs that
2020 will provide further opportunities.
Unsurprisingly, the Board views underwriting
as the Group’s key risk. As such, the Board
continues to focus on underwriting expertise
and discipline to effectively balance the
equation of risk and return, and operate
nimbly through the cycle. The Board is
actively engaged in the development and
implementation of the Group’s underwriting
strategy, plus the articulation of, and
adherence to, formal underwriting risk
tolerances. Quarterly risk data on this
is both received and reviewed by the
Board’s Underwriting and Underwriting
Risk Committee (UURC) to ensure that good
risk selection and disciplined underwriting
remain at the core of the Group’s underwriting
strategy. The UURC and Board also review and
approve the structure of the Group’s outwards
reinsurance programme.
www.lancashiregroup.com
35
Type
Intrinsic risk: Core
Underwriting: Losses in our classes are hard to predict, in particular
Modelling: We apply loads to, and stress test, stochastic models and
as to the specifics of timing and quantum of catastrophe loss
develop alternative views of losses using exposure damage ratios. We
events. Additionally, we write lines of business that are subject
review our assumptions periodically to ensure they remain appropriate.
to accumulations, including accumulations of individual risk losses
We also back test our portfolio against historic events to assess potential
arising from a single event such as several property catastrophe
losses.
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 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.
RRC: The RRC considers accumulations, clashes and parameterisation
of losses and models.
Governance: Board and capital management: We set our internal
capital requirements at a level that allows for buffers above
accumulations of extreme events and, further to recommendations,
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
2020 to ensure it remained aligned to our strategy and risk profile.
PerformancePerformance
P R I N C I P A L R I S K S C O N T I N U E D
Type
Mitigation
Trend
Impact
Appetite
Link to strategy Opportunities
How the Board reviews this risk
Intrinsic risk: Core (continued)
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 an interest rate risk as a result of Federal
Reserve policy, such as the pivot in the Federal Reserve’s outlook in
June 2019. We model our investment portfolios and use various stress
scenarios to see what kinds of losses we could expect under a range
of outcomes. The Investment Committee adopts a strategy which has
a low exposure to the effects of climate change transitional risk over
the various asset classes.
Intrinsic risk: Non-core
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.
(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.
36
36
Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
Governance: Board and 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. The Group’s principal investment managers are signatories
to the Principles for Responsible Investment.
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.
Governance: Reserves are reviewed and approved by the Reserve
Committee whose members include representation from finance,
actuarial and claims; there are additional attendees from finance,
actuarial, underwriting, legal and risk. A reserve report is presented
and reviewed on a quarterly basis by the Audit Committee.
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 Audit Committee of the Board receives
and considers quarterly reports from management and the Group Chief
Actuary. In addition, the Audit Committee receives and considers reports
on reserve adequacy from the external actuary six monthly.
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.
Effectively
balance risk
and return
The primary objectives for our investment
The Investment Committee receives and
portfolio remain capital preservation
reviews investment strategies, guidelines
and liquidity. Our conservative approach
and policies, risk appetite and associated
limits our downside risk but means we
risk tolerances, and makes recommendations
are unlikely to equal the returns of peers
to the Board in this regard. The Committee
taking on more investment risk.
also monitors performance of the investment
strategies within the risk framework and
compliance with investment operating
guidelines. In addition, the quarterly
ORSA report from the Group CRO includes
statements regarding performance against
investment risk tolerances.
Effectively
Whilst our focus is on short-tail lines
The Board reviews this risk in detail on
balance risk
of business uncertainty still exists on
a six-monthly basis through the Audit
and return
the eventual ultimate losses as loss
Committee, which focuses on the
information can take some time to
obtain. As additional information
appropriateness of the overall reserve
levels, informed by the external actuary’s
emerges, the Group’s actual ultimate
independent review of reserve adequacy
loss may vary, perhaps materially,
from those initially reported. This
may result in reserve releases or a
required strengthening of reserves.
and the UURC, which receives updates from
management on individual large losses.
Underwriting
As both a purchaser and seller of
The quarterly ORSA report to the Board
comes first
reinsurance, opportunities exist
includes the top five reinsurance counterparty
and Effectively
throughout the insurance cycle. In
exposures versus the Board-agreed tolerances.
balance risk
recent years, with rates suppressed,
These tolerances are reviewed and approved
and return
the quantum of reinsurance coverage
on an annual basis by the Board and
purchased has increased and therefore
considered as part of the annual strategy
so has counterparty exposure. This
review. Amounts owed to intermediary
is mitigated through established
counterparties are included in the
governance processes to manage the
underwriting information provided
aggregate exposure and credit control
to the UURC on a quarterly basis.
processes to ensure monies due are
received. As always, it is the case of
balancing the risk we are taking with
the expected return; reinsurance
purchasing is one way of balancing this.
Type
Mitigation
Trend
Impact
Appetite
Link to strategy Opportunities
How the Board reviews this risk
Intrinsic risk: Core (continued)
Investment: We need to hold sufficient assets in readiness to pay
Governance: Board and investment strategy: Our strategy is that
claims, but the markets and products in which we invest can suffer
investment income is not expected to be a significant driver of our
volatility and losses. As a short-tail insurer, we are able to hold the
returns. Our primary focus remains on underwriting as the engine
majority of assets in low-duration securities such as fixed maturities.
of profits. Investment strategy, including investment risk tolerances,
However, this creates an additional source of risk in the current
is approved annually and monitored on a quarterly basis by the
environment where there is an interest rate risk as a result of Federal
Investment Committee and Board. A detailed strategic asset
Reserve policy, such as the pivot in the Federal Reserve’s outlook in
allocation study is performed biannually.
June 2019. We model our investment portfolios and use various stress
scenarios to see what kinds of losses we could expect under a range
of outcomes. The Investment Committee adopts a strategy which has
a low exposure to the effects of climate change transitional risk over
the various asset classes.
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. The Group’s principal investment managers are signatories
to the Principles for Responsible Investment.
Intrinsic risk: Non-core
Reserving: Because we do not know the amount of losses we are
Short-tail business: Lancashire’s focus is on short-tail lines of business
going to incur at the outset of a contract, we have to make estimates
where losses are usually known within, or shortly after, the policy period
of the reserves we need to hold to pay claims. If these reserves are
with a reasonable degree of certainty.
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.
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.
Governance: Reserves are reviewed and approved by the Reserve
Committee whose members include representation from finance,
actuarial and claims; there are additional attendees from finance,
actuarial, underwriting, legal and risk. A reserve report is presented
and reviewed on a quarterly basis by the Audit Committee.
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 Audit Committee of the Board receives
and considers quarterly reports from management and the Group Chief
Actuary. In addition, the Audit Committee receives and considers reports
on reserve adequacy from the external actuary six monthly.
(Re)Insurance and intermediary counterparty: Almost all the
Counterparty credit limits: The Broker Vetting Committee is
insurance policies which we write are brought to us by brokers,
responsible for the broker vetting approval process and monitoring
who act as intermediaries between us and the client, and handle
credit risk in relation to brokers. In addition, the Group conducts
the transaction of payments of claims and premiums on our behalf.
broker business using non-risk transfer TOBAs. This mitigates the risk
This exposes us to the risk of mishandling by, or failure of, the broker
due to non-payment by brokers and intermediaries as monies are held
concerned. In order to make our portfolio as efficient as possible,
in separated client accounts. We use counterparty credit limits, seek to
we buy reinsurance to protect against severity, frequency and
deal with reputable reinsurers that meet our minimum rating standards,
accumulation of losses. Again, this exposes us to the risk that our
and use collateral agreements where appropriate. The operating entities
counterparties may have the inability or unwillingness to pay us in
of the Group that contract for reinsurance separately maintain and
the event of a loss.
report their own counterparty credit limits at the entity level. The
RSC is responsible for approving counterparties and monitoring
aggregate limits.
Effectively
balance risk
and return
The primary objectives for our investment
portfolio remain capital preservation
and liquidity. Our conservative approach
limits our downside risk but means we
are unlikely to equal the returns of peers
taking on more investment risk.
The Investment Committee receives and
reviews investment strategies, guidelines
and policies, risk appetite and associated
risk tolerances, and makes recommendations
to the Board in this regard. The Committee
also monitors performance of the investment
strategies within the risk framework and
compliance with investment operating
guidelines. In addition, the quarterly
ORSA report from the Group CRO includes
statements regarding performance against
investment risk tolerances.
Effectively
balance risk
and return
Whilst our focus is on short-tail lines
of business uncertainty still exists on
the eventual ultimate losses as loss
information can take some time to
obtain. As additional information
emerges, the Group’s actual ultimate
loss may vary, perhaps materially,
from those initially reported. This
may result in reserve releases or a
required strengthening of reserves.
The Board reviews this risk in detail on
a six-monthly basis through the Audit
Committee, which focuses on the
appropriateness of the overall reserve
levels, informed by the external actuary’s
independent review of reserve adequacy
and the UURC, which receives updates from
management on individual large losses.
Underwriting
comes first
and Effectively
balance risk
and return
As both a purchaser and seller of
reinsurance, opportunities exist
throughout the insurance cycle. In
recent years, with rates suppressed,
the quantum of reinsurance coverage
purchased has increased and therefore
so has counterparty exposure. This
is mitigated through established
governance processes to manage the
aggregate exposure and credit control
processes to ensure monies due are
received. As always, it is the case of
balancing the risk we are taking with
the expected return; reinsurance
purchasing is one way of balancing this.
The quarterly ORSA report to the Board
includes the top five reinsurance counterparty
exposures versus the Board-agreed tolerances.
These tolerances are reviewed and approved
on an annual basis by the Board and
considered as part of the annual strategy
review. Amounts owed to intermediary
counterparties are included in the
underwriting information provided
to the UURC on a quarterly basis.
www.lancashiregroup.com
37
PerformancePerformance
P R I N C I P A L R I S K S C O N T I N U E D
Type
Mitigation
Trend
Impact
Appetite
Link to strategy Opportunities
How the Board reviews this risk
Intrinsic risk: Non-core (continued)
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.
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.
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. Additionally, the Group has both Disaster Recovery and
Business Continuity Plans in place that are tested annually and which are
designed, in particular, to help minimise the risk posed by Bermuda hurricane
events or disruptive political or terrorism events in London. The business
follows strict tax and regulatory operating guidelines, which are periodically
reviewed and approved by the Board.
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. In addition, the
Group has core values, which all employees subscribe to and which reflect the
culture described in our recent staff engagement survey. The Board regularly
reviews succession planning arrangements and remuneration structures.
Although the Group holds limited personal data, it has a suite of policies and
processes, including penetration testing procedures, around data protection
which facilitate compliance with the EU General Data Protection Regulation
(GDPR) and the Bermuda equivalent of the GDPR, the Personal Information
Protection Act (PIPA).
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. Brexit
updates were included throughout the year.
Operational
These are risks arising as a result of inadequate or failed internal
processes, personnel, systems or (non-insurance) external
events. The Group is also subject to regulatory supervision
and oversight, as well as legislation and tax requirements across
a number of jurisdictions (see page 46 for more information).
Operational risks 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. Furthermore, unauthorised access to IT systems
as a result of a breach or failure could result in data loss,
including personal data, which may have regulatory and/or
reputational risk implications.
Other – Brexit and climate change
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. Brexit has been a continued focus
of the Group during 2019. With the UK having left the EU at the
end of January 2020, our focus for 2020 will be on monitoring
what the UK’s ongoing trading relationship with the EU will be
at the end of the transition period (currently due to end on
31 December 2020), in particular on the financial services
industry. We maintain our view that the impact of Brexit is
not a significant risk to the Group given our trading profile and
the solutions that have been put in place. Whilst we view climate
change as a factor relevant principally to our underwriting and
investment risks (see above), the Board and business continue
to monitor the effects of climate change risk perceptions as a
driver of global economic, political and regulatory change.
38
38
Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
Effectively
balance risk
and return
As previously noted, liquidity is a primary objective of
Liquidity risk is reviewed by the
our investment portfolio. It is important we balance
Investment Committee which
the need for liquidity and being able to pay our
regularly receives and reviews
clients’ claims on a timely basis with the opportunity
reports detailing asset allocation
for return from our investments. We do this through
and compliance with pre-defined
different investment portfolio categories.
guidelines and tolerances.
Operate nimbly
A risk-based approach is followed to determine
The Audit Committee receives
through the
which areas require strongly controlled processes
quarterly reports from the Group
and procedures (i.e. the key risk areas) and those
CRO summarising the results
cycle and
Effectively
balance risk
and return
areas where a more proportionate approach is
appropriate (those areas assessed as low risk).
from the quarterly risk and
control affirmation process. The
Audit Committee reviews this
alongside the quarterly updates
from internal audit regarding their
programme of work and opinion
on the effectiveness of controls.
In addition, the quarterly ORSA
report from the Group CRO to
the Board includes details of any
operational loss events and
changes to the risk register and
the drivers for such change. The
focus on operational resilience
and culture has increased in
2019, with the Audit Committee
receiving an internal audit report
on IT strategy and the Board
receiving the results of the staff
engagement survey.
Effectively
balance risk
and return
Brexit and climate change risk factors are examples
As Peter Clarke and Alex Maloney
of other risks the Group considers and monitors.
noted in their introductory
As reported last year, to mitigate the impact of
Brexit, the Group considers that a significant
proportion of LUK’s existing EU27 business could
be written via Lloyd’s Brussels, utilising LSL, which
has Lloyd’s approval for this arrangement, subject
to ongoing approval from Lloyd’s and any additional
approvals required in relation to the operation of
Lloyd’s Brussels.
Climate change, as Alex Maloney discussed in
his report on page 13, and the trend of increased
frequency and severity of weather-related loss events
illustrate the value of our insurance and reinsurance
products to our clients. Whilst we already insure
many clients in the renewable energy sector, as the
world transitions to non-carbon forms of energy the
opportunities within this sector will grow.
statements (see page 9 and page
13), climate change is increasingly
a topic of debate at the Board and
its various Committee meetings.
In addition, the stress and
scenario testing performed as part
of the annual business planning
process and regulatory reporting
process includes a climate change
related scenario looking at both
transitional and physical risks,
and the Board concluded that
the results of this scenario testing
did not represent a material risk
to the Group.
Type
Mitigation
Trend
Impact
Appetite
Link to strategy Opportunities
How the Board reviews this risk
Intrinsic risk: Non-core (continued)
Liquidity: In order to satisfy claims payments we need to ensure
Portfolio management: The Group maintains liquidity in excess of the
that sufficient assets are held in a readily realisable form. This
Board-agreed tolerances. This is achieved through the maintenance of
includes holding liquid assets for the modelled payout of loss
a highly liquid portfolio with short duration and high creditworthiness.
reserves, as well as ensuring that we can meet claims payments
We monitor this through the use of stress tests and mitigate risks through
in relatively extreme events.
the quality of the investments themselves.
Operational
These are risks arising as a result of inadequate or failed internal
Capacity: We mitigate IT availability risk by adding redundancy to the
processes, personnel, systems or (non-insurance) external
capacity we need and using backups of data, including off-site storage that
events. The Group is also subject to regulatory supervision
we test regularly. Additionally, the Group has both Disaster Recovery and
and oversight, as well as legislation and tax requirements across
Business Continuity Plans in place that are tested annually and which are
a number of jurisdictions (see page 46 for more information).
designed, in particular, to help minimise the risk posed by Bermuda hurricane
Operational risks have the potential either to magnify the
events or disruptive political or terrorism events in London. The business
adverse impacts of intrinsic risks or crystallise separately in
follows strict tax and regulatory operating guidelines, which are periodically
their own right. This can encompass IT availability, where the
reviewed and approved by the Board.
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. Furthermore, unauthorised access to IT systems
as a result of a breach or failure could result in data loss,
including personal data, which may have regulatory and/or
reputational risk implications.
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. In addition, the
Group has core values, which all employees subscribe to and which reflect the
culture described in our recent staff engagement survey. The Board regularly
reviews succession planning arrangements and remuneration structures.
Although the Group holds limited personal data, it has a suite of policies and
processes, including penetration testing procedures, around data protection
which facilitate compliance with the EU General Data Protection Regulation
(GDPR) and the Bermuda equivalent of the GDPR, the Personal Information
Protection Act (PIPA).
Other – Brexit and climate change
These are risks for which quantitative assessment is difficult but
Qualitative approach: These risks require a qualitative approach, engaging
for which a structured approach is still required to ensure that
staff in appropriate discussions about sources of risk, and then thinking about
their potential impact is considered and mitigated insofar as
possible outcomes. The Group Executive Management Committee and the
practicable. They include categories such as strategic, group,
RRC consider these issues, and the quarterly ORSA reports made by the
regulatory and emerging risks. Brexit has been a continued focus
Group CRO to the Board include standing items on these risk areas. Brexit
of the Group during 2019. With the UK having left the EU at the
updates were included throughout the year.
end of January 2020, our focus for 2020 will be on monitoring
what the UK’s ongoing trading relationship with the EU will be
at the end of the transition period (currently due to end on
31 December 2020), in particular on the financial services
industry. We maintain our view that the impact of Brexit is
not a significant risk to the Group given our trading profile and
the solutions that have been put in place. Whilst we view climate
change as a factor relevant principally to our underwriting and
investment risks (see above), the Board and business continue
to monitor the effects of climate change risk perceptions as a
driver of global economic, political and regulatory change.
Effectively
balance risk
and return
As previously noted, liquidity is a primary objective of
our investment portfolio. It is important we balance
the need for liquidity and being able to pay our
clients’ claims on a timely basis with the opportunity
for return from our investments. We do this through
different investment portfolio categories.
Liquidity risk is reviewed by the
Investment Committee which
regularly receives and reviews
reports detailing asset allocation
and compliance with pre-defined
guidelines and tolerances.
Operate nimbly
through the
cycle and
Effectively
balance risk
and return
A risk-based approach is followed to determine
which areas require strongly controlled processes
and procedures (i.e. the key risk areas) and those
areas where a more proportionate approach is
appropriate (those areas assessed as low risk).
The Audit Committee receives
quarterly reports from the Group
CRO summarising the results
from the quarterly risk and
control affirmation process. The
Audit Committee reviews this
alongside the quarterly updates
from internal audit regarding their
programme of work and opinion
on the effectiveness of controls.
In addition, the quarterly ORSA
report from the Group CRO to
the Board includes details of any
operational loss events and
changes to the risk register and
the drivers for such change. The
focus on operational resilience
and culture has increased in
2019, with the Audit Committee
receiving an internal audit report
on IT strategy and the Board
receiving the results of the staff
engagement survey.
Effectively
balance risk
and return
Brexit and climate change risk factors are examples
of other risks the Group considers and monitors.
As reported last year, to mitigate the impact of
Brexit, the Group considers that a significant
proportion of LUK’s existing EU27 business could
be written via Lloyd’s Brussels, utilising LSL, which
has Lloyd’s approval for this arrangement, subject
to ongoing approval from Lloyd’s and any additional
approvals required in relation to the operation of
Lloyd’s Brussels.
Climate change, as Alex Maloney discussed in
his report on page 13, and the trend of increased
frequency and severity of weather-related loss events
illustrate the value of our insurance and reinsurance
products to our clients. Whilst we already insure
many clients in the renewable energy sector, as the
world transitions to non-carbon forms of energy the
opportunities within this sector will grow.
As Peter Clarke and Alex Maloney
noted in their introductory
statements (see page 9 and page
13), climate change is increasingly
a topic of debate at the Board and
its various Committee meetings.
In addition, the stress and
scenario testing performed as part
of the annual business planning
process and regulatory reporting
process includes a climate change
related scenario looking at both
transitional and physical risks,
and the Board concluded that
the results of this scenario testing
did not represent a material risk
to the Group.
www.lancashiregroup.com
39
PerformancePerformance
E N G A G E M E N T A N D S U S T A I N A B I L I T Y
We are committed to engaging with our
people, our stakeholders and society,
and creating a healthy and sustainable
corporate culture .
The Board and Section 172 responsibilities
At the beginning of 2019, the 2018 UK Corporate Governance Code
introduced more formal requirements around the interests of and
engagement with stakeholders, and the duties falling upon boards
under Section 172 of the UK Companies Act 2006. Although the
Company is incorporated in Bermuda and therefore not subject to
the UK Companies Act requirements, the Board continues to pay close
attention to developments in English law and governance best practice.
In this 2019 Annual Report and Accounts, we give an overview of
how both the Board and the business have factored in the needs of its
stakeholders in their discussions and decision making. To that end, this
engagement and sustainability segment should be considered together
with the rest of this report as the Company’s comprehensive account
of its Directors’ compliance with their Section 172 duties. The table
below directs readers to some illustrative examples of where the
Board and business have addressed these duties:
Section
172(1):
Duty to promote the success
of the company, with regard to:
For further details, see:
Our stakeholders
Lancashire
Foundation
Brokers
Society
and the
Environment
Our
Policyholders
Communities
Board
Engagement
and Decision
Making
Government
and
Regulators
Our
Shareholders
Our
People
Rating
Agencies
Service
Providers
Lenders
a)
b)
c)
d)
e)
f)
The likely consequences of any
decision in the long term;
• The Group’s statement of purpose – inside cover
• The Group’s business model for success – pages 10 to 11
• The Group’s strategic goal and three priorities: that underwriting comes first; to effectively balance risk and return;
and to operate nimbly through the cycle – pages 14 to 15
The interests of the company’s
employees;
• The importance of our people, and the business’s focus on Lancashire’s values, culture, diversity & inclusion, training
& development and workforce engagement (for example, our ‘Engagement in action’) – pages 41 to 43 and 74 to 76
The need to foster the company’s
business relationships with
suppliers, customers and others;
• Our business depends upon the strong business relationships that we build and maintain with our core and broader
stakeholders. All Board members attend the quarterly Underwriting and Underwriting Risk Committee and, during 2019,
gave close consideration to business development opportunities as summarised in the Committee’s report –
pages 43 and 70 to 71
The impact of the company’s
operations on the community and
the environment;
• Society and the environment form part of our ‘core’ set of stakeholders. The Board is engaged with the impact of the
Company’s operations through its oversight of the Lancashire Foundation, the Group’s submission to the Carbon Disclosure
Project, the annual offsetting of our GHG emissions, and more recently the commitment to report against the UNEP FI
Principles for Sustainable Insurance – pages 44 to 45 and 52 to 54
The desirability of the company
maintaining a reputation for high
standards of business conduct; and
• Through its compliance with the FRC’s UK Corporate Governance Code, the Company strives to operate in line with high
standards of governance expectation and business conduct. A healthy and sustainable corporate culture is embedded
throughout the business, which is assessed by the Board through various channels – pages 40 to 47, 48 to 49 and 64 to 67
• The Audit Committee oversees the Group’s implementation of whistleblowing arrangements, and other systems and
controls for the prevention of fraud, bribery and money laundering – page 62
The need to act fairly as between
members of the company.
• The Board is committed to treating the Company’s shareholders fairly, and engaging with them through a broad programme
of investor relation activities, meetings (including the AGM), and targeted consultations; be that with our substantial
shareholders, the Company’s own employees, private individuals, or via shareholder advisory groups – pages 28 to 29, 40
to 47 and 76
• Capital management/actions and dividend policy – in particular, the Board’s consideration of the balance between
underwriting opportunities and the payment of special dividends – pages 8 to 9, 29 and 96
40
40
Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
Delivering our purpose Our approach to stakeholder engagement
The Group has always positively engaged with a broad range of
stakeholders. Our ‘core’ stakeholders are shown at the heart of the
diagram, namely our shareholders and our people (who support our
business), as well as our policyholders who rely on the (re)insurance
products we sell. Through our purpose as a business we aim to benefit
society and the environment. The value of these relationships and the
responsibilities they entail are recognised throughout the Group,
ranging from Board-level decision making through to the day-to-day
business activities of our workforce.
The Group’s relationship with its broader stakeholders can, of course,
at any one time also be of key importance. The Board and the business
prioritise underwriting excellence and nimble capital management to
serve the best interests of core stakeholders, and ultimately benefit a
broader group of stakeholders. It is the fluidity of these relationships
which enables the business to deliver on its purpose and strategy.
Engagement in action:
2019 employee engagement survey
In September 2019, the Group conducted its first employee engagement
survey – ‘Have Your Say’. The survey was undertaken with the purpose
of measuring employee satisfaction, highlighting the key attributes of
the business’s culture and gaining valuable feedback on areas for potential
improvement across the Group. The survey was co-ordinated by an
independent company to guarantee the confidentiality of individuals’
responses. In light of this being the first iteration of the feedback exercise,
the results were benchmarked against similar-sized companies within
the financial services sector. The Group Head of HR presented the overall
results to the Board and executive teams and, in turn, departmental heads
held dedicated sessions with their team members to discuss the results
pertinent to that area of the business. Based on the positive feedback
received, the Group intends to conduct an employee engagement survey
on an annual basis and to implement new initiatives with a view to building
on areas of the Group’s culture.
Key findings and feedback:
Employee participation
Employees responding positively
as engaged with the business
Versus benchmark
2018
39%
75%
2018
39%
85%
14 points
against peer benchmarks
Employee Engagement
85%
Vs benchmark
+14 points
Company Alignment
75%
Vs benchmark
+5 points
Leadership
My Colleagues
83%
+29 points
78%
+3 points
My Manager
86%
+30 points
80%
+12 points
Empowerment
Personal Growth
Recognition
73%
+13 points
64%
+8 points
Wellbeing
Satisfaction
64%
+6 points
76%
+19 points
Engagement in action:
The ‘Lancashire values’ working group
During 2019, a small working group of employee volunteers was
assigned the task of devising a new set of ‘Lancashire values’,
based on what they consider to be representative of the business’s
culture. The values form part of the year-end employee appraisal
process and reflect a standard of conduct expected from everyone
working within the Group. Following a series of constructive meetings,
the working group settled upon the following new values, which were
approved by the Group Executive and will be rolled out to the business
during 2020:
• Leadership, exhibiting passion and commitment in all aspects
of Lancashire life and inspiring others to do the same, we are...
• Aspirational, aspiring to deliver a superior service for our clients,
ourselves and our business partners, we are...
• Nimble in our decisions, actions and business processes, we are...
• Collaborative, valuing teamwork and a diversity of skills and
experience and sharing in our success, and we are...
• Straightforward in conducting our business in an accountable,
open, honest and sustainable way.
www.lancashiregroup.com
www.lancashiregroup.com
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PerformancePerformance
E N G A G E M E N T A N D S U S T A I N A B I L I T Y C O N T I N U E D
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 to become shareholders.
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 64 to 67). 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 12 different nations and the gender split of males
to females (see page 67) is 61.5%/38.5% respectively. The Group is
also committed to providing a working environment that is free from
any form of bullying or harassment.
We expect our staff to conduct themselves in a professional
manner which is reflective of the Group’s core values (see page 41
for further details). All new employees are required to attend our
Communications Etiquette/Equality, Diversity & Inclusion training
sessions as part of their induction. The training sessions aim to
highlight employees’ responsibilities in ensuring that there is no
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
* Unless otherwise stated above all figures are as at 31 December.
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Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
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.
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 2019,
approximately 69.3% 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 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 2019
9.2% 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 the requirements of the Market Abuse Regulation 2016),
Inspections, Financial Crime, ERM, Communications Etiquette/
Equality, Diversity & Inclusion, GDPR and Conduct Rules. 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.
2019*
218
38.5%
37.5%
50.0%
38.1%
12
8.0%
13.8%
69.3%
100.0%
Yes
2018*
218
39.0%
28.6%
37.5%
29.4%
13
6.9%
13.8%
65.6%
100.0%
Yes
“The Group promotes an inclusive, collegiate
and positive environment that recognises
and values diversity as key to enhancing
individual development and maximising
business effectiveness.”
Number of employees
218
Percentage of women on the
Group executive committee
50.0%
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 LSL 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
of the Chairman’s introduction for an account of the Board’s
engagement with the workforce in 2019 and its plans for 2020.
Our new programme of employee engagement surveys (as conducted
in 2019) gives our staff members the opportunity to provide their
feedback to peers, senior management, departmental heads and the
Board on their experience working for the Lancashire Group. For a
fuller account, see our ‘Engagement in action’ section on page 41.
Our employees also continue to contribute towards the
development of our marketplace through their involvement with
market committees, boards and working groups. During 2019, our
employees actively participated in industry conferences, investor days
and symposia, and market education programmes. We also donate to
many of the causes supported by our industry partners through the
Lancashire Foundation.
Our 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 20 to 23 and pages 24 to 29, respectively.
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 independent 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.
www.lancashiregroup.com
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PerformancePerformance E N G A G E M E N T A N D S U S T A I N A B I L I T Y C O N T I N U E D
Our 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 shareholder 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 (with both shareholders and industry analysts).
These can cover a range of topics including the Group’s financial
performance and business strategy; ESG matters; 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.
Society and the environment
Environmental impact and offsetting
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% 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 Group CEO’s review on page 13 and the section
on principal risks from pages 33 to 39 for further details). The Group
CRO and the Board oversee the Company’s annual submission to the
Carbon Disclosure Project. The information which is requested as
part of the reporting process is aligned with the recommendations
of the Task Force on Climate-related Financial Disclosures.
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 2019 to 31
December 2019 and are calculated by converting consumption data into
tonnes of carbon equivalent (tCO2e) using the BEIS 2019 factors (note:
this annual publication was previously managed by the UK’s Department
for Environment, Food and Rural Affairs (DEFRA), though is now published
by the Department for Business, Energy and Industrial Strategy (BEIS)).
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% 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 14064-1:2018 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 2019, values have been extrapolated by
using available data or calculated using industry benchmarks.
* The Group’s UK operations have been awarded BREEAM excellence for their
London offices at 20 Fenchurch Street
Types of Emissions
Direct (Scope 1)
Indirect Energy (Scope 2)
Indirect Other (Scope 3)
Activity
Gas (measured in kWh)
Refrigerant (measured in kg)
Electricity (measured in kWh)
Business Travel (measured in miles and spend)
Additional Upstream Activities (measured in kWh, litres, miles and spend)
Water (measured in m3)
Waste (measured in kg)
Paper (measured in reams)
Hotels (measured in hotel nights)
Gross Emissions (tCO2e)
Gross Emissions per FTE (tCO2e/FTE)
Carbon Credits
Total Net Emissions after offset (tCO2e)
2019
tCO2e
126.9
0.0
294.1
1,925.9
2018
tCO2e
60.1
0.0
319.9
1,457.2
297.1
14.2
6.1
4.4
26.8
2,695.5
12.4
2,696
0.0
246.4
12.9
3.7
5.6
24.0
2,129.8
9.8
2,130
0.0
Please note: all numbers quoted have been rounded to one decimal place.
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.
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Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
“Family Centre is an internationally accredited Bermuda registered charity that
provides early intervention services to children and families at risk in Bermuda. Our
mandate is to strengthen families to create a healthier Bermuda for our children.
Family Centre is proud to call Lancashire Foundation a ‘Champion of Children’.
They have partnered with Family Centre since 2007 and have provided $1,309,407
in vital funding to sustain the delivery of critical intervention and counselling
services to children and families in crisis – free of charge. Thanks to the Lancashire
Foundation we have many children and families who have successfully turned their
crisis into an opportunity to have a positive outcome and brighter future.”
Family Centre
The table on page 44 sets out the Group’s carbon footprint for the
current and prior reporting period, broken down by emission source.
graduates are afforded the opportunity to work and learn about
insurance in the Group’s London office.
Total emissions for 2019 have increased by 26.6% compared to 2018.
As FTEs have remained constant year on year, emissions per FTE have
also increased by 26.6%.
Results show that GHG emissions in the year were 2,695.5 tCO2e,
comprised of direct emissions (Scope 1) amounting to 126.9 tCO2e,
and indirect emissions (Scope 2) amounting to 294.1 tCO2e. The
source of other indirect emissions (Scope 3) comprised 2,274.5 tCO2e.
Scope 1 emissions have increased by 111.2% due to improving data
quality for natural gas. Scope 2 emissions have decreased by 8.1%
compared with 2018 due to the continuing decarbonisation of the UK
grid mix. Scope 3 emissions have also increased compared with 2018
due, primarily, to increasing air mileage year-on-year. This is in part a
result of the Board’s decision to re-establish Group regulatory
supervision to Bermuda with effect from 1 January 2019. The Board
will continue to monitor and offset the Group’s emissions, mindful of
the Group’s strategic and business operational requirements.
The Group has fully offset its 2019 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.
Communities, 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. Read further on to learn more
about the Lancashire Foundation and the charities it supports.
The Group and the Foundation have jointly sponsored an internship
programme for Bermuda resident college graduates since 2014. These
The Board keeps itself informed of the activities of the Lancashire
Foundation through regular reporting and meetings with the
Foundation’s Trustees. The Board also sets the policy for donations
to the Lancashire Foundation.
The Lancashire Foundation
The Lancashire Foundation, our charitable grant-making body,
is the cornerstone of our community activity and support, and
a key component of our corporate persona.
The Foundation is funded by regular donations from the Company and
also retains a shareholding in the Company, therefore benefitting 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 the
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. Our donation to St
Giles Trust seeks to break the cycle of reoffending that blights many
of our most vulnerable communities.
Other charities supported by the Lancashire Foundation during
2019 include:
• London Air Ambulance
• Cancer Research UK
• Child Bereavement UK
• Kiva Microfunds
• Knowledge Quest
• Medical Detection Dogs
• Mission Aviation Fellowship
www.lancashiregroup.com
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PerformancePerformance E N G A G E M E N T A N D S U S T A I N A B I L I T Y C O N T I N U E D
• St Giles Trust
• Family Centre
• Tomorrow’s Voices
• Victor Scott (Fruit for Schools)
• Warwick Academy
• Windreach Bermuda
• Team-Up
• The Poppy Factory
• Care for Children
• Vauxhall City Farm
Our broader stakeholders
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. 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 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.
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.
The 2019 Project Transform team
The Foundation in action: Project Transform
“Seven members of staff from across the Group were chosen
to join the 2019 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 ICM does with Project Transform. 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 provide the skills to
recognise illness and to provide guidance on starting a small
business. 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 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. For the 2019 team this was something
we’ll never forget.”
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Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
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.
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 162 to 164.
Team Tango – Bermuda
The Foundation in action: Relay for Life
“The Bermuda Relay for Life cancer fundraiser took place on
May 17-18 and we had a huge team of almost 100 staff, family
and friends participating in the 24-hour event. Team Tango
(the LICL team) raised $24,274 through its participation in
2019’s event, which raised some $707,804 in total.
Bermuda Cancer and Health Centre is a registered charity
engaged in the prevention, detection, treatment and support
of cancer and other health concerns in the local community.
Their vision is to serve the community by building healthier
lives free of cancer and disease. Since 2017, residents no
longer have to uproot their lives and travel overseas for
radiation treatment. The radiation therapy unit at BCHC
can treat 95% of all cancers enabling patients to undergo
treatment surrounded by family and friends and to participate
in their regular daily activities such as work. Funds raised
support Bermuda Cancer and Health Centre’s Equal Access
Fund; ensuring that everyone can utilise the Centre’s services
(mammography, ultrasound, breast and prostate biopsies
and radiation therapy) without a health insurance co-pay,
regardless of their level of health insurance or ability to pay.”
www.lancashiregroup.com
47
PerformancePerformance C H A I R M A N ’ S I N T R O D U C T I O N
Promoting an open, accountable
and engaged culture
Peter Clarke
Non-Executive Chairman
48
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Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
In my opening statement, I discussed the Board’s oversight of
performance, strategy, risk and capital management during 2019.
The following section focuses on the work carried out by the Board
and each of its Committees in providing challenge and support to
the management team and in engaging with the wider business to
oversee the development and delivery of an effective strategy.
How does the Board manage and implement
environmental, social and 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 through
the work of our Nomination and Corporate Governance Committee
(see page 64 for the Committee report).
In this corporate governance section and throughout the Annual
Report and Accounts for the 2019 financial year, areas of corporate
governance compliance are explained by reference to the Code. The
Company also monitors its compliance with applicable corporate
governance requirements under Bermuda law and regulations, having
re-established Group supervisory and tax domicile in Bermuda with
effect from 1 January 2019. This has not affected the regulation of the
Group’s UK insurance entities, which continue to be regulated by the
PRA and the FCA, and Lloyd’s in the case of LSL and Syndicates 2010
and 3010.
As we reported last year, in 2018 the FRC published a revised UK
Corporate Governance Code. During 2019, our Nomination and
Corporate Governance Committee systematically tracked and
implemented the requirements of the revised Code. The Code has
increased its focus on the sustainability of businesses, not only with
regard to the operation of formal governance arrangements, but
increasingly with regard to social and environmental impacts.
The Code specifically stresses the importance of the Section 172
responsibilities of boards under the UK Companies Act 2006, and
whilst the Company is incorporated in Bermuda and not formally
subject to Section 172 as a matter of law, our Board has for many
years operated a strong culture of proactive and constructive
stakeholder engagement. Consequently, many of the changes in
emphasis in the revised Code had already been focus areas for the
Board. For example, workforce and stakeholder engagement and
We value a nimble governance culture which promotes clear and open communication and constructive engagement with our people, our stakeholders and in society. the oversight of a healthy business culture had already been topics
of Board focus for many years and the latest Code changes did not
require significant change to our existing practices.
On pages 52 to 54 of this report we have included a summary of those
matters touching on sustainability, which are areas of focus under the
‘Principles for Sustainable Insurance’ promoted by the United Nations
Environment Programme Finance Initiative. This is the first year for
which the Board and business have become signatories to the UN
Principles. Readers will also note our 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 47. This includes
the Board’s statement in respect of matters covered by Section 172
which can be found on page 40.
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 2019.
The Board and business continue to use the formal consideration of
governance and regulatory requirements as practical working tools
to create the dynamic and successful business culture which are a
mark of the Group’s success.
How does the Board engage with the workforce and
create a healthy business culture?
The Board has for many years had a strong culture of ‘workforce’
engagement in part due to 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. 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. During 2019, the Board addressed the expectations of the
revised UK Code in this regard by providing for the direct involvement
of one of our Non-Executive Directors, on a rotating basis, in the ‘town
hall’ staff meetings which, for a number of years, Alex Maloney has
led on a quarterly basis with all our staff in face to face meetings
conducted in both our UK and Bermuda offices. The Board has also
held a number of informal buffet lunches where staff members have
the opportunity to meet the Directors. Other initiatives during the
year have been the introduction within the rolling internal audit
programme of a focus upon business culture at a business unit level,
which affords the Audit Committee another tool to help monitor
the health of the Group’s business culture. The Board and business
continue to support the work of the Lancashire Foundation, which
continues its strong tradition of staff engagement and activism. The
business also appointed an employee working group to help review
and revise the ‘Lancashire values’, which form an important part in
setting the cultural ‘tone’ of our business and are used in the year-end
employee appraisal process.
In short, the Board engages with the workforce and monitors the
Group’s business culture through several channels. At our November
2019 meeting we received feedback from a staff engagement survey,
conducted on an anonymised basis, which demonstrates that the
majority of the staff within the Group are engaged with the business
and the successful implementation of our strategy. Whilst there will
always be areas for improvement and innovation and the need for
ongoing vigilance, the Board is pleased that we operate an open,
respectful and successful business culture and that we have the
practical tools to ensure strong and effective two way engagement
between the workforce and our Board. The Board considers these
methods of both formal and informal workforce engagement to be
the most effective for our business. For further discussion of the work
of the business, the Board and its Committees in the areas of culture
and engagement please refer to the engagement and sustainability
report (pages 40 to 47), the report from the Audit Committee (pages
59 to 63) and the report from the Nomination and Corporate
Governance Committee (pages 64 to 67).
How has Board membership and succession planning
evolved during the year?
As we noted in last year’s Annual Report and Accounts, Sally Williams
joined our Board in January 2019. We have had a year during which the
composition of the Board has not changed, although, as Alex mentions
in his introductory remarks, Elaine Whelan announced her intention to
retire during May 2019 and will step down both as our Group CFO and
as a Director, at the end of February 2020. Over the summer of 2019,
the Board engaged the firm of Sainty Hird to conduct a search, which
enabled us to engage with several external and internal candidates.
As we announced in December 2019, Natalie Kershaw has been
appointed to the role of Group CFO and as an Executive Director
of LHL. I look forward to welcoming Natalie to our Board and to
the fresh insights which she will bring to her role.
Over many years Elaine brought to her CFO role a rigorous attention
to detail and a profound understanding of the workings of the Group’s
business. She has also been widely liked and respected in her role as
the CEO of LICL in Bermuda. On behalf of the whole Board I would like
to thank Elaine for her outstanding contribution to our business and
we wish her well for the future.
Are the Board and its Committees operating
effectively?
Following the Board performance evaluation which was facilitated
by Lintstock Ltd at the end of 2018, we tracked several actions and
enhancements during the course of 2019. During 2019, our Board once
again carried out a review of its effectiveness, which was facilitated
internally by Chris Head, our Group Company Secretary. A summary
report was discussed by the full Board and the exercise has again
helped us identify certain topics for training or specific focus during
the coming year, as well as other enhancements to our Board and
Committee reporting and operational processes. Throughout 2019
I have continued to meet regularly with the chairs of each of our
principal subsidiary boards and our performance evaluation concluded
that the relationship between the main Lancashire Board and the
subsidiary boards continues to operate effectively. We concluded that
the Board, its members and each of its Committees have a balance
of experience and talents that serve the Group well and have the
competencies and operational culture necessary to meet the strategic
challenges of the business effectively (see page 56 for further details).
I would like to thank all our Directors, our management team and all
our employees for their hard work during the year.
Peter Clarke
Non-Executive Chairman
www.lancashiregroup.com
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GovernanceGovernance B O A R D O F D I R E C T O R S
A balanced Board
R
Alex Maloney
Group Chief Executive Officer
UB
Elaine Whelan
B
Group Chief Financial Officer
I
Michael Dawson
Non-Executive Director
B
RN
U
Peter Clarke
Non-Executive Chairman
B
NI
Date of appointment to the Board:
9 June 2014
Date of appointment to the Board:
5 November 2010
Date of appointment to the Board:
1 January 2013
Date of appointment to the Board:
3 November 2016
Board meeting attendance: 4/4
Board meeting attendance: 4/4
Board meeting attendance: 4/4
Board meeting attendance: 4/4
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.
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.
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 Deputy Chairman of the
management committee of Nuclear
Risk Insurers Limited. He is also a
Director of Knoll Investments Limited,
a private family investment company.
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.
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.
50
50
Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
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
B
Simon Fraser
Senior Independent
Non-Executive Director
A
R
Samantha
B
Hoe-Richardson
Non-Executive Director
A
N
B
A
Robert
Lusardi
Non-Executive Director
I
R
B
Sally
Williams
Non-Executive Director
A N
Christopher Head
Company Secretary
Date of appointment to the
Board: 5 November 2013
Date of appointment to the
Board: 20 February 2013
Date of appointment to the
Board: 8 July 2016
Date of appointment to the
Board: 14 January 2019
Board meeting attendance:
N/A
Board meeting attendance:
4/4
Board meeting attendance:
4/4
Board meeting attendance:
4/4
Board meeting attendance:
4/4
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 LSL.
Skills, experience and
qualifications:
Samantha Hoe-Richardson
since 2014 has been
Chairman of the Audit
Committee. Prior to this,
she was Head of Environment
& Sustainability for Network
Rail and formerly Head of
Environment for Anglo
American plc, one of the
world’s leading mining and
natural resources companies.
She was also a director and
founder of Anglo American
Zimele Green Fund (Pty) Ltd,
which supports entrepreneurs
in South Africa. Prior to her
role with Anglo American,
Ms Hoe-Richardson worked
in investment banking and
audit and she holds a master’s
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. She also chairs their
Audit Committees. Ms
Hoe-Richardson is also a
Non-Executive Director
for 3i Infrastructure plc
and a Non-Executive
Director of LUK.
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.
Skills, experience and
qualifications:
Sally Williams has more than
30 years’ experience in the
financial services sector, with
extensive risk, compliance
and governance experience,
having held senior positions
with Marsh, National
Australia Bank and Aviva.
Ms Williams is a chartered
accountant and spent the first
15 years of her career with
PricewaterhouseCoopers,
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 Family
Assurance Friendly Society
Limited (OneFamily), where
she is chair of their Audit
Committee and a member
of the Risk, Nominations,
Member and Customer and
With Profits Committees.
Ms Williams is also a
Non-Executive Director of
Close Brothers Group plc and
Close Brothers Limited, where
she is a member of their Audit
and Risk Committees.
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.
www.lancashiregroup.com
51
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GovernanceGovernance T H E U N I T E D N A T I O N S E N V I R O N M E N T P R O G R A M M E
F I N A N C E I N I T I A T I V E ( U N E P F I )
Principles for Sustainable Insurance
Launched at the 2012 UN Conference on Sustainable Development,
the UNEP FI Principles for Sustainable Insurance (‘the Principles’)
serve as a global framework for the insurance industry to address
ESG risks and opportunities.
The purpose of the Principles for Sustainable Insurance Initiative is
to better understand, prevent and reduce environmental, social and
governance risks, and better manage opportunities to provide quality
and reliable risk protection.
The Board has opted to report against the Principles and this table
directs readers to where the relevant activities of the Board and
business are discussed in more detail within this report. This is
Lancashire’s first report with reference to the Principles. The
business will continue to monitor and embed the Principles
in the delivery of its strategy.
Principle 1
We will embed in our decision-making environmental, social and governance
issues relevant to our insurance business.
For more information
please see:
Company strategy
We embed ESG issues within our Board and management’s strategic and business planning processes to
foster a strong, purposeful and profitable culture of sustainable governance. The business is led by a strong
management team accountable to an independent, diverse and effective Board and Committee structure.
Our principal strategic purpose is to deliver bespoke risk solutions that protect our clients and support
economies, businesses and communities in the face of uncertain loss events, including those influenced by the
effects of climate change. We are committed to monitoring and offsetting the Group’s own carbon emissions.
Management and the Board actively support the work of the Lancashire Foundation, which promotes
engagement of our staff with a range of charitable and social projects, including a record of assistance
to disadvantaged communities blighted by catastrophic events.
We value our people and the strategic benefits of a healthy business culture. Our management team and
Board promote an active programme of engagement and we operate a robust, yet flexible, programme of
staff training and opportunities for career development.
We offer attractive remuneration and employee benefits packages and have a planned approach to succession,
staff retention and employee satisfaction.
There is regular engagement with our shareholders and other stakeholders by both management, the Board
and the business, touching upon a range of strategic and business issues, including the Group’s approach to
a range of ESG matters.
Purpose statement (inside cover)
Engagement and sustainability –
section 172 (page 40)
Governance report (pages 48
to 100)
Purpose statement (inside cover)
Chief Executive’s review (page 13)
Underwriting review
(pages 20 to 23)
Environmental impacts and
offsetting (pages 44 to 45)
Communities, including
the Lancashire Foundation
(pages 45 to 47)
Succession planning
(pages 13, 49 and 65)
Engagement and People
(pages 41 to 42)
Workforce engagement
and culture (page 49)
Employees/Health and
Safety (page 98)
Purpose statement (inside cover)
Strategic report (pages 1 to 47)
Chairman’s introduction – ESG
implementation (page 48)
Governance report (pages 48
to 100)
52
52
Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
Principle 1 continued
We will embed in our decision-making environmental, social and governance
issues relevant to our insurance business.
For more information
please see:
Risk management and underwriting
There is a strong culture of underwriting discipline and risk management within the Group, which
values professionalism and embeds risk monitoring and control processes in our underwriting activities.
Environmental risk exposures, including assumptions related to climate change, are embedded into our
risk management, underwriting processes and capital management.
Management and the Board agree and monitor performance against formal risk tolerances, in particular
with regard to the Group’s exposures to natural catastrophe loss events, including weather events impacted
by climate change.
Product and service development
Our (re)insurance products and services help our clients manage the threats they face from unpredictable
perils, contributing towards the resilience of businesses and communities faced with the threat of climate
and other natural catastrophes.
The Board and management foster a nimble underwriting and business culture to respond to the risk
requirements of clients in a changing world. Included within the Group’s energy underwriting business
is an established portfolio of renewable energy products and clients.
Claims management
Our experienced teams of claims specialists are well-equipped with specific knowledge of our diverse product
lines. We have high levels of expertise that allow us to effectively manage and thoroughly investigate any loss
our clients may sustain. Our goal is to ensure timely and equitable claims resolution for our clients.
Sales and marketing
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 with independent brokers, who distribute our products. We seek to
engage with our clients and their brokers to provide relevant and targeted risk solutions based on a sustainable
strategy and business model.
Investment management
We actively manage our climate change transitional risk, with sensitivity to, and promotion of, ESG responsible
investment. Our principal investment managers are signatories to the world’s leading proponent of responsible
investment, the UN-supported ‘Principles for Responsible Investment’.
Chief Executive’s review (page 13)
Enterprise risk management and
principal risks (pages 30 to 39)
Risk disclosures (pages 118 to 142)
Risk disclosures – peak zone
elemental loss exposures (page 120)
Purpose statement (inside cover)
Underwriting review
(pages 20 to 23)
Chief Executive’s review (page 13)
Business review – losses
(pages 25 to 26)
Engagement and sustainability –
our policyholders (page 43)
Purpose statement (inside cover)
Engagement and sustainability –
brokers (page 43)
Principal risks – investment risk
management (pages 36 to 37)
Investment Committee report
(pages 68 to 69)
www.lancashiregroup.com
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GovernanceGovernance
T H E U N I T E D N A T I O N S E N V I R O N M E N T P R O G R A M M E
F I N A N C E I N I T I A T I V E ( U N E P F I ) C O N T I N U E D
Principle 2
We will work together with our clients and business partners to raise awareness
of environmental, social and governance issues, manage risk and develop solutions.
For more information
please see:
Clients and suppliers
We engage constructively with our clients, brokers and other suppliers to address environmental, social
and governance issues relevant to the operation of our business and to address our clients’ needs for risk
management solutions across a range of specialty and property lines.
Insurers, reinsurers and intermediaries
We engage with industry bodies to develop and promote awareness of market issues
(including environmental factors).
Purpose statement (inside cover)
Chief Executive’s review (page 13)
Underwriting review
(pages 20 to 23)
Chairman’s introduction (page 48)
Chief Executive’s review /
comments on climate change
impacts and actions (page 13)
Engagement and sustainability –
(page 43)
Chairman’s introduction (page 48)
Principle 3
We will work together with governments, regulators and other key stakeholders
to promote widespread action across society on environmental, social and
governance issues.
For more information
please see:
Governments, regulators and other policymakers
Our Board and business operate constructively within a highly regulated insurance and financial services
environment in the UK, Bermuda and internationally. As a listed company, LHL systematically monitors,
records and reports its compliance with the FRC’s UK Corporate Governance Code.
The Board and business monitor and comply with relevant law and regulation. Examples include the
Board’s clearly articulated position regarding slavery and human trafficking, pursuant to the provisions
and requirements of the UK Modern Slavery Act 2015. Our Board has also engaged with both the Hampton-
Alexander and the Parker Reviews regarding our gender and ethnic diversity.
The Board oversees the Company’s annual submission to the Carbon Disclosure Project. The information
which is requested as part of this reporting process is aligned with the recommendations of the Task Force
on Climate-related Financial Disclosures.
Principle 4
We will demonstrate accountability and transparency in regularly disclosing
publicly our progress in implementing the Principles.
We offer clear and transparent ESG reporting through multiple channels, including our Annual Report
and Accounts, our website and our work with the Carbon Disclosure Project.
Chairman’s introduction – covering
governance and regulation
(pages 48 to 49)
Nomination and Corporate
Governance Committee report
(pages 64 to 67)
Enterprise risk management –
emerging risk (page 32)
See also: LHL’s responses on the
Carbon Disclosure Project website
For more information
please see:
www.lancashiregroup.com
See also: LHL’s responses on the
Carbon Disclosure Project website.
Our decision to report against the Principles in itself demonstrates our commitment to being both transparent
and accountable, by publicly disclosing the business’s implementation of them.
Chairman’s introduction
(pages 48 to 49)
Chief Executive’s review (page 13)
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Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
C O R P O R A T E G O V E R N A N C E R E P O R T
Board Committees
The Directors
Appointments to the Board are made on merit, against objective
criteria and with due regard for the benefits of diversity on the Board,
including gender. The Board considers all of the Non-Executive
Directors to be independent within the meaning of the Code.
Michael Dawson, Simon Fraser, Samantha Hoe-Richardson, Robert
Lusardi and Sally Williams 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.
During 2019, Samantha Hoe-Richardson and Sally Williams
respectively accepted appointments to the boards of 3i Infrastructure
plc and Close Brothers Group plc, these being UK listed entities.
In accordance with their LHL letters of appointment, the proposed
appointments were discussed with the Board Chairman, including
an indication of the time involved and any possible conflicts arising,
prior to acceptance.
At the Board meeting held on 12 February 2020, 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.
Board and Committee administration
The Board of Directors is responsible for the leadership, strategy and
control and the long-term success and sustainability 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 Group CEO. The
Chairman is responsible for the leadership and management of the
Board and for providing appropriate support and advice to the Group
CEO. The Group CEO is responsible for the management of the
Group’s business and for the development of the Group’s strategy
and commercial objectives. The Group 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, strategy and risk management 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. Time dedicated
to the Board’s strategic planning was set aside around the 2019
Q1 Board meetings on 30 April and 1 May 2019.
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 Chairman also
holds regular meetings with the Chairs of the Group’s principal
operating subsidiaries: LICL, LUK, LSL and LCM.
www.lancashiregroup.com
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GovernanceGovernance C O R P O R A T E G O V E R N A N C E R E P O R T C O N T I N U E D
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
meetings 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,
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 its 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, skills set, supporting processes and
management of the Group. The evaluation is forward-looking in terms
of identifying the strategic priorities and actions 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 2018 evaluation was conducted externally by Lintstock Limited,
a London-based corporate advisory firm with no other connection to
the Group. The 2019 evaluation was conducted internally, facilitated
by the Company Secretary and the Chairman.
The 2019 evaluation process involved each Director as well as the
Company Secretary, the Group CRO, Group General Counsel and
other Committee members and members of senior management
completing a questionnaire designed by the Chairman and the
Company Secretary, with input from the Chairs of each of the
relevant Committees. Responses to the completed questionnaires
were collated and emerging themes explored. A suite of anonymised
summary reports was prepared and these were discussed in draft
with the Board Chairman and Committee Chairs before being
distributed to each of the Directors.
In February 2020, 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 2020.
In summary, in its consideration of the 2019 performance evaluation
reports, the Board concluded that it operates effectively and has
a good blend of insurance, financial and regulatory expertise. All
Non-Executive Directors are committed to the continued success
of the Group and to making the Board and its Committees work
effectively. Attendance at Board meetings was found to be good.
The 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 also considered to manage risk effectively.
Furthermore, the number of Directors on the Board is considered
to be appropriate.
It was noted in the evaluation process that 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. In this regard, it
was noted that workforce engagement, in accordance with the
expectations of the revised UK Code, had been enhanced during
the course of the year. For further information on workforce
engagement, please see Peter Clarke’s introduction to the Governance
report on page 48 and the report from the Nomination and Corporate
Governance Committee on page 64. The strategic priorities identified
for the year ahead included ensuring that the Group holds sufficient
capital and effectively utilises capital tools, and to position the
business as a leading (re)insurance market. In particular, the Board
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Relations with shareholders
During 2019, the Group’s Head of Investor Relations, usually
accompanied by one or more of the Group CEO, the Group CUO,
the Group CFO, the Chairman or a senior member of the underwriting
team, made presentations to major shareholders, analysts and the
investor community. Formal reports of these meetings were provided
to the Board on at least a quarterly basis.
The Chairman of the Remuneration Committee conducted
a consultation with the Company’s significant shareholders
concerning planned changes to the shareholder-approved Directors’
Remuneration Policy, which is to be submitted for consideration
and approval by shareholders at the 2020 AGM. See the Remuneration
Committee report on page 72 and the Directors’ Remuneration Report
on page 74 for further details.
Conference calls with shareholders and analysts hosted by senior
management are held quarterly following the announcement of
the Company’s quarterly financial results or trading statements.
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 2020 AGM.
The Company commissions regular independent shareholder analysis
reports together with research on feedback from shareholders and
analysts following the announcement of the Company’s results.
plans to keep under review the Group’s capital structures. 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 reports also highlighted a number of themes which will inform
the business of the Board during 2020 including:
• challenges to the investment portfolio posed by the low interest
rate environment;
• the importance of maintaining a positive culture which attracts
and retains talented people; and
• positioning the business to develop opportunities to grow premium
income in an improved underwriting environment.
As part of the evaluation exercise, the Board identified a number of
areas for training or specific themes over the coming year including
the following:
• the new IFRS 17 accounting requirements;
• ESG developments and investor expectations;
•
‘deeper dive’ presentations from underwriters on the Group’s
business classes; and
• a systematic presentation on the Group’s IT systems, requirements
and risks.
The Board will continue to review its procedures, training
requirements, effectiveness and development during 2020.
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 2019.
The discussion and feedback were positive regarding the Chairman’s
performance. Particular reference was made to the Chairman’s
work in facilitating open communication across the business and
in encouraging a strong culture, which appropriately balances
challenge and insightful support for management and the business.
Following the year end, the Chairman met with the Group CEO, and
the Group CEO met with the Group CFO and the incoming Group CFO
designate, to conduct a performance appraisal in respect of 2019 and
to set targets for 2020. 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 74.
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GovernanceGovernance C O R P O R A T E G O V E R N A N C E R E P O R T C O N T I N U E D
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 2019 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 2019 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 59 to page 73.
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 2019, the Board carried out a robust
assessment of the emerging and principal risks affecting the Group’s
business model, future performance, solvency and liquidity and the
operation of internal control systems.
Further discussion of the emerging and principal risks affecting the
Group, as well as the procedures in place to identify and manage
them, can be found in the ERM section of this report on pages
30 to 39 and in the risk disclosures section on pages 118 to 142.
Each of the Committees is responsible for various elements of risk
(see the various Committee reports from pages 59 to 73 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 tolerances, emerging
risks, any lessons learned from risk events and assurance provided
over key risks. 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. In this
regard please see the Audit Committee report on pages 59 to 63.
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Samantha Hoe-Richardson
Chairman of the Audit
Committee
C O M M I T T E E R E P O R T S
Audit Committee
Committee membership
The Audit Committee comprises four independent Non-Executive
Directors and is chaired by Samantha Hoe-Richardson, a qualified
Chartered 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.
Samantha Hoe-Richardson (Chairman)
Simon Fraser
Robert Lusardi
Sally Williams
Meetings attended
4/4
4/4
4/4
4/4
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 public reporting
requirements arising under applicable supervisory rules. Reviews
and reports to the Board on significant financial reporting issues
and judgements which 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’ arrangements and other systems and
controls for the prevention of fraud, bribery and money laundering.
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GovernanceDuring 2019, one of the areas of heightened focus for the Committee has been the strengthening of its oversight of corporate culture through the reporting of the internal audit function. The Committee has also maintained its focus on the adequacy of loss reserves; the effectiveness of the business’s control environment; the integrity of external financial reporting; and the progress of the Group’s implementation plans for the IFRS 9 (‘Financial Instruments’) and IFRS 17 (‘Insurance Contracts’) accounting standards.Governance
C O M M I T T E E R E P O R T S C O N T I N U E D
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Lancashire Holdings Limited
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Annual Report & Accounts 2019
Annual Report & Accounts 2019
How the Committee discharged its responsibilities Financial reporting Committee responsibilityMonitors the integrity of the Group’s consolidated financial statements, including its annual and half-yearly reports, annual reporting arising under applicable supervisory rules, 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 2019 Audit Committee meeting prior to the recommendation of their approval at the May 2019 Board meeting. Following the change in Group regulatory supervision to the BMA effective from 1 January 2019, the Group’s regulatory reporting for the 2019 year end and onwards will be prepared in accordance with the BMA’s requirements. The Committee also monitors the activities of the Group’s Disclosure Committee and reviews the Group’s financial press releases (prepared in respect of the second and fourth quarters) and trading statements (prepared in respect of the first and third quarters), which it recommends to the Board for approval. The Committee receives regular reports from management on:• loss reserving (see page 114 for further details);• developments in accounting and financial reporting requirements;• any new and/or significant accounting treatments/transactions in the quarter;• the assessment of the Group’s ability to continue as a going concern (see page 99 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;• the activities of LHL’s subsidiary companies, including consideration of any risk issues; 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 audit results report. These reports 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. Of these, the most significant area of judgement and estimation considered by the Committee during 2019 was the valuation of ultimate loss reserves. The Audit Committee’s quarterly review of the adequacy of the loss reserves is explained in detail on page 63. Less significant areas of judgement and estimation are in relation to the Group’s two indefinite life assets and determining the fair value of certain financial instruments, specifically Level (iii) investments (see accounting policies pages 113 to 114 for the details of these areas.)KPMG’s 2019 year-end audit report identifies revenue recognition through the estimation of premium revenues as a key audit matter. 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 2019 Annual Report and Accounts in order to keep apprised of its key themes and messages. The Committee reviewed the final draft of the 2019 Annual Report and Accounts at the February 2020 Audit Committee meeting, together with the external auditor’s report. The Committee advised the Board that, in its view, the 2019 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. www.lancashiregroup.com
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GovernanceExternal 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. Following the year-end audit, the Committee performs an assessment of the effectiveness of the external audit process. This assessment was last conducted at the April 2019 Audit Committee meeting and 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. The Committee also formally reviews the independence of the external auditors, in particular at the half-year and year-end meetings, taking into account any non-audit services provided. The Committee considers that KPMG remain independent.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. 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. The policy was last reviewed and discussed by the Group CFO and Committee Chairman in October 2019, and it was considered fit for purpose. Given the changes to the Ethical Standard announced by the FRC in December 2019, the policy will be revised in 2020. 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 2019, KPMG provided $0.4 million of non-audit services to the Group relating to the audit of Solvency II and Lloyd’s regulatory returns.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. Following KPMG’s re-appointment at the 2019 AGM, further to a recommendation from the Committee and the full Board, the 2019 financial year was the third financial year in which KPMG acted as the Group’s external auditors. The lead audit partner is Rees Aronson. The Committee and the Board are recommending the re-appointment of KPMG as external auditors at the 2020 AGM. The Committee continues to monitor the developments and recommendations arising from the Independent Review of the FRC, led by Sir John Kingman, the final report published by UK Competition and Markets Authority on the statutory audit services market, and Sir Donald Brydon’s report setting out his views on the quality and effectiveness of audit.Governance C O M M I T T E E R E P O R T S C O N T I N U E D
Internal audit
Committee responsibility
Monitors and assesses the role and
effectiveness of the Group’s internal
audit function in the overall context of
the Group’s risk management system.
Committee activities
The 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 considered for audit annually, whilst less critical
risks are audited periodically as part of a flexible multi-year programme. The findings of each internal 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. Consideration is also given to the
assessment of the Group’s culture for each audit undertaken and an overall summary of observations
identified in respect of the Group’s culture is presented to the Committee on a quarterly basis. The
Committee meets in executive session with the Group Head of Internal Audit usually on a quarterly basis.
During 2019, the Committee reviewed and approved the Internal Audit Charter. This can be viewed on the
Group’s website. An external assessment of the effectiveness of the internal audit function was commissioned
by the Committee and conducted by Mazars LLP (Mazars), with a report issued to the Committee. The
Committee discussed the report and its findings with Mazars and the Group Head of Internal Audit and noted
that no significant issues were raised. The Committee concluded that the internal audit function is operating
effectively in the overall context of the Group’s risk management system. Following a selection process run
in 2018, Samantha Churchill joined the Group as the new Group Head of Internal Audit in January 2019.
Internal controls and risk management systems
Committee responsibility
Reviews 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.
Reviews for adequacy and security the
Group’s compliance, ‘whistleblowing’
and fraud controls.
Committee activities
The 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 2019, the Committee and Board
were satisfied that the governance, risk and control framework continue to remain both effective
and appropriate for the Lancashire Group.
During 2019, 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 and requires regular updates on compliance training delivered across
the Group (see page 42 for further details).
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GovernanceSignificant area of judgement and estimationThe valuation of loss reserves and expensesAs detailed on pages 125 to 126 of the consolidated financial statements, the valuation 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 Chief Actuary. KPMG conduct a detailed reprojection of the Group’s loss reserves as part of the half-year review and full-year audit. The Committee also receives independent estimates of the Group’s loss reserves from an external actuary and compares these third-party estimates to those of the Group at its second and fourth quarter Audit Committee meetings. During 2019, 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.Systems changes relating to the implementation of IFRS 9 and IFRS 17During 2019, 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 consolidated financial statements on an IFRS 9 and IFRS 17 basis. The project management and governance of this project were covered by an internal audit review during 2019, with no significant issues highlighted to the Audit Committee. The prospective deferral of the implementation date for the standard has not had a significant impact on the Group’s implementation project timetable.Priorities for 2020The Committee’s key priorities for 2020 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;• To continue to monitor the preparation by the Group for the implementation of IFRS 9 and IFRS 17;• To ensure the ongoing constructive engagement of the Committee with the new Group CFO and the maintenance of high standards of financial controls and reporting; • To continue to monitor and embed aspects of positive business culture in quarterly reporting, in particular regarding the Group’s financial and risk control environment; • To continue to monitor developments and recommendations with regard to audit practice, including areas of potential change and reform; and• To review the Group’s segmental reporting in the light of recent systems enhancements.Governance C O M M I T T E E R E P O R T S C O N T I N U E D
Nomination and Corporate
Governance Committee
Committee membership
The majority of the Nomination and Corporate Governance
Committee members 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
Sally Williams
Meetings attended
4/4
4/4
4/4
4/4
Principal responsibilities of the Committee
• Reviews the structure, size and composition (including the skills,
knowledge, independence, experience and diversity) of the Board;
• Considers succession planning for Directors and other senior
executives;
• Nominates candidates to fill Board vacancies;
• Makes recommendations to the Board concerning Non-Executive
Director independence, membership of Committees, suitable
candidates for the role of Senior Independent Director, and
the re-election of Directors by shareholders;
• Reviews the Company’s corporate governance arrangements
and compliance with the Code; and
• Makes recommendations to the Board concerning the charitable
and corporate social responsibility activities of the Company and
donations to the Lancashire Foundation.
Peter Clarke
Chairman of the Nomination
and Corporate Governance
Committee
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Annual Report & Accounts 2019
Following the revisions to the UK Corporate Governance Code in 2018 the Committee oversaw a programme for the quarterly monitoring of the requirements of the revised Code. The Company systematically developed its governance practices during 2019, including enhanced measures for engagement between the Board and the workforce which included the attendance of Non-Executive Directors at the quarterly staff ‘town hall’ meetings and the use of a Group-wide workforce feedback questionnaire.
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GovernanceHow the Committee discharged its responsibilities Corporate governance Board composition and effectivenessIn accordance with the provisions of the Code, all of the Directors are subject to annual (re)election by shareholders. All of the Directors were elected or re-elected by shareholders at the 2019 AGM. The Committee also reviewed the composition of the Board at its November 2019 meeting and it was agreed 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 regularly discussed in its meetings whether any additional skills and experience were needed to complement those already on the Board. In July 2019, the Committee carried out a review and revision of the document describing the division of responsibilities between the Group CEO and the LHL Chairman, in particular articulating the respective responsibilities for the oversight and implementation of a healthy corporate culture for the Group. The Committee oversaw the process for the year-end review of the effectiveness of the Board, the Committees and each of the Directors, which was internally facilitated by the Company Secretary. The Committee and the Board were satisfied that the Board and each of its Committees were operating effectively. Further details of the performance evaluation process can be found on page 56. UK Code complianceThe Committee keeps under review the Company’s corporate governance arrangements, particularly the Company’s compliance with the FRC’s UK Corporate Governance Code (‘the Code’). The Committee introduced its monitoring of the revised Code from the beginning of 2019 and reviewed the Company Secretariat’s checklist record of the Company’s compliance with the Code on a quarterly basis – with a particular view to ensuring that the Board and business were meeting any new governance requirements under the revised Code. Appointments and succession planningThe Committee reviewed and recommended the approval and adoption by the Board of the Company’s succession plan and talent management and development programme for the 2019/2020 year. This is with the objective of fostering a diverse workforce and pipeline to meet the needs of the business. The Committee reviewed training and development proposals for a number of key employees across the Group as part of the succession planning process. The Committee reviewed a number of senior appointments across the Group including those of Emma Woolley as the CEO of LSL, John Cadman as the CEO of LUK, Hayley Johnston as the CEO of LICL (to take effect in early 2020) and James Flude as the CUO of LUK (also to take effect in early 2020), subject to regulatory approval. Due to the upcoming retirement of the Group’s CFO, Elaine Whelan, the Committee oversaw the appointment of her successor and approved the appointment of Sainty Hird, an independent recruitment agency. The Committee approved a search brief and oversaw the creation of a detailed list of potential external and internal candidates. Following a series of informal and formal meetings with both members of management and the Board, the Committee constituted a CFO Appointment Panel and empowered the Group CEO and Chairman to agree to the formal terms of appointment for the recommended candidate. Natalie Kershaw was appointed to the role of Group CFO in December 2019; she joins the Board on 1 March 2020 (see page 49 for further details).Workforce engagementDuring 2019, the Company continued the practice of the Group CEO holding ‘town hall’ meetings with employees following the announcement of the Company’s quarterly results. In order to further enhance arrangements for engagement between the Directors and members of the workforce, the Committee arranged for these ‘town hall’ meetings to be periodically attended by the Chairman of the Board or another Non-Executive Director. Peter Clarke and Alex Maloney attended the ‘town hall’ meeting in Bermuda in July 2019, Samantha Hoe-Richardson attended the ‘town hall’ meeting in London in August 2019 and Sally Williams attended the same in November 2019. Staff feedback from these ‘town hall’ meetings and from other avenues was subsequently shared with the relevant Committees and the Board. The Committee and Board intend for these arrangements to continue in 2020. Audit reformThe Committee has monitored developments in the area of audit market reform, regulation and practice during 2019, including the Kingman Review, the Brydon report and the recommendations of the UK Competition and Markets Authority. Governance C O M M I T T E E R E P O R T S C O N T I N U E D
Brexit
Subsidiary boards
ESG reporting
Environment
Social responsibility
Diversity
The Lancashire Foundation
The Committee has considered the impact of Brexit on both the Company and its business, for more
detail please see page 38.
The Committee monitored the composition of subsidiary boards during 2019 and recommended
appointments to the boards of LUK, LSL and LICL.
The Committee and Board have also approved the use in this Annual Report of the UN sponsored
Principles for Sustainable Insurance as a framework for our ESG reporting. Please see pages 52 to 54
for further details.
The Committee also periodically reviews developments in the areas of the environment and climate
change and the management of related risks and opportunities within the context of sustainability
and social responsibility. For more information on these issues, please see the Chief Executive’s
review on page 13 and the principal risks report on pages 34 to 39.
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 and illustrate the progress made in relation to the obtainment of the Company’s
stated goals with regard to diversity. The Committee also reviewed 2019 comparative pay data by
gender within the Lancashire Group. The Committee recommended approval by the Board of an
updated diversity policy, which is posted on the Company’s website. The Board remains of the view
that the skills and experience needed to take the business of the Company forward are of paramount
importance in selecting Board members and employees. Lancashire’s approach to recruitment and
ensuring the benefits of a broad diversity throughout the business is discussed further on page 42
in the discussion of the workplace culture.
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 2019, the Committee received a report on the Foundation, including
its objectives, governance, approach to funding for 2020 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 0.75% of full year Group profits (subject to a cap
of $750,000 and a $250,000 collar).
UK Modern Slavery Act 2015
During 2019, 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.
Priorities for 2020
The Committee’s key priorities for 2020 are:
• To ensure that the Company is able to discharge effectively its governance responsibilities under the 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 diversity metrics.
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Gender diversity
LHL Board members
Group management excluding
LHL Non-Executive Directors
Overall Group employees
Male: 5 (62.5%)
Female: 3 (37.5%)
Male: 13 (61.9%)
Female: 8 (38.1%)
Male: 134 (61.5%)
Female: 84 (38.5%)
Senior management
Direct reports to senior
management
Male: 13 (61.9%)
Female: 8 (38.1%)
Male: 49 (62.0%)
Female: 30 (38.0%)
All gender composition data is shown as at 31 December 2019.
www.lancashiregroup.com
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GovernanceGovernance
C O M M I T T E E R E P O R T S C O N T I N U E D
Investment Committee
Robert Lusardi reflects on the Group’s
investment performance and strategy
How did investment returns contribute to the Group’s
performance in 2019?
Lancashire experienced a very good performance in 2019 with
the investment portfolio returning 4.9%, notwithstanding
a conservative asset allocation strategy. Put differently, the
investment portfolio generated over half of the Company’s
14.1% RoE, highlighting the importance of the investment
function to shareholder returns. Our duration remained under
two years and VaR was only 2.7% of shareholders’ equity at
year end. More details of the Group’s investment performance
can be found on page 27.
How does the business think about the strategic
balance between investment and underwriting
risks and opportunities?
In 2020, we will complete a biennial strategic asset allocation
study which will factor in risk/return expectations of our
various asset classes, current underwriting strategy and
market conditions including related capital requirements, and
potential liquidity and claims needs. With the improvement in
underwriting conditions we will likely increase our overall
investment risk appetite slightly while remaining relatively
conservative. At the same time, we will be reallocating a
significant portion of our hedge fund portfolio into other
risk assets where we believe we can earn slightly better
risk adjusted returns. Since the majority of our policies and
claims are U.S. dollar denominated, the bulk of our investment
portfolio is invested in U.S. dollar fixed income instruments.
The U.S. Federal Reserve has signalled that it is less willing
to lower rates in 2020; accordingly we are not anticipating
a significant shift in our overall investment philosophy,
although we could be increasing our portfolio duration slightly.
Robert Lusardi
Chairman of the
Investment Committee
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The Committee was pleased with the investment returns for the year, which made a meaningful contribution to the Group’s RoE. The Committee works to articulate and support the Board’s investment philosophy, which continues to be conservative in nature, and is intended to help support the Group’s underwriting strategy and to provide appropriate liquidity to match the Group’s risk exposures. The Committee works to articulate and support the Board’s
investment philosophy, which continues to be conservative in nature,
and is intended to help support the Group’s underwriting strategy and
to provide appropriate liquidity to match the Group’s risk exposures.
The Committee establishes and monitors a number of investment risk
metrics, including certain ‘Black Swan’ scenarios, which might impair
the Group’s investment portfolio. The Committee is also mindful
of the potential impact of climate change transitional risk to certain
asset classes, although it considers that the current portfolio has only
very limited exposure in this regard. The Committee considers the
Group’s responsibility to act as a responsible investor. To that end the
Group’s principal investment managers (with the exception of some
of the Group’s hedge fund managers) are signatories to the Principles
for Responsible Investment, with a commitment to incorporate ESG
issues into investment analysis and decision-making processes.
Following the Company’s move of Group insurance regulatory
supervision and tax residence to Bermuda at the beginning of 2019,
the Committee considered potential adjustments to the investment
strategy and asset allocation in light of the transition from the UK’s
Solvency II Group supervision regime.
Priorities for 2020
The Committee’s key priorities for 2020 are:
• To maintain a continued focus on a diversified and sustainable
portfolio, the preservation of capital, the maintenance of liquidity
and the management of interest rate and other investment risks;
• To focus on the implication of macro-economic trends, in particular
the U.S. domestic and international political environment and Brexit
developments in the UK; and
• To conduct a biennial asset allocation review.
www.lancashiregroup.com
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GovernanceCommittee membershipThe Terms of Reference of the Investment Committee 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 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). Meetings attendedRobert Lusardi (Chairman)4/4Peter Clarke4/4Denise O’Donoghue 4/4Elaine Whelan 4/4Principal 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 The Committee focused on the consequences of U.S.-China trade friction and related developments in the U.S. Federal Reserve’s interest rate policy and the implications of Brexit developments within the UK, with a particular focus on resultant exchange rate volatility. The Committee regularly reviewed these and other macro-economic, capital markets and global political developments during the year, often in discussion with our professional investment managers. The Committee received two presentations: the first from Payden & Rygel regarding specific U.S. economic data, emerging market growth, emerging market debt growth and the implications of a no-deal Brexit; and the second from Pinebridge Investments on a market overview of the fixed income and loan market, with a particular focus on the Collateralised Loan Obligations (CLO) market.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 LSL. Governance C O M M I T T E E R E P O R T S C O N T I N U E D
Underwriting and
Underwriting Risk Committee
Committee membership
During 2019, 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 of LUK, the Active Underwriters for Syndicates 2010 and
3010 and the Group Chief Actuary (who are not Directors).
Alex Maloney (Chairman)
Jon Barnes
Michael Dawson
Paul Gregory
James Irvine
Hayley Johnston
Ben Readdy
John Spence
Meetings attended
4/4
4/4
4/4
4/4
4/4
4/4
4/4
4/4
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.
Alex Maloney
Group CEO and Chairman of the
Underwriting and Underwriting
Risk Committee
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The Committee’s focus is on the Group’s underwriting, which is central to our purpose as a business. The Committee’s role is to oversee the development and implementation of underwriting strategy, including areas of opportunity and the prudent management of the Group’s underwriting risk exposures.
The Committee reviewed developments in the third-party reinsurance
capital markets and the progress of the Kinesis facility, which is
underwritten by LCM, which underwrote reinsured limits in
excess of $500 million during 2019. The Committee also monitored
the operation of the Group’s reinsurance fronting protocol between
LICL and the Kinesis facility.
During 2019, the Committee meetings were open to attendance
by all Board members. 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 24 to 26.
Priorities for 2020
The Committee’s key priorities for 2020 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 underwriting opportunities, including
potential new lines of business and opportunities for the managed
‘organic’ growth in the Group’s specialty and catastrophe lines; and
• To continue to foster a nimble, sustainable and responsive
underwriting culture, capable of responding to the needs of clients,
investors, employees and other stakeholders.
www.lancashiregroup.com
www.lancashiregroup.com
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GovernanceHow the Committee discharged its responsibilities The Committee has been actively engaged during 2019 in the development and implementation of the Group’s underwriting strategy. It considers the articulation of and adherence to formal underwriting risk tolerances, which are approved and monitored by the Committee and the Board. Underwriting risk is the key risk faced by the business. 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 to ensure that good risk selection and disciplined underwriting remain at the core of the Group’s underwriting strategy. This is facilitated through regular update reports from the Active Underwriters of Syndicates 2010 and 3010, the CUOs for LUK and LICL and the CEO of LCM. The Committee also receives quarterly reports of significant claims and related developments. Another equally important underwriting risk management tool is the programme of reinsurance protections purchased across the Group. In this regard, the Committee reviewed the structure, pricing and operation of the outwards reinsurance programmes and regularly discussed management reports covering outwards reinsurance developments. Within the context of climate change risk, the Committee discussed the Group’s exposures to California wildfire risk and the articulation of an appropriate underwriting and risk management strategy and management preference for wildfire exposures. The Committee considered developing trends in the frequency and severity of weather-related events and was satisfied that the Group’s underwriting strategy and reinsurance and risk management programmes are appropriate for the management of underwriting risk relating to these factors. For more detail, please see the ERM report on page 30 and the Group’s PML exposures on page 120.Regarding business development opportunities, the Committee: • Reviewed management plans for the expansion of the Group’s property risk exposures in the Florida market; • Monitored the development of risk and opportunity in the marine, war and onshore energy markets; • Reviewed management plans for the re-establishment of a property direct and facultative underwriting capacity at LUK; and• Received management reports on the progress and approval by Lloyd’s of the business plans for Syndicates 2010 and 3010. Governance C O M M I T T E E R E P O R T S C O N T I N U E D
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 subsequently made, are fair to the individual
and the Company; and
• Oversees any major changes in employee benefit structures
throughout the Group.
Simon Fraser
Chairman of the
Remuneration Committee
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Our remuneration structures are designed to incentivise, reward and retain talented people across the business, within an appropriate framework of risk management. The Remuneration Policy and its implementation are proportional, predictable and straightforward. Remuneration structures and outcomes are aligned to the objective of embedding a healthy and sustainable corporate culture which is consistent with the Group’s purpose, values and strategy.
The revised 2020 Remuneration Policy for Executive Directors is set
out in the Directors’ Remuneration Report between pages 74 and 95
and will be put to shareholders for approval at the 2020 AGM.
During 2019, the Committee reviewed Executive Directors’
shareholdings in the context of the Company’s share ownership
guidelines for senior/key executives.
The Committee continued to monitor progress made during the
year on the alignment of remuneration practices across the Group
and reviewed the operation of the Group’s Remuneration Policy.
The Committee also 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 74 to 95. The Annual Report on Remuneration highlights
those areas of debate and focus within the Committee and the Board
on the alignment of remuneration and Group performance, both
in the current year and over a longer timeframe. The Committee
considers the remuneration practices across the Group and the
internal and external measures used to be appropriate and aligned
with Group strategy and risk management. In particular, the
Committee considers that the Group’s remuneration practices as set
out in the Annual Report on Remuneration are clear and transparent,
and appropriately simple in their structure and operation.
Priorities for 2020
The Committee’s key priorities for 2020 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;
• To seek shareholder support for the revised 2020 Directors’
Remuneration Policy at the 2020 AGM; and
• To work with the Group’s independent remuneration advisers to
keep abreast of compensation levels amongst the Group’s London,
Bermudian and other peers, and the latest remuneration-related
regulation, guidance and market practices.
www.lancashiregroup.com
www.lancashiregroup.com
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GovernanceHow the Committee discharged its responsibilities During 2019, the Committee reviewed the Group incentive packages to ensure that remuneration is structured appropriately in order 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 the Executive Directors, as well as other designated senior executives, and in this context had regard to remuneration levels and practices across the workforce. The Committee also approved the grant of awards under the Company’s RSS.The Committee reviewed the Directors’ Remuneration Policy, which has a three-year life following its approval by shareholders at the 2017 AGM. The Committee held discussions throughout the year on areas of developing best practice, regulation and investor expectation. Towards the end of 2019, the Committee requested a shareholder consultation with the Group’s principal shareholders, as well as several of the leading shareholder advisory groups, in relation to the areas for potential change in the shareholder-approved Policy. The consultation was led by Simon Fraser (as the Chair of the Committee) who sent a consultation letter and held a number of follow-up meetings. The Committee consulted in certain areas where there were considered to be opportunities to amend and further enhance policy, in particular: • the development of malus and clawback triggers to cover instances of corporate failure or material damage to the business or its reputation;• the introduction of post-cessation shareholding requirements for Executive Directors, to supplement the in-post shareholding guidelines currently operated by the Group;• the introduction within the Group RSS rules, which govern the use of equity-based incentivisation for Executive Directors and across the Group, of a downward discretion which may be exercised by the Committee, which is intended to be limited to use in exceptional circumstances; and• the clarification of policy in the area of the alignment of Executive Director pension entitlements with practice across the wider workforce.Governance D I R E C T O R S ’ R E M U N E R A T I O N R E P O R T
D I R E C T O R S ’ R E M U N E R A T I O N R E P O R T
Annual statement
Dear Shareholder,
I am pleased to present the 2019 Directors’ Remuneration Report
to shareholders.
Shareholder engagement and Remuneration Policy
review and proposals
Lancashire’s Directors’ Remuneration Policy was last approved by
shareholders at the May 2017 AGM. There were no changes to the
Policy proposed last year and at the 2019 AGM we received support from
89% of shareholders that voted for our Annual Report on Remuneration.
Given the three year shareholder-approval cycle for the Directors’
Remuneration Policy under the UK rules, during 2019 the Committee
considered options for updating the Policy in the light of changes to
the Code and other best practice recommendations. The Committee
identified a number of areas for potential change, and in November 2019
I wrote to our major shareholders and certain of the leading shareholder
governance advisory services setting out our proposals for changes.
In summary, the Committee and Board have proposed changes to the
Directors’ Remuneration Policy for approval at the 2020 AGM including
the following:
• Malus and clawback triggers – the Committee has introduced two
additional triggers for both the annual bonus and the LTI awards made
under the RSS to cover corporate failure and material damage to the
Group’s business or reputation;
• Executive Directors’ shareholding guidelines and requirements –
for new RSS awards made during 2020, the Committee proposes
that the shareholding requirement for Executive Directors should
be contractually enforceable under the terms of the awards and
that for departing Executive Directors there should be a requirement
to maintain a qualifying holding for a period of 24 months following
cessation of employment;
• Discretionary override of formulaic outcomes – the proposed Policy
now states that the Committee may, in exceptional circumstances,
use discretion to scale back RSS vesting outcomes;
• Directors’ pension alignment – the proposed Policy has been clarified
to provide that the maximum payable (to both existing and new
Executive Directors) will be at a rate not greater than that which
is available to the majority of the Group workforce. All Executive
Directors have a 10% pension contribution which is aligned with
the standard practice for the Group workforce.
The full 2020 Directors’ Remuneration Policy is set out on pages 76 to 80
and includes the detail of where the 2020 Policy has introduced changes
to the 2017 Policy.
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Annual Report & Accounts 2019
Remuneration and strategy
The Committee has once again debated the appropriate remuneration
structures to be used in 2020 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 2019.
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 strategic
objective is to achieve attractive returns appropriate to overall risk levels
across the (re)insurance market cycle.
Performance outcomes for 2019 – generating an
attractive return
After two years of well above average industry losses in 2017 and 2018,
with the resulting impact on the Company’s financial performance and
therefore executive compensation, we are pleased that 2019 has been a
much stronger year for Lancashire, and can report that our total Group
CEO and the retiring Group CFO remuneration has increased by 114%
and 87% respectively (see the comparison table for single figure
remuneration on page 86). The Group has produced a strong RoE of
14.1% in an environment which has seen some modest improvement in
the (re)insurance pricing environment whilst once again being impacted
by a number of natural catastrophe losses, in particular in Japan and the
Caribbean (see the strategy and performance reviews of this Annual
Report and Accounts on pages 14 to 19).
The Board and Committee were satisfied that, in light of the 2019
market environment, this performance represents a strong outcome
for the year and a return to a more attractive level of profitability
following the severely market loss impacted results of 2017 and 2018.
This has been a year in which catastrophe loss activity has been markedly
lower than the previous two years. The business is well-positioned to
compete in the market as we enter 2020 in what we hope to be an
improving pricing environment.
Our business will continue to explore opportunities for organic growth,
where this makes sense, whilst ensuring a rigorous focus on the balanced
management of risk and reward.
The Executive Directors’ annual bonus performance targets set at the
beginning of 2019 for personal and financial performance were stretching.
The financial element which made up 75% of the annual bonus
opportunity resulted in a bonus at 162.4% of target for that element
given the Company’s strong return in 2019. The Board also considered
that both the Executive Directors had performed strongly in managing
risk within the business, in driving profitability, in further integrating the
Group’s business platforms during the year and in positioning the Group
well for the underwriting opportunity which we expect to develop during
2020, and a bonus at 150% of target was awarded for the personal
component in respect of 2019 performance. In summary, annual bonuses
for our Executive Directors were achieved above target level at 80% of
maximum bonus for both the Group CEO and the retiring Group CFO
(see pages 86 to 88 for further details).
In relation to long-term incentives for Executive Directors and other
senior management, the 2017 Performance RSS awards were 75% based
on absolute RoE targets and 25% on relative TSR against specified peer
group companies over the three-year period to 31 December 2019.
Our TSR performance (in U.S. dollars) over this period ranked the
Company below the median of the designated peer group of
companies, resulting in 0% vesting for the TSR component.
Our average RoE performance over this three-year performance period
was 3.5% against a threshold target of the 13-week Treasury bill rate plus
6% and a maximum pay out of the 13-week Treasury bill rate plus 13%,
resulting in 0% of the RoE component of the 2017 Performance RSS
awards vesting. This was below the target threshold level for the RoE
element of the 2017 awards, principally on account of the impact of
the lower returns generated during 2017 and 2018. Therefore overall,
the 2017 Performance RSS awards vested at 0%. This compared with
the 0% vesting of the 2016 Performance RSS awards due to 0% vesting
of the RoE and TSR portions of those awards, which we reported last year.
The Committee remains concerned at the impact of catastrophe losses
in the recent 2017 and 2018 years, which has now resulted in the low
or non-vesting of RSS awards for Executive Directors over a period
of several years. The RSS scheme is intended to generate long-term
equity alignment between our management and shareholders, and
the 0% vesting of both the 2016 and 2017 awards is a cause of concern
for the Committee and the Board. It was for this reason that the
Committee and Board moved to the annual measurement of each
year of the three-year performance awards at the beginning of 2018,
principally to avoid the vesting levels of awards being dragged down on
account of one or more years of exceptional loss activity. We therefore
anticipate that RSS vesting levels will in future years be more balanced
and less prone to volatility, which is in the best interests of shareholders
and executive alignment.
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 notes the 0% vesting of the 2017 RSS awards but
remains satisfied that there has been sufficient linkage between
performance and reward for Executive Directors, albeit that arguably
the overall remuneration outcomes for 2019 have been lower than
might have been hoped for on account of the series of above average
catastrophe loss events to the global insurance markets and the Group
during 2017 and 2018, which were beyond the power of our Executive
Directors to control, but which have been appropriately planned for.
The Committee will continue to work towards ensuring that there is
appropriate alignment between executive remuneration and Company
performance in line with the Group’s cross-cycle return expectations.
Application of Remuneration Policy for 2020
As mentioned above the Remuneration Committee conducted a full
review of the Directors’ Remuneration Policy in 2019, and the revised
2020 Policy will be put to shareholders for consideration at the
2020 AGM.
At the end of this section is the Annual Report on Remuneration, which
provides detailed disclosure on how the Policy will be implemented for
2020 and how Directors have been paid in relation to 2019. During the
year, Elaine Whelan decided to step down as an Executive Director from
LHL with effect from 28 February 2020 and Natalie Kershaw has been
appointed as her successor (see pages 9 and 13 for further details).
The Board has decided to apply the targets for the annual bonus to
be used in 2020 and to implement the three-year RSS awards for
Executive Directors on substantially the same basis as agreed for 2019.
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, alongside the binding vote on the Remuneration Policy, and I hope
that you will be able to support both resolutions 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
Lancashire Holdings Limited
Annual Report & Accounts 2019
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D I R E C T O R S ’ R E M U N E R A T I O N R E P O R T C O N T I N U E D
D I R E C T O R S ’ R E M U N E R A T I O N R E P O R T C O N T I N U E D
• 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, corporate
failure and material damage to the Group’s business or reputation
or the Executive Director ceasing to be a Director and/or employee
due to gross misconduct (see page 78 for the full Policy details).
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. As noted above, in November 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 for amendments to the 2020
Remuneration Policy and the plans for implementation for the Executive
Directors for 2020. Feedback received was broadly supportive of the
Committee’s 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 the same as the standard pension contributions made
to employees in the Group (in percentage of salary terms).
Whilst the Company does not consult with employees on Executive
Directors’ remuneration, the Board and Committee did receive employee
feedback. 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.
Directors’ Remuneration Policy section
As a company incorporated in Bermuda, LHL is not bound by UK law
or regulation in the area of Directors’ remuneration to the same extent
that it applies to UK incorporated companies. However, by virtue of the
Company’s premium listing on the LSE, and 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. The Committee 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, which was effective for a period of three years. 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 conducted a full review of the Remuneration Policy in
2019, with the amended 2020 Policy being put to shareholders for
consideration at the 2020 AGM, and will be effective for the next
three years (or until amended in any material respect by a decision
of shareholders, if earlier).
The revised 2020 Remuneration Policy contains details of the Company’s
policy to govern future payments that will be made to Directors. Changes
to the Policy are outlined by Simon Fraser on page 74 and are shown in
italics in the Remuneration Policy table on pages 77 to 80. The Annual
Report on Remuneration also details the remuneration paid to Directors
in respect of the 2019 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 current Executive
Directors, meaning that there is a strong focus on sustainable long-
term shareholder value; and
76
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Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
Remuneration Policy table
Fixed pay
Base salary
2020 Remuneration Policy
(showing material changes to the 2017 approved Remuneration Policy)
Note: changes introduced for the 2020 Policy are shown throughout the table in italics.
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 Bermuda.
Opportunity
No maximum.
Benefits
Purpose and link to strategy Market competitive structure to support recruitment and retention.
Medical cover aims to ensure minimal business interruption as a result of illness.
Operation
Executive Directors’ benefits may include healthcare, dental, vision, gym membership and life insurance.
Other additional benefits may be offered from time to time that the Committee considers appropriate
based on the Executive Director’s circumstances.
Executive Directors who are expatriates or are required to relocate may be eligible for a housing allowance
or other relocation-related expenses.
Any reasonable business-related expense can be reimbursed, including any personal tax thereon if such
expense is determined to be a taxable benefit.
Opportunity
No maximum.
Pension
Purpose and link to strategy
Contribution towards funding post-retirement lifestyle.
Operation
Opportunity
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.
Company contribution is currently 10% of base salary.
The maximum pension payable to both existing and new Executive Directors will be at a rate not greater than that
which is available to the majority of the Group workforce.
Lancashire Holdings Limited
Annual Report & Accounts 2019
www.lancashiregroup.com
75
77
Governance
D I R E C T O R S ’ R E M U N E R A T I O N R E P O R T C O N T I N U E D
D I R E C T O R S ’ R E M U N E R A T I O N R E P O R T C O N T I N U E D
Remuneration Policy table continued
Annual bonus1,2
Purpose and link to strategy
Operation
Opportunity
Performance metrics
2020 Remuneration Policy
(showing material changes to the 2017 approved Remuneration Policy)
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% 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:
(i) the financial statements of the Company were materially misstated or an error occurred in assessing
the performance conditions of the bonus;
(ii) the Company has suffered an instance of corporate failure which has resulted in the appointment of a liquidator
or administrator or resulted in the Company reaching a compromise arrangement with its creditors;
(iii) the Company or the relevant business unit for which the participant works suffers damage to its business or
reputation which, in the determination of the Committee, is at least partly due to a breach of corporate risk policies/tolerances
and to a failure in the management of the Company or relevant business unit and to which the participant made a material
contribution: and/or
(iv) the Executive ceased to be a Director or employee due to gross misconduct.
The maximum bonus for Executive Directors for achieving the target level of performance as a percentage
of salary is 200% 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 Remuneration 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% of the overall opportunity,
and no more than 25% 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% 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.
76
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Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
Long Term Incentives (LTI)
2020 Remuneration Policy
(showing material changes to the 2017 approved Remuneration Policy)
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, the Company has suffered an incident of corporate failure,
material damage to the Group’s business or reputation 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.
The Committee has the discretion, in exceptional circumstances, to scale back RSS vesting outcomes or to impose additional
vesting conditions. The use of such discretion should be limited to exceptional circumstances, such as a downturn in the
performance of the individual or the Company or Group.
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% 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% 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% of this part of the award will vest for achieving median or index.
Lancashire Holdings Limited
Annual Report & Accounts 2019
www.lancashiregroup.com
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Governance
D I R E C T O R S ’ R E M U N E R A T I O N R E P O R T C O N T I N U E D
D I R E C T O R S ’ R E M U N E R A T I O N R E P O R T C O N T I N U E D
Remuneration Policy table continued
Share ownership guidelines
and requirements4
2020 Remuneration Policy
(showing material changes to the 2017 approved Remuneration Policy)
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% of the net of tax value of awards that vest under the RSS.
In respect of performance RSS and deferred bonus RSS awards made after 1 January 2020 there is to be a requirement on
each Executive Director to retain 50% of the net of tax shares resulting on exercise in order to hold an interest equivalent
in value of up to two times salary for a period of two years (or such other period or amount as the Committee may in future
determine) following the date of termination of employment of the relevant Executive Director.
A nominee account may be established into which shares acquired under RSS awards (i.e. on exercise of (nil cost) options)
will ordinarily be directed for the purposes of enforcing the guidelines and requirements.
The Remuneration Committee shall retain a discretion to waive the requirements, in whole or in part, in exceptional
circumstances such as death, critical illness or personal financial hardship.
In the event of a change of control (takeover) of LHL the guidelines and requirements shall cease to apply on the date of
such change of control.
Chairman and Non-Executive
Directors’ fees
Purpose and link to strategy Helps recruit, motivate and retain a Chairman and Non-Executive Directors of a high calibre by offering
Operation
a market competitive fee level.
The Chairman is paid a single fee for his responsibilities as Chairman. The level of these fees is reviewed
periodically by the Committee and the Group CEO by reference to broadly comparable businesses in terms
of size and operations.
In general, the Non-Executive Directors are paid a single fee for all responsibilities, although supplemental
fees may be payable where additional responsibilities are undertaken, including a Non-Executive Director
role on a subsidiary board.
Any reasonable business-related expenses (including any personal tax payable) can be reimbursed.
Opportunity
No maximum.
1. The Committee operates the annual bonus plan and RSS according to their respective rules and in accordance with the Listing Rules. The Committee, consistent with normal market
practice, retains discretion over a number of areas relating to the operation and administration of these plans and this discretion forms part of this Policy.
2. All historic awards that were granted under any current or previous share scheme operated by the Company that remain outstanding remain eligible to vest based on their original
award terms and this provision forms part of the Policy.
3. Performance measures: these may include the KPIs shown on pages 18 to 19 or others described within the Annual Report and Accounts Glossary commencing on page 171 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 tax 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.
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Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
Illustrations of annual application of Remuneration Policy
The charts below show the potential total remuneration opportunities for the Executive Directors in 2020 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
7.72
17%
35%
6.38
42%
42%
35%
16%
13%
3.69
36%
36%
28%
1.07
100%
Fixed pay
On-target
Maximum
CEO
Maximum +50%
growth in shares
3.44
40%
44%
4.13
17%
33%
36%
2.09
35%
37%
28%
On-target
16%
Maximum
Incoming CFO
14%
Maximum +50%
growth in shares
0.57
100%
Fixed pay
Fixed pay
Annual bonus
LTI awards (RSS)
LTI awards (RSS) + 50% share price growth
Fixed pay = 2020 Salary + Actual Value of 2019 Benefits + 2020 Pension Contribution.
On-target = Fixed Pay + Target Bonus (being half the Maximum Bonus Opportunity) + Target Value of 2020 RSS grant (assuming 50% vesting with
the face values of grant).
Maximum = Fixed Pay + Maximum Bonus Opportunity + Maximum Value of 2020 RSS grant (assuming 100% vesting with the face values of grant).
Maximum + 50% growth over performance period = Fixed Pay + Maximum Bonus Opportunity + Maximum Value of 2020 RSS grant + 50% share
price appreciation (assuming 100% vesting with the face values of grant).
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 would 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 in their
employment terms 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.
Lancashire Holdings Limited
Annual Report & Accounts 2019
www.lancashiregroup.com
79
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Governance
D I R E C T O R S ’ R E M U N E R A T I O N R E P O R T C O N T I N U E D
D I R E C T O R S ’ R E M U N E R A T I O N R E P O R T C O N T I N U E D
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 Annual Report and Accounts (including
for current Executive Directors as detailed on page 90 of the Annual
Report on Remuneration) remain eligible for vesting or exercise based
on their original award terms.
The Company seeks to apply the principle of mitigation in the payment of
compensation on the termination of the service contract of any Executive
Director. There are no special provisions in the service contracts for
payments to Executive Directors on a change of control of the Company.
In the event of an exit of an Executive Director, the overriding principle
will be to honour contractual remuneration entitlements and determine,
on an equitable basis, the appropriate treatment of deferred and
performance-linked elements of the package, taking account of the
circumstances. Failure will not be rewarded.
Depending on the leaver classification, an Executive Director may be
eligible for certain payments or benefits continuation after cessation
of employment.
If an Executive Director resigns or is summarily dismissed, salary, pension
and benefits will cease on the last day of employment and there will be
no further payments.
Leaver on arranged terms or good leaver
If an Executive Director leaves on agreed terms, including compassionate
circumstances, there may be payments after cessation of employment.
Salary, pension and benefits will be paid up to the length of the agreed
notice period or agreed period of gardening leave.
Subject to performance, a bonus may be payable at the discretion of
the Committee pro-rata for the portion of the financial year worked.
Vested but unexercised deferred bonus 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.
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Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
Annual Report on Remuneration
This Annual Report on Remuneration together with the Chairman’s statement, as detailed on pages 74 and 75, will be subject to an advisory vote
at the 2020 AGM. The following sections in respect of Directors’ emoluments have been audited by KPMG:
• Single figure of remuneration.
• Non-Executive Director fees.
• 2020 annual bonus payments in respect of 2019 performance.
• Long-term share awards with performance periods ending in the year – 2017 RSS awards.
• 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 2020
Base salary and fees
Executive Directors
Increases and resulting salaries effective from 1 January 2020 are set out below:
• CEO – salary increased by 3% to $895,544.
• Outgoing CFO – salary increased by 3% to $614,941.
• Incoming CFO – salary has been set at $500,000.
• For 2020, increases of 3% 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 2020:
• 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 approximately $63,644 per annum
depending on prevailing exchange rates at times of payment as Samantha is remunerated in GBP.
• Simon Fraser is a Non-Executive Director of LSL in which capacity he will receive a fee of $80,000 per annum.
Lancashire Holdings Limited
Annual Report & Accounts 2019
www.lancashiregroup.com
81
83
Governance
D I R E C T O R S ’ R E M U N E R A T I O N R E P O R T C O N T I N U E D
D I R E C T O R S ’ R E M U N E R A T I O N R E P O R T C O N T I N U E D
Annual bonus
For 2020, the Group CEO, outgoing Group CFO and incoming Group CFO will have a target bonus of 150% of salary and, therefore, a maximum
opportunity of 300% 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% of salary less than the set policy limit.
The financial and personal portions of the annual bonus will remain unchanged with 75% on financial performance and 25% on personal performance.
Financial performance (75%)
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 14 and 15 of
this Annual Report and Accounts). For 2020, the financial component for the 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% of target bonus shall be payable at a threshold level of RoE equal to RFRoR + 6% (0% will be payable below this threshold).
• 50% of target bonus shall be payable at a level of RoE equal to RFRoR + 7%.
• 100% of target bonus shall be payable at a level of RoE equal to RFRoR + 8%.
• 200% of target bonus shall be payable at a level of RoE equal to RFRoR + 14%.
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.
Personal performance (25%)
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 2020 personal objectives for each Executive Director.
Executive Director
Alex Maloney
Elaine Whelan
Natalie Kershaw
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 transition of responsibilities to incoming CFO and incoming CEO for the LICL office.
Contribution aligned to the Lancashire Group values.
Effective transition planning and implementation.
Effective management of the finance function and participation in Group management and the Board.
Innovative contribution to strategic planning with particular focus on capital and business planning processes.
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 2020 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.
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Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
Restricted Share Scheme
Performance conditions
For Executive Directors, 2020 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 2022. 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 2020, the weighting is 85% on annual growth in FCBVS plus accrued dividends and 15% on absolute TSR.
Target ranges
The annual growth in FCBVS plus accrued dividends target range for 2020 awards is:
• threshold – 6%; and
• maximum – 13%.
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% of the relevant element
of the RSS award will vest at threshold, and 100% of the relevant element of the RSS award will vest at maximum. Performance between threshold and
maximum is determined on a straight-line basis.
The TSR target range for 2020 awards is:
• threshold – 8% compound annual growth; and
• maximum – 12% 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% of the award will vest at threshold, and 100% of the 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.
Award levels
2020 RSS award levels are as follows:
• Group CEO – RSS awards in respect of shares to the value of $2,686,632 (being 300% of salary)
• Outgoing Group CFO will receive no RSS awards in respect of 2020
• Incoming Group CFO – RSS awards in respect of shares to the value of $1,375,000 will be awarded upon commencement (being 275% of salary)
The number of RSS awards in respect of shares which are 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.
Post-employment holding requirements
In respect of performance RSS awards made after 1 January 2020, there is a requirement on each Executive Director to retain 50% of the net of
tax shares resulting on exercise in order to hold an interest equivalent in value of up to two times salary for a period of two years (or such other
period or amount as the Committee may in future determine) following the date of termination of employment of the relevant Executive Director.
Lancashire Holdings Limited
Annual Report & Accounts 2019
www.lancashiregroup.com
83
85
Governance
D I R E C T O R S ’ R E M U N E R A T I O N R E P O R T C O N T I N U E D
D I R E C T O R S ’ R E M U N E R A T I O N R E P O R T C O N T I N U E D
Single figure of remuneration
The following table presents the Executive Directors’ emoluments in U.S. dollars in respect of the years ended 31 December 2019 and
31 December 2018.
Executive Directors
Alex Maloney4,, CEO
Elaine Whelan4, CFO
Salary
$
867,361
846,910
597,030
579,967
2019
2018
2019
2018
Pension
$
86,736
84,691
59,703
57,795
Taxable
benefits1
$
21,921
24,879
152,112
234,144
Annual bonus5
$
2,077,754
474,826
1,426,726
326,048
Long-term
incentives
(RSS)2,3
$
0
0
0
0
Total4
$
3,053,772
1,431,306
2,235,571
1,197,954
The following charts set out the above disclosed 2019 total remuneration received by Executive Directors as a percentage of their total
2019 remuneration.
Alex Maloney
Elaine Whelan
Fixed pay: 32%
Annual bonus: 68%
LTI awards (RSS): 0%
Fixed pay: 36%
Annual bonus: 64%
LTI awards (RSS): 0%
1. Benefits comprise Bermuda 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 2019, the long-term incentive values are based on the 2017 RSS awards which vest at 0% and are based on a three-year performance period that ended on 31 December 2019.
3. For 2018, the long-term incentive values were based on the 2016 RSS awards which vested at 0% and were based on a three-year performance period that ended on 31 December 2018.
4. Some amounts were paid in Sterling and converted at the average exchange rate of 1.2738 for the year as they are set in U.S. dollars.
5. Bonus targets were set at the beginning of 2019 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 162.4% of target as the RoE for 2019 was
14.1% against a target level of RFRoR +8%. Final bonus payout to Executive Directors will be 80% of the maximum for the CEO and 80% of the maximum for the retiring CFO.
For full details of Executive Directors’ bonuses and the associated performance delivered see pages 84 and 85. 25% of Executive Directors’ annual bonus is deferred into RSS
awards without performance conditions, vesting at 33.3% per year over a three-year period.
84
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Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
Non-Executive Directors’ fees
Current Non-Executive Directors
Peter Clarke
Michael Dawson
Simon Fraser
Samantha Hoe-Richardson1
Robert Lusardi
Sally Williams2
Former Non-Executive Directors
Tom Milligan3
Fee
$
Other
$
Total
$
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
350,000
350,000
175,000
175,000
175,000
175,000
175,000
175,000
175,000
175,000
168,884
–
–
43,750
–
–
–
–
80,000
80,000
63,644
67,099
–
–
–
–
–
–
350,000
350,000
175,000
175,000
255,000
255,000
238,644
242,099
175,000
175,000
168,884
–
–
43,750
1. Samantha Hoe-Richardson’s LUK fees are paid in GBP and converted at the average exchange rate at the time of payment.
2. Sally Williams was appointed on 10 July 2018 as a Non-Executive Director and her appointment took effect on 14 January 2019. Her 2019 fees were proportionally pro-rated
for the year.
3. Tom Milligan retired as a Non-Executive Director effective 31 March 2018. His 2018 fees were proportionally pro-rated for the year and no fees were paid for 2019.
2020 annual bonus payments in respect of 2019 performance
As detailed in the Remuneration Policy, 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% of salary for the Group CEO and Group CFO respectively, and the maximum payable was two times the
target value. The RoE is 14.1%.
Financial performance
75% of the 2019 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%
14.1
162.4% of target payable in
respect of Company performance
In 2019, financial returns were above the target levels. Bonus targets were set at the beginning of 2019 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 162.4% of target as
RoE was 14.1% against a target level of RFRoR +8% and a threshold of RFRoR +6%.
Lancashire Holdings Limited
Annual Report & Accounts 2019
www.lancashiregroup.com
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87
Governance
D I R E C T O R S ’ R E M U N E R A T I O N R E P O R T C O N T I N U E D
D I R E C T O R S ’ R E M U N E R A T I O N R E P O R T C O N T I N U E D
Personal performance
25% of the 2019 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 2019 personal objectives for each Executive Director.
Executive Director
Personal performance
Factors relevant to the Board’s determination for the 2019 performance year
Alex Maloney
Effective leadership and management of the
senior executive team and Group.
Development of the general business strategy.
Contribution aligned to the Lancashire Group values.
Elaine Whelan Effective leadership and management of the
finance function and the Bermuda office.
Development of the general business strategy.
Contribution aligned to the Lancashire Group values.
Delivering a team of employees with strong professional skills
at all levels throughout the Group.
Achieving controlled organic growth in the business during
the year (see pages 16 to 17 for further details).
Global employee engagement survey delivered exceptional results
giving evidence of a healthy corporate culture within the business
(see pages 40 to 43 for further details).
Delivering a team of employees with strong professional skills
at all levels throughout the Group.
Delivering strong leadership of the Group’s investment function
(see pages 68 to 69 for further details).
Material progress made on the IFRS 17 implementation project
(see pages 63 and 112 for further details) which marks an
enhancement to the Group’s IT and finance systems.
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 2019 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.
For the 2019 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. The Board considers the business
to be well positioned for the business opportunities and challenges which lie ahead.
A table of performance measures and total 2019 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
80
80
Total
bonus value1
$
2,077,754
1,426,726
Value of bonus
paid in cash
(75% of
total bonus)
$
Value of bonus
deferred into RSS
awards (25% of
total bonus)1
$
1,558,315
1,070,044
519,439
356,682
1. 25% 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
2021, subject to the Company not being in a closed period. These awards vest on the relevant dates subject to continued employment.
86
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Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
Long-term share awards with performance periods ending in the year – 2017 RSS awards
The 2017 RSS awards were based on a three-year performance period ending on 31 December 2019 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%, 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 2017 RSS awards)
Average annual RoE
(over three years in excess of 13-week Treasury bill rate)
(relevant to 75% of the 2017 RSS awards)
Performance required
% vesting
Performance required (%)
% vesting
Below median
Median
Upper quartile or above
Below median
0
25
100
0
Below 6
6
13 or above
3.5
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
value1
$
Value of shares
including dividend
accrual2
$
286,666
180,441
286,666
180,441
0
0
0
0
0
0
1. 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.
2. The value of the vested shares is based on the 2017 RSS awards which vest at 0% and are based on a three-year performance period that ended on 31 December 2019.
Scheme interests awarded during the year
The table below sets out the performance RSS awards that were granted as nil-cost options on 22 February 2019.
Executive Director
Alex Maloney
Elaine Whelan
Grant date2
22-Feb-2019
22-Feb-2019
Number of awards
granted during
the year
306,915
193,186
Face value
of awards
granted during
the year1,3
$
2,608,388
1,641,836
% 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 £6.54 (a share price of $8.50 based on the exchange rate of 1.2995) 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 2021 and becoming exercisable in the
first open period following the release of the Company’s 2021 year-end results after the meeting of the Board in February 2022.
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 2019 year.
Lancashire Holdings Limited
Annual Report & Accounts 2019
www.lancashiregroup.com
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Governance
D I R E C T O R S ’ R E M U N E R A T I O N R E P O R T C O N T I N U E D
D I R E C T O R S ’ R E M U N E R A T I O N R E P O R T C O N T I N U E D
Details of all outstanding share awards
In addition to awards made during the 2019 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
Alex Maloney,
Group CEO
Total
Elaine Whelan,
Group CFO &
LICL CEO
Performance RSS2,3
Deferred Bonus RSS4
Performance RSS2,3
Deferred Bonus RSS4
Performance RSS3,5
Deferred Bonus RSS4
Performance RSS3,5
Deferred Bonus RSS4
Performance RSS2,3
Deferred Bonus RSS4
Performance RSS2,3
Deferred Bonus RSS4
Performance RSS3,5
Deferred Bonus RSS4
Performance RSS3,5
Deferred Bonus RSS4
Grant date1
18-Feb-16
11-Mar-16
14-Mar-17
14-Mar-17
23-Feb-18
23-Feb-18
22-Feb-19
22-Feb-19
18-Feb-16
11-Mar-16
14-Mar-17
14-Mar-17
23-Feb-18
23-Feb-18
22-Feb-19
22-Feb-19
Exercise
price
Awards
held at
1-Jan-19
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-19
End of
performance
period
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
219,254
18,741
286,666
35,477
315,762
13,090
–
–
–
–
–
–
–
–
306,915
13,968
–
219,254
18,741
–
17,739
–
4,363
–
–
–
–
–
–
–
–
–
–
18,741
– 31-Dec-18
–
–
286,666 31-Dec-19
17,739
17,738
–
315,762 31-Dec-20
4,363
8,727
–
–
306,915 31-Dec-21
13,968
888,990
320,883
40,843
219,254
40,843
949,776
157,104
12,869
180,441
24,361
198,755
9,663
–
–
–
–
–
–
–
–
193,186
9,592
–
157,104
12,869
–
12,181
–
3,221
–
–
–
–
–
–
–
–
–
–
12,869
– 31-Dec-18
–
–
180,441 31-Dec-19
12,181
12,180
–
198,755 31-Dec-20
3,221
6,442
–
–
193,186 31-Dec-21
9,592
Total
583,193
202,778
28,271
157,104
28,271
600,596
1. The market values of the common shares on the dates of grant were:
• 18 February 2016 £6.17
• 23 February 2018 £5.69
• 11 March 2016 £5.37
• 22 February 2019 £6.54
• 14 March 2017 £7.02
2. The vesting of the RSS performance awards above is subject to two performance
conditions as follows:
• 25% 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 92
for a list of comparator companies for each grant year), over a three-year performance period.
25% of this part of the award vests for median performance by the Company, rising to 100%
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% of each award is subject to a performance condition based on average annual RoE
over a three-year performance period. 25% 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 91, 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 91. Between these two points vesting will take place on a straight-line basis from
25% to 100% 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:
• 2016 – 14 February 2019;
• 2017 – 13 February 2020;
• 2018 – first open period following the release of the Company’s 2020 year-end results; and
• 2019 – first open period following the release of the Company’s 2021 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 2016 to 2019 deferred bonus awards,
are as follows:
• 2016 – vest 33.33% per year over a three-year period at the first open period following the release
of the Company’s year-end results for 2016, 2017 and 2018;
• 2017 – vest 33.33% 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;
• 2018 – vest 33.33% 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; and
• 2019 – vest 33.33% per year over a three-year period at the first open period following the release
of the Company’s year-end results for 2019, 2020, and 2021.
5. The vesting of the RSS performance awards above is subject to two performance
conditions as follows:
• 15% of each award is subject to a performance condition measuring the absolute TSR performance
of the Company over a three-year performance period. 25% of this part of the award vests for
threshold performance (8% compound annual growth) by the Company, rising to 100% vesting of
this part of the award for maximum performance (12% compound annual growth) by the Company
or better. Performance between threshold and maximum is determined on a straight-line basis.
• The other 85% 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% 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 91, 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 91. 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 79 of the 2018 Annual
Report and Accounts.
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90
Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
Relative TSR targets for RSS (25% weighting)
100%
25%
Nil
ROE targets for RSS (75% weighting)
100%
25%
Nil
* Average annual growth in FCBVS plus accrued dividends.
Absolute TSR targets for RSS (15% weighting)
100%
25%
Nil
2018*
12%
8%
< 8%
Annual growth in FCBVS plus accrued dividends targets for RSS (85% weighting)
100%
25%
Nil
* See pages 85 and 86 for the vesting methodology to be applied for the 2018 and onwards RSS awards.
2018*
13%
6%
< 6%
2016
2017
75th percentile
= median
< median
75th percentile
= median
< median
2016
RFRoR +15%
RFRoR + 6%
< RFRoR + 6%
2019*
12%
8%
< 8%
2019*
13%
6%
< 6%
2017*
13%
6%
< 6%
2020*
12%
8%
<8%
2020*
13%
6%
<6%
Lancashire Holdings Limited
Annual Report & Accounts 2019
www.lancashiregroup.com
89
91
Governance
D I R E C T O R S ’ R E M U N E R A T I O N R E P O R T C O N T I N U E D
D I R E C T O R S ’ R E M U N E R A T I O N R E P O R T C O N T I N U E D
Historical peer group data for 2017 and prior RSS awards (relative TSR element)
Peer companies10
2016 awards
2017 awards
Arch Capital Group Limited1, 3
Argo Group International Holdings, Ltd.
Aspen Insurance Holdings Limited2
Axis Capital Holdings Limited
Beazley plc
Endurance Specialty Holdings Ltd.3,6
Everest Re Group, Ltd.4
Greenlight Capital Re, Ltd.8
The Hanover Insurance Group5
Hiscox Ltd.
Novae Group plc6,7
Renaissance Re Holdings Ltd.
Third Point Reinsurance Ltd.9
Validus Holdings Ltd.8
XL Group Ltd7,9
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. 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.
2. Apollo Funds announced on 28 August 2018 that it intended to acquire all outstanding common shares of Aspen Insurance Holdings Limited (‘Aspen’). As a result of this acquisition,
Aspen ceased to be in the comparator peer group from 30 June 2018.
3. 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.
4. Everest Re Group, Ltd. was added to the peer group of companies with effect from 1 July 2015 as a replacement for Amlin plc.
5. 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.
6. Novae Group plc was added to the peer group of companies with effect from 1 January 2015 as a replacement for Catlin Group Ltd.
7. 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.
8. American International Group, Inc. announced on 22 January 2018 that it was set 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.
9. 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.
10. For 2018 and onwards RSS awards the Board adopted a range of absolute TSR targets. See page 91 for further details.
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Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
Directors’ shareholdings and share interests
Formal shareholding guidelines were first introduced in 2012 and have subsequently been modified. The guidelines require the Group CEO and Group
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.
Total as at 1 January 2019
As at 31 December 2019
Number of common shares
Legally owned
Subject to deferral
under the RSS
1,546,714
1,210,362
679,308
654,106
40,433
28,214
60,000
11,000
1,000
5,356
8,000
N/A
60,000
15,000
1,000
5,356
8,000
1,422
N/A
N/A
N/A
N/A
N/A
N/A
Subject to
performance
conditions
under the RSS
909,343
572,382
N/A
N/A
N/A
N/A
N/A
N/A
Vested but
unexercised
awards under
other share-
based plans
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Total
1,629,084
1,254,702
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
Directors
Alex Maloney
Elaine Whelan
Peter Clarke
Michael Dawson
Simon Fraser
Samantha Hoe-Richardson
Robert Lusardi
Sally Williams
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.
Lancashire Holdings Limited
Annual Report & Accounts 2019
www.lancashiregroup.com
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Governance
D I R E C T O R S ’ R E M U N E R A T I O N R E P O R T C O N T I N U E D
D I R E C T O R S ’ R E M U N E R A T I O N R E P O R T C O N T I N U E D
Performance graph and total remuneration history for Group CEO
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.
£
500
450
400
350
300
250
200
150
100
50
0
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Lancashire Holdings
FTSE 250 Index
Source: Datastream (Thomson Reuters)
This graph shows the value, by 31 December 2019, 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.
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.
2010
2011
2012
2013
20141
20142
2015
2016
2017
2018
2019
Total remuneration
($000s)
Annual bonus (%)
LTI vesting (%)
9,945
9,623
10,460
10,175
94
99.6
73
100
73
99
80
100
10,072
80
611
2,405
73
50
3,853
3,800
1,943
1,431
3,054
72
75
76
67
17
22.5
19
0
80
0
1. Richard Brindle was the Group 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 Group 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.
The table above shows the total remuneration figure for the former Group CEO during each of the relevant financial years; figures for the current Group
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 Group CEO remuneration
The following table sets out the percentage change in the aggregate value of salary, benefits and bonus for the Group 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
Bonus4
Year-on-year
change
CEO2
%
Average
year-on-year
change employees1,3
%
2
-1
338
15
34
93
1. Employee numbers were calculated on a per permanent employee headcount basis for the years ending 31 December 2019 and 31 December 2018, adjusted for any joiners and leavers
during this period.
2. The underlying salary increase from 2018 to 2019 for the Group CEO was 3%. However some amounts were paid in Sterling and converted at the average exchange rate of 1.2738
for the year, which has resulted in the overall 2% base salary year-on-year change above.
3. The underlying salary increase from 2018 to 2019 for Group employees was a standard 3%. The 15% increase reflects staff promotions and other adjustments made during the year.
4. The year-on-year bonus increase is reflective of the better performance year observed in 2019 compared to the higher than normal catastrophe year of 2018.
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Annual Report & Accounts 2019
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 2019 compared with the year
ended 31 December 2018.
Employee remuneration costs
Dividends
2019
$m
78.5
30.2
2018
$m
56.9
70.2
Percentage change
%
38
-57
The principal factor influencing the year-on-year increase in employee remuneration costs was the improvement in RoE for 2019 to 14.1% from
RoE of 2.4% for 2018.
Committee members, attendees and advice
For Remuneration Committee membership and attendance at meetings through 2019, please refer to page 72 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’). 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 2019 were $81,643 (2018 – $71,334). 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; any matters discussed with shareholders during the year are provided in the Annual Statement for 2019 starting on page 74.
For
Against
Total
Abstentions
Approved by the Board of Directors and signed on behalf of the Board.
Simon Fraser
Chairman of the Remuneration Committee
12 February 2020
Vote to approve 2018 Annual Report
on Remuneration (at the 2019 AGM)
Vote to approve 2017-2019
Remuneration Policy (at the 2017 AGM)
Total number
of votes
% of
votes cast
Total number
of votes
148,941,195
17,672,221
166,613,416
526,656
89.4
10.6
100.0
144,229,951
7,870,777
152,100,728
9,125,993
% of
votes cast
94.8
5.2
100.0
Lancashire Holdings Limited
Annual Report & Accounts 2019
www.lancashiregroup.com
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Governance
D I R E C T O R S ’ R E P O R T
Overview of the Group
LHL 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, the holding company of LSL, and in June 2013 established Kinesis
(now LCM), a third-party capital and underwriting management facility, to complement the Group’s longstanding specialty insurance activities.
An analysis of the Group’s business performance can be found in the business review on pages 24 to 29.
Dividends
During the year ended 31 December 2019, the following dividends were declared:
• a final dividend of $0.10 per common share was declared on 13 February 2019 and paid on 27 March 2019 in pounds sterling at the pound/U.S.
dollar exchange rate of 1.3029 or £0.0768 per common share; and
• an interim dividend of $0.05 per common share was declared on 24 July 2019 and paid on 6 September 2019 in pounds sterling at the pound/
U.S. dollar exchange rate of 1.2091 or £0.0414 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) ordinary dividend, supplemented by special dividends from time-to-time. Dividends will be linked to past performance and future prospects.
Under most scenarios, the annual ordinary 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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Annual Report & Accounts 2019
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Annual Report & Accounts 2019
Directors’ interests
The Directors’ beneficial interests in the Company’s common shares as at 31 December 2019 and 2018, including interests held by family
members, were as follows:
Directors
Peter Clarke
Michael Dawson1
Simon Fraser
Samantha Hoe-Richardson
Robert Lusardi
Alex Maloney2
Elaine Whelan3
Sally Williams4
Common
shares
held as at
31 December
2019
60,000
15,000
1,000
5,356
8,000
679,308
654,106
1,422
Common
shares
held as at
31 December
2018
60,000
11,000
1,000
5,356
8,000
657,724
627,169
N/A
There have been no changes in Directors’ shareholdings between the end of the financial year and the date of this report.
1. Michael Dawson conducted the following transactions in the Company’s shares during 2019:
• 26 July – purchase of 4,000 shares at a price of £7.05 costing £28,200.
2. Includes 155,722 shares owned by his spouse, Amanda Maloney. Alex Maloney conducted the following transactions in the Company’s shares during 2019:
• 2 August – exercise of 40,843 deferred bonus RSS awards and related sale of 19,259 shares to cover tax liabilities, at a price of £7.03 realising £135,390.77.
3. Includes 11,590 shares owned by her spouse, Kilian Whelan. Elaine Whelan conducted the following transactions in the Company’s shares during 2019:
• 20 February – exercise of 28,271 deferred bonus RSS awards and related sale of 1,334 shares to cover tax liabilities, at a price of £6.50 realising £8,671.
4. Sally Williams was appointed to the Board with effect from 14 January 2019 and conducted the following transactions in the Company’s shares during 2019:
• 26 July – purchase of 1,414 shares at a price of £7.09 costing £10,018.19.
• 10 September – acquired 8 shares through an automatic dividend reinvestment scheme at a price of £7.10 costing £56.84.
Transactions in own shares
The Company did not repurchase any of its own common shares during 2019 or 2018.
The Company’s current repurchase programme has 20,194,192 common shares remaining to be purchased as at 31 December 2019
(approximately $205.4 million at the 31 December 2019 share price). Further details of the share repurchase authority and programme
are set out in note 19 to the consolidated financial statements on page 165. The repurchase programme is subject to renewal at the 2020
AGM for an amount of up to 10% of the then issued common share capital.
Directors’ remuneration
Details of the Directors’ remuneration are set out in the Directors’ Remuneration Report on pages 74 to 95.
www.lancashiregroup.com
www.lancashiregroup.com
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GovernanceGovernance D I R E C T O R S ’ R E P O R T C O N T I N U E D
Substantial shareholders
As at 12 February 2020, the Company was aware of the following interests of 3% or more in the Company’s issued share capital:
Name
Invesco Limited
Setanta Asset Management Limited
Merian Global Investors
Frank W Cawood & Associates
Troy Asset Management Limited
Vanguard Group
BlackRock, Inc.
GLG Partners
Dimensional Fund Advisors LP
Number of
shares as at
12 February
2020
31,911,749
27,400,626
11,087,705
9,302,300
8,824,666
8,565,704
8,297,885
7,661,224
7,469,834
% of
shares
in issue
15.72
13.51
5.46
4.58
4.35
4.22
4.09
3.78
3.68
Corporate governance – compliance statement
The Company’s compliance with the Code is summarised in the corporate governance section of this Annual Report and Accounts on pages
48 to 49.
The Board considers, and the Company confirms, in accordance with the principle of ‘comply or explain’ that the Company has applied
the principles and complied with the provisions and guidance set out in the UK Corporate Governance Code throughout the year ended
31 December 2019.
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 of this Annual Report and Accounts on page 44.
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 employment policies are available to all
employees in the staff handbook which is located 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 30 to 32 and in the risk disclosures section on pages
118 to 142 of the consolidated financial statements. The Group’s use of derivative financial instruments can be found on pages 131 to 133.
Accounting standards
The Group’s consolidated financial statements are prepared on a going concern basis in accordance with 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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Annual Report & Accounts 2019
Annual Report & Accounts 2019
Annual Report & Accounts 2019
Annual General Meeting
The Notice of the 2020 AGM, to be held on 29 April 2020 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 24 to 29 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 33 to 39.
Starting on page 118, 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 24 July 2019.
The Board receives quarterly reports from the Group CRO and sets, approves and monitors risk tolerances for the business.
During 2019, 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 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 2022, 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 2022. 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 2020 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:
• 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
12 February 2020
www.lancashiregroup.com
www.lancashiregroup.com
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GovernanceGovernance S T A T E M E N T O F D I R E C T O R S ’ R E S P O N S I B I L I T I E S
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, is 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
12 February 2020
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100
100 Lancashire Holdings Limited
Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
Annual Report & Accounts 2019
I N D E P E N D E N T A U D I T O R ’ S R E P O R T
T O T H E M E M B E R S O F L A N C A S H I R E H O L D I N G S L I M I T E D
F
i
n
a
n
c
i
a
l
s
t
a
t
e
m
e
n
t
s
1. Our opinion is unmodified
We have audited the consolidated financial statements of Lancashire Holdings Limited ("the Group") for the year ended 31 December 2019
which comprise the consolidated statement of comprehensive income , the consolidated balance sheet, the consolidated statement of changes
in shareholders' equity, the statement of consolidated cash flows, and the related notes, including the accounting policies on pages 111 to 117.
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 2019 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
(2019: $874.5m gross, $547.0m net of outwards reinsurance, of which incurred but not reported represented $383.7m gross, $168.2m net of outwards
reinsurance; 2018: $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)
Refer to page 59 (Audit Committee report), page 114 (accounting policy) and pages 158 to 160 (financial disclosures)
Lancashire Holdings Limited
Annual Report & Accounts 2019
www.lancashiregroup.com
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T O T H E M E M B E R S O F L A N C A S H I R E H O L D I N G S L I M I T E D C O N T I N U E D
Risk vs 2018: ◄ ►
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.
These judgemental and complex calculations for insurance liabilities
are also used to derive the valuation of the related reinsurance assets.
In setting the provision for insurance liabilities, an allowance is made
for specific risks. The determination of the allowance is a subjective
judgement 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.
Response
We have used our own actuarial specialists to assist us in performing
our procedures in this area.
Our procedures included:
• Control operation
Evaluating and testing the design and implementation of key controls
around review and approval of reserves as well as the completeness
and accuracy of the data used in the reserving process.
• Methodology assessment
Assessing and challenging the reserving assumptions and methodology
(on a gross basis and net of outwards reinsurance) for reasonableness
and consistency year on year based on our knowledge and understanding
of the reserving policy within the Group. This has also involved comparing
the Group’s reserving methodology with industry practice and
understanding the rationale for key differences.
• Historical experience
Challenging the quality of the Group’s historical reserving estimates
by monitoring the development of losses against initial estimates.
• Independent re-projections
Applying our own assumptions, across all classes of business, to perform
re-projections on the insurance contract liabilities on both a gross and
net basis and comparing these to the Group’s projected results including
any allowance for specific risks. Where there were significant variances
in the results, we have challenged the Group’s assumptions.
• Sector experience and benchmarking of large losses
Assessing and challenging the reserving assumptions by comparing
the Group’s loss experience to peers in the market, on a gross and
net basis, including on a contract by contract basis for large loss
and catastrophe events.
In addition to the procedures above, the audit team performed
the following procedures:
• Data reconciliations
Checking the completeness and accuracy of the data used within the
reserving process by reconciling the actuarial source data to the financial
systems. We have also checked the completeness and accuracy of the
data flow from the claims and policy systems into the financial systems
primarily by performing substantive testing over data reconciliations.
• Assessing transparency
Considering the adequacy of the Group’s disclosures in respect of the
valuation of insurance liabilities
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Annual Report & Accounts 2019
Annual Report & Accounts 2019
T O T H E M E M B E R S O F L A N C A S H I R E H O L D I N G S L I M I T E D C O N T I N U E D
I N D E P E N D E N T A U D I T O R ’ S R E P O R T
The Group maintains reserves to cover the estimated ultimate cost
We have used our own actuarial specialists to assist us in performing
of settling all losses and loss adjustment expenses arising from events
our procedures in this area.
Risk vs 2018: ◄ ►
Risk
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.
These judgemental and complex calculations for insurance liabilities
are also used to derive the valuation of the related reinsurance assets.
In setting the provision for insurance liabilities, an allowance is made
for specific risks. The determination of the allowance is a subjective
judgement 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
Response
Our procedures included:
• Control operation
Evaluating and testing the design and implementation of key controls
around review and approval of reserves as well as the completeness
and accuracy of the data used in the reserving process.
• Methodology assessment
Assessing and challenging the reserving assumptions and methodology
(on a gross basis and net of outwards reinsurance) for reasonableness
and consistency year on year based on our knowledge and understanding
of the reserving policy within the Group. This has also involved comparing
the Group’s reserving methodology with industry practice and
understanding the rationale for key differences.
• Historical experience
Challenging the quality of the Group’s historical reserving estimates
by monitoring the development of losses against initial estimates.
• Independent re-projections
Applying our own assumptions, across all classes of business, to perform
re-projections on the insurance contract liabilities on both a gross and
net basis and comparing these to the Group’s projected results including
any allowance for specific risks. Where there were significant variances
in the results, we have challenged the Group’s assumptions.
• Sector experience and benchmarking of large losses
Assessing and challenging the reserving assumptions by comparing
the Group’s loss experience to peers in the market, on a gross and
net basis, including on a contract by contract basis for large loss
and catastrophe events.
In addition to the procedures above, the audit team performed
the following procedures:
Checking the completeness and accuracy of the data used within the
reserving process by reconciling the actuarial source data to the financial
systems. We have also checked the completeness and accuracy of the
data flow from the claims and policy systems into the financial systems
primarily by performing substantive testing over data reconciliations.
• Assessing transparency
Considering the adequacy of the Group’s disclosures in respect of the
valuation of insurance liabilities
forming judgements over key assumptions, is not complete and accurate
• Data reconciliations
then material impacts on the valuation of insurance liabilities may arise.
Valuation of premiums which are estimated, included in gross premiums written
(2019: $706.7m, 2018: $638.5m) and included in inwards premiums receivable from insureds and cedants (2019: $350.5m, 2018: $318.1m)
Refer to page 59 (Audit Committee report), page 113 (accounting policy) and pages 144 and 145 (financial disclosures)
Response
Our procedures included:
• Control operation
Evaluating and testing the design and implementation of key controls
over the periodic review of premium estimates booked.
• Retrospective analysis
Assessing the Group’s past expertise in making premium estimates
by comparing the estimates and actuals for prior years for a sample
of policies.
• Methodology assessment
Assessing estimated premium income for a sample of policies, including
consideration of the basis of estimation, and consistency in estimation
methodology over time.
• Assessing transparency
Considering the adequacy of the Group’s disclosures in respect of
the valuation of premiums which are estimated.
Risk vs 2018: ◄ ►
Risk
Subjective valuation:
There are adjustments made to gross premiums written to reflect
adjustments to ultimate premium estimates such declarations received
on binding authority contracts, reinstatement premiums on reinsurance
contracts and other routine adjustments to premium income due to
policy amendments.
There is a material proportion of premium which is written through the
Syndicates and UK insurer, pricing for which is based on a best estimate
of ultimate premiums. 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, impacting gross written premiums in the consolidated
statement of comprehensive income and inwards premiums receivable
from insureds and cedants recorded on the consolidated balance sheet.
The effect of these matters is that, as part of our risk assessment, we
determined that the valuation of gross premium written estimates
included within the inwards premiums receivable from insureds and
cedants at the year-end has a high degree of estimation uncertainty,
with a potential range of reasonable outcomes greater than our
materiality for the financial statements as a whole, and possibly
many times that amount.
It should however be noted that it is only a portion of the total gross
premiums written and inwards premiums receivable from insureds
and cedants figures noted above that are subject to this valuation risk.
102
Lancashire Holdings Limited
Annual Report & Accounts 2019
Lancashire Holdings Limited
Annual Report & Accounts 2019
www.lancashiregroup.com
103
103
Financial statements
I N D E P E N D E N T A U D I T O R ’ S R E P O R T
T O T H E M E M B E R S O F L A N C A S H I R E H O L D I N G S L I M I T E D C O N T I N U E D
Valuation of level 3 investments
(2019: $165.5m, 2018: $149.2m)
Refer to page 59 (Audit Committee report), pages 114 and 115 (accounting policy) and pages 152 to 156 (financial disclosures)
Risk vs 2018: ▲
Risk
Subjective valuation:
A proportion of the Group’s investment assets are comprised of
investments in hedge funds and are classified as level 3 investments.
The valuation of these investments are based on hedge fund manager’s
valuation reports. These assets are inherently harder to value due to the
inability to obtain a market price of these assets as at the year-end date.
The effect of these matters is that, as part of our risk assessment, we
determined that valuation of hedge funds has a high degree of estimation
uncertainty, with a potential range of reasonable outcomes greater than
our materiality for the financial statements as a whole, and possibly many
times that amount.
Response
Our procedures included:
• Control operation
Evaluating and testing the design and implementation of the controls
associated with the valuation of level 3 investments.
• Comparing valuations
Obtaining the hedge fund manager’s valuation reports and comparing
the valuations recorded by the Group to assess for any material
valuation differences.
• Benchmarking hedge funds
Understanding the strategy for each hedge fund held by the Group
to identify relevant comparable funds and comparing their valuations
with the hedge funds held by the Group. Where this benchmarking
identifies a material difference we investigate the possible reasons for
differences and assess if any adjustment is required at the year-end.
• Historical accuracy
Retrospectively assessing the historical accuracy of the valuations used
by the Group by comparing interim fund manager valuation reports to
the final year-end reports for prior periods. Where this identifies a material
difference we investigate the possible reasons for differences and assess
if any adjustment is required at the year-end.
• Assessing transparency
Considering the adequacy of the Group’s disclosures in respect of
the valuation of hedge funds.
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 $6.3 million (2018: $5.1 million), determined with reference to a benchmark
of Group gross written premiums (2018: 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 0.9% (2018: 5%). We have changed our benchmark from the prior year as we consider
Group gross written premiums to be the most appropriate benchmark as it provides a more stable measure year on year than Group profit before tax.
We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding $0.32 million (2018: $0.25 million),
in addition to other identified misstatements that warranted reporting on qualitative grounds.
Of the Group’s 9 (2018:9) reporting components, including the parent company, UK insurance company, Bermuda insurance company, UK service
entity and Lloyd’s operations, we subjected 5 (2018:5) to full scope audits for Group purposes. Including the audit of the consolidation adjustments
our scope covered 100% (2018: 100%) 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 $1.6 million to $6.2 million (2018: $0.8 million to $5.0 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 (2018: 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.
104
104 Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
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.
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 99 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.
Lancashire Holdings Limited
Annual Report & Accounts 2019
www.lancashiregroup.com
105
105
Financial statements
I N D E P E N D E N T A U D I T O R ’ S R E P O R T
T O T H E M E M B E R S O F L A N C A S H I R E H O L D I N G S L I M I T E D C O N T I N U E D
C O N S O L I D A T E D S T A T E M E N T O F C O M P R E H E N S I V E I N C O M E
F O R T H E Y E A R E N D E D 3 1 D E C E M B E R 2 0 1 9
6. Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on page 100, 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
12 February 2020
106
106 Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
Gross premiums written
Outwards reinsurance premiums
Net premiums written
Change in unearned premiums
Change in unearned premiums on premiums ceded
Net premiums earned
Net investment income
Net other investment income (losses)
Net realised gains (losses) and impairments
Share of profit (loss) of associate
Other income
Net foreign exchange losses
Total net revenue
Insurance losses and loss adjustment expenses
Insurance losses and loss adjustment expenses recoverable
Net insurance losses
Insurance acquisition expenses
Insurance acquisition expenses ceded
Equity based compensation
Other operating expenses
Total expenses
Results of operating activities
Financing costs
Profit before tax
Tax (charge) credit
Profit for the year
Profit for the year attributable to:
Equity shareholders of LHL
Non-controlling interests
Profit for the year
Other comprehensive income (loss)
Total comprehensive income for the year
Total comprehensive income attributable to:
Equity shareholders of LHL
Non-controlling interests
Total comprehensive income for the year
Earnings per share
Basic
Diluted
Other comprehensive income (loss) to be reclassified to
profit or loss in subsequent periods
Net change in unrealised gains/losses on investments
Tax (charge) credit 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
7
6, 7, 21
8
9
3, 11
11
2019
$m
706.7
(282.0)
424.7
(35.8)
32.8
421.7
37.7
8.0
8.9
5.9
11.4
(1.5)
492.1
264.5
(134.7)
129.8
124.4
(19.0)
9.6
106.0
350.8
141.3
21.8
119.5
(1.3)
118.2
117.9
0.3
118.2
28.6
(0.8)
27.8
146.0
145.7
0.3
146.0
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)
7.9
89.2
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
23
23
$0.59
$0.58
$0.19
$0.19
Lancashire Holdings Limited
Annual Report & Accounts 2019
107
T O T H E M E M B E R S O F L A N C A S H I R E H O L D I N G S L I M I T E D C O N T I N U E D
I N D E P E N D E N T A U D I T O R ’ S R E P O R T
C O N S O L I D A T E D S T A T E M E N T O F C O M P R E H E N S I V E I N C O M E
F O R T H E Y E A R E N D E D 3 1 D E C E M B E R 2 0 1 9
6. Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on page 100, 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
12 February 2020
106
Lancashire Holdings Limited
Annual Report & Accounts 2019
Gross premiums written
Outwards reinsurance premiums
Net premiums written
Change in unearned premiums
Change in unearned premiums on premiums ceded
Net premiums earned
Net investment income
Net other investment income (losses)
Net realised gains (losses) and impairments
Share of profit (loss) of associate
Other income
Net foreign exchange losses
Total net revenue
Insurance losses and loss adjustment expenses
Insurance losses and loss adjustment expenses recoverable
Net insurance losses
Insurance acquisition expenses
Insurance acquisition expenses ceded
Equity based compensation
Other operating expenses
Total expenses
Results of operating activities
Financing costs
Profit before tax
Tax (charge) credit
Profit for the year
Profit for the year attributable to:
Equity shareholders of LHL
Non-controlling interests
Profit for the year
Other comprehensive income (loss) to be reclassified to
profit or loss in subsequent periods
Net change in unrealised gains/losses on investments
Tax (charge) credit on net change in unrealised gains/losses on investments
Other comprehensive income (loss)
Total comprehensive income for the year
Total comprehensive income attributable to:
Equity shareholders of LHL
Non-controlling interests
Total comprehensive income for the year
Earnings per share
Basic
Diluted
Notes
2
2
2
2
3
3
3
16
5
2, 13
2, 13
2, 4
2, 4
7
6, 7, 21
8
9
3, 11
11
2019
$m
706.7
(282.0)
424.7
(35.8)
32.8
421.7
37.7
8.0
8.9
5.9
11.4
(1.5)
492.1
264.5
(134.7)
129.8
124.4
(19.0)
9.6
106.0
350.8
141.3
21.8
119.5
(1.3)
118.2
117.9
0.3
118.2
28.6
(0.8)
27.8
146.0
145.7
0.3
146.0
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)
7.9
89.2
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
23
23
$0.59
$0.58
$0.19
$0.19
Lancashire Holdings Limited
Annual Report & Accounts 2019
www.lancashiregroup.com
107
107
Financial statements
C O N S O L I D A T E D B A L A N C E S H E E T
A S A T 3 1 D E C E M B E R 2 0 1 9
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
Right-of-use assets
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
Lease liabilities
Long-term debt
Total liabilities
Shareholders’ equity
Share capital
Own shares
Other reserves
Accumulated other comprehensive income (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
21
17
13
15
18
21
18
19
19
20
11
24
2019
$m
2018
$m
320.4
7.2
1,525.1
350.5
89.5
327.5
16.9
51.7
108.3
1.2
18.2
81.7
154.5
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
3,052.7
2,859.7
874.5
406.4
27.4
126.6
17.6
47.5
2.4
9.6
1.1
21.9
323.5
915.0
370.6
36.0
81.3
7.1
45.4
0.9
11.2
0.4
–
324.3
1,858.5
1,792.2
101.5
(13.3 )
881.3
13.5
210.6
101.0
(9.4)
869.0
(14.3)
120.9
1,193.6
1,067.2
0.6
1,194.2
3,052.7
0.3
1,067.5
2,859.7
The consolidated financial statements were approved by the Board of Directors on 12 February 2020 and signed on its behalf by:
Peter Clarke
Director/Chairman
Elaine Whelan
Director/CFO
108
108 Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
C O N S O L I D A T E D S T A T E M E N T O F C H A N G E S I N S H A R E H O L D E R S ’ E Q U I T Y
F O R T H E Y E A R E N D E D 3 1 D E C E M B E R 2 0 1 9
Notes
Share
capital
$m
Own
shares
$m
100.7
(12.1)
Other
reserves
$m
866.2
Accumulated
other
comprehensive
income (loss)
$m
Retained
earnings
$m
Shareholders’
equity
attributable
to equity
shareholders
of LHL
$m
Non-
controlling
interests
$m
Total
shareholders’
equity
$m
(1.5)
153.6
1,106.9
0.4
1,107.3
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
Balance as at 31 December 2018
19, 20, 24
19, 20
20
19
20
Initial application of IFRS 16 – Leases
Total comprehensive income for
the year
Shares purchased by the trust
Distributed by the trust
Dividends on common shares
Equity based compensation
19, 20, 24
19, 20
19
20
–
0.3
–
–
–
–
101.0
–
–
0.5
–
–
–
Balance as at 31 December 2019
101.5
(13.3)
–
(4.6)
7.3
–
–
–
–
4.3
(9.9)
(0.1)
–
8.5
(12.8)
–
–
–
–
–
37.5
–
–
–
(70.2 )
–
24.7
–
(2.6 )
(0.1 )
(70.2 )
8.5
(9.4)
869.0
(14.3)
120.9
1,067.2
–
–
–
2.0
2.0
–
(9.3)
5.4
–
–
–
8.8
(6.7)
10.2
881.3
27.8
–
–
–
–
13.5
117.9
–
–
(30.2 )
–
145.7
–
(1.3 )
(30.2 )
10.2
210.6 1,193.6
0.1
–
–
(0.2)
–
–
0.3
–
0.3
–
–
–
–
0.6
24.8
–
(2.6)
(0.3)
(70.2)
8.5
1,067.5
2.0
146.0
–
(1.3)
(30.2)
10.2
1,194.2
Lancashire Holdings Limited
Annual Report & Accounts 2019
www.lancashiregroup.com
109
109
Financial statements
S T A T E M E N T O F C O N S O L I D A T E D C A S H F L O W S
F O R T H E Y E A R E N D E D 3 1 D E C E M B E R 2 0 1 9
Cash flows from (used in) operating activities
Profit before tax
Tax paid
Depreciation
Interest expense on long-term debt
Interest expense on lease liabilities
Interest and dividend income
Net amortisation of fixed maturity securities
Equity based compensation
Foreign exchange losses (gains)
Share of (profit) loss of associate
Net other investment (income) losses
Net realised (gains) losses and impairments
Net unrealised losses (gains) on interest rate swaps
Changes in operational assets and liabilities
– Insurance and reinsurance contracts
– Other assets and liabilities
Net cash flows from (used in) operating activities
Cash flows from (used in) investing activities
Interest and dividends received
Purchase of property, plant and equipment
Purchase of underwriting capacity
Investment in associate
Purchase of investments
Proceeds on sale of investments
Net cash flows from (used in) investing activities
Cash flows used in financing activities
Interest paid
Lease liabilities paid
Dividends paid
Distributions by trust
Purchase of shares from non-controlling interest
Net cash flows used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of exchange rate fluctuations on cash and cash equivalents
Cash and cash equivalents at end of year
110
110 Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
Notes
6, 21
8
21
3
7
16
3
17
24
21
19
10
2019
$m
119.5
(2.1 )
3.9
18.5
1.3
(39.7 )
(1.3 )
9.6
2.5
(5.9 )
(8.8 )
(8.9 )
0.7
(46.0 )
(8.8 )
34.5
41.1
(1.1 )
(0.7 )
(35.3 )
(948.3 )
1,127.7
183.4
(18.5 )
(3.6 )
(30.2 )
(1.3 )
–
(53.6 )
164.3
154.6
1.5
320.4
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
A C C O U N T I N G P O L I C I E S
F O R T H E Y E A R E N D E D 3 1 D E C E M B E R 2 0 1 9
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 IFRS as adopted by the EU. The Directors performed
an assessment of the Group’s ability to continue as a going concern and have a reasonable expectation that the Group has adequate resources to
continue in operational existence for the foreseeable future.
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 on page 112 , that have had a significant effect on amounts recognised in the
consolidated financial statements.
The consolidated balance sheet is presented in order of decreasing liquidity. All amounts, excluding share data or where otherwise stated, are in millions
of U.S. dollars.
CHANGES IN ACCOUNTING STANDARDS
The Group adopted IFRS 16, with an initial date of application of 1 January 2019, using the modified retrospective approach (previously disclosed as the
fully retrospective transition approach in the consolidated financial statements for the year ended 31 December 2018). The cumulative effect of applying
IFRS 16 is recognised as an adjustment against the opening balance in shareholders’ equity as at the date of initial application.
On initial application of IFRS 16, the weighted average discount rate applied to lease liabilities was 5.4%.
Lease liability impact on date of initial application of IFRS 16 – Leases
Operating lease commitment as at 31 December 2018
Discounted using the incremental borrowing rate at 1 January 2019
Recognition exemption for extension and termination options
Operating lease commitment disclosed in 2019 for contracts incepting in 2020
Recognition exemption for short-term leases
Lease liability recognised as at 1 January 2019
$m
41.8
28.9
(5.0)
(4.4)
(0.2)
19.3
For lessees, IFRS 16 removes the distinction between operating and finance leases and requires the recognition of a right-of-use asset and lease liability
at the commencement of all leases, except for short-term leases or low value assets. The Group has made use of the practical expedient to grandfather
the definition of a lease on transition to IFRS 16. Accordingly, the definition of a lease under IAS 17 and IFRIC 4 continues to be applied to leases entered
into or modified before 1 January 2019. The Group previously classified operating leases based on its assessment of whether or not the lease transferred
significantly all of the risk and rewards incidental to ownership of the underlying asset.
The change in definition of a lease under IFRS 16 mainly relates to the concept of control. IFRS 16 determines whether a contract contains a lease on the
basis of whether the Group has the right to control the use of an identified asset, for a period of time, in exchange for consideration. The Group applied
the IFRS 16 definition of a lease and the related guidance to all lease contracts entered into or modified on or after 1 January 2019.
IAS 17 did not require assets and liabilities arising from operating leases to be recognised on the balance sheet but did require disclosure of operating
lease commitments in the notes to the consolidated financial statements.
Applying IFRS 16, the Group:
• Recognises right-of-use assets and lease liabilities in the consolidated balance sheet;
• Recognises depreciation of right-of-use assets and interest expense on lease liabilities in the consolidated statement of comprehensive income; and
• Separates the total amount of cash paid into a principal portion and an interest portion in the consolidated statement of cash flows.
The Group has elected not to recognise right-of-use assets and lease liabilities for short-term leases, which have a lease period of 12 months or less and
low-value assets. The Group recognises these lease payments in other operating expenses within the consolidated statement of comprehensive income
on a straight-line basis over the lease term.
While a number of other amended IFRS standards and IFRIC interpretations have become effective this year, none of these standards have had a material
impact on the Group.
Lancashire Holdings Limited
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Financial statements
A C C O U N T I N G P O L I C I E S C O N T I N U E D
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 likely to
be effective for accounting periods beginning on or after 1 January 2022, following an IASB meeting in December 2019 where a number of changes to
IFRS 17 were agreed. 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
its 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 income (loss) 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. The change in classification from AFS to FVTPL mandatory will result in balances within accumulated
other comprehensive income (loss) being reclassified to retained earnings on the date of transition.
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 114 and also in the risk disclosures section from page 125.
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, specifically “Level (iii)” investments is discussed on pages 114 and 115 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
2019. 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. Similarly, the Group’s proportion of the syndicates’ assets and liabilities have 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 for the period. Adjustments are made to associate accounting policies, where necessary, in order to
be consistent with the Group’s accounting policies.
112
112 Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
A C C O U N T I N G P O L I C I E S C O N T I N U E D
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 likely to
be effective for accounting periods beginning on or after 1 January 2022, following an IASB meeting in December 2019 where a number of changes to
IFRS 17 were agreed. 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
its 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 income (loss) 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. The change in classification from AFS to FVTPL mandatory will result in balances within accumulated
other comprehensive income (loss) being reclassified to retained earnings on the date of transition.
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 114 and also in the risk disclosures section from page 125.
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, specifically “Level (iii)” investments is discussed on pages 114 and 115 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
2019. 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. Similarly, the Group’s proportion of the syndicates’ assets and liabilities have 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
Subsidiaries’ accounting policies are generally consistent with the Group’s accounting policies. Where they differ, adjustments are made on consolidation
each year of account.
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 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 within net foreign exchange losses. 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.
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. Additional syndicate participation rights may be purchased from time to time and
are recorded as the cost at date of auction. 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.
112
Lancashire Holdings Limited
Annual Report & Accounts 2019
Lancashire Holdings Limited
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Financial statements
A C C O U N T I N G P O L I C I E S C O N T I N U E D
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 management’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 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.
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 or 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 designate certain fixed maturity securities
and its private debt fund 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.
Regular way purchases and sales of investments are recognised at estimated fair value including, in the case of investments not carried at FVTPL,
transaction costs attributable to the acquisition of that investment on the trade date and are subsequently carried at estimated fair value. The estimated
fair values of quoted and unquoted investments are determined based on bid prices from recognised exchanges, broker-dealers, recognised indices or
pricing vendors. Unrealised gains and losses from changes in the estimated fair value of AFS investments are included in accumulated other
comprehensive income (loss) in shareholders’ equity. Changes in estimated fair value of investments classified at FVTPL are recognised in the
consolidated statement of comprehensive income within net other investment income (losses).
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Annual Report & Accounts 2019
A C C O U N T I N G P O L I C I E S C O N T I N U E D
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 management’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 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.
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 or 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 designate certain fixed maturity securities
and its private debt fund 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.
hedge fund manager.
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
Regular way purchases and sales of investments are recognised at estimated fair value including, in the case of investments not carried at FVTPL,
transaction costs attributable to the acquisition of that investment on the trade date and are subsequently carried at estimated fair value. The estimated
fair values of quoted and unquoted investments are determined based on bid prices from recognised exchanges, broker-dealers, recognised indices or
pricing vendors. Unrealised gains and losses from changes in the estimated fair value of AFS investments are included in accumulated other
comprehensive income (loss) in shareholders’ equity. Changes in estimated fair value of investments classified at FVTPL are recognised in the
consolidated statement of comprehensive income within net other investment income (losses).
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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 income (loss) in shareholders’ equity
and included in the consolidated statement of comprehensive income as a realised gain or loss within net realised gains (losses) 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
income (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 within net other investment income (losses).
The Group does not currently apply hedge accounting to any derivative contracts. 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.
OF
SERVICES
NATURE
The table below details the type of services from which the Group derives its other income, which are within the scope of IFRS 15, Revenue from
Contracts with Customers and disclosed in note 5.
Services
Nature, timing of satisfaction of performance obligation and significant payment terms
LCM underwriting fees
LCM profit commission
LSL consortium management fees
LSL consortium profit commission
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.
LSL managing agency fees
The Group recognises managing agency fees in line with services provided for each year of account.
Managing agency fees are received quarterly.
LSL managing agency profit
commission
The Group recognises profit commission on open years of account when measurement is highly
probable. Profit commissions are received once the year of account closes.
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Financial statements
A C C O U N T I N G P O L I C I E S C O N T I N U E D
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. Costs for repairs and maintenance are charged to profit or loss as incurred.
LEASES
Policy application prior to 1 January 2019
Rentals payable under operating leases are charged to profit or loss on a straight-line basis over the lease term.
Policy application from 1 January 2019
The Group assesses whether a contract is, or contains, a lease at the inception of a contract for all contracts that have been entered into or modified
on or after 1 January 2019. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of
time in exchange for consideration. The Group recognises a right-of-use asset and a lease liability at the lease commencement date.
The lease liability is initially measured at the present value of the future lease payments at the lease commencement date. Lease payments are
discounted using the rate implicit in the lease, if readily determinable, or the Group’s incremental borrowing rate. Lease payments included in the
measurement of the lease liability comprise:
• Fixed lease payments;
• Variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date; or
• Payments in respect of purchase options, lease termination options or lease extension options that the Group is reasonably certain to exercise.
The lease liability is subsequently measured by increasing the lease carrying amount to reflect the interest due on the lease liability using the effective
interest rate method and by reducing the carrying amount to reflect the lease payments made.
The Group re-measures the lease liability and the related right-of-use asset whenever:
• The lease term changes as a result of the Group changing its assessment of whether it will exercise a purchase, extension or termination option,
in which case the lease liability is re-measured by discounting the revised lease payments using a revised discount rate;
• The lease payments change due to changes in an index or rate or a change in expected payment under a guaranteed residual value, in which case
the lease liability is re-measured by discounting the revised lease payments using the initial discount rate; or
• A lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is re-measured
by discounting the revised lease payments using a revised discount rate.
The right-of-use asset is initially measured at cost, which comprises the initial measurement of the corresponding lease liability adjusted for any lease
payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of any costs to be incurred at expiration
of the lease agreement.
Right-of-use assets are subsequently measured at cost less accumulated depreciation and any impairment losses. Straight-line depreciation is calculated
from the commencement date of the lease to the earlier of either the end date of the lease term or the useful life of the underlying asset.
Both the right-of-use assets and lease liabilities are presented as separate financial statement line items on the consolidated balance sheet.
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A C C O U N T I N G P O L I C I E S C O N T I N U E D
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
Gains and losses on the disposal of property, plant and equipment are determined by comparing proceeds with the carrying amount of the asset, and
are included in the consolidated statement of comprehensive income. Costs for repairs and maintenance are charged to profit or loss as incurred.
of the asset.
LEASES
Rentals payable under operating leases are charged to profit or loss on a straight-line basis over the lease term.
Policy application prior to 1 January 2019
Policy application from 1 January 2019
The Group assesses whether a contract is, or contains, a lease at the inception of a contract for all contracts that have been entered into or modified
on or after 1 January 2019. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of
time in exchange for consideration. The Group recognises a right-of-use asset and a lease liability at the lease commencement date.
The lease liability is initially measured at the present value of the future lease payments at the lease commencement date. Lease payments are
discounted using the rate implicit in the lease, if readily determinable, or the Group’s incremental borrowing rate. Lease payments included in the
measurement of the lease liability comprise:
• Fixed lease payments;
• Variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date; or
• Payments in respect of purchase options, lease termination options or lease extension options that the Group is reasonably certain to exercise.
The lease liability is subsequently measured by increasing the lease carrying amount to reflect the interest due on the lease liability using the effective
interest rate method and by reducing the carrying amount to reflect the lease payments made.
The Group re-measures the lease liability and the related right-of-use asset whenever:
• The lease term changes as a result of the Group changing its assessment of whether it will exercise a purchase, extension or termination option,
in which case the lease liability is re-measured by discounting the revised lease payments using a revised discount rate;
• The lease payments change due to changes in an index or rate or a change in expected payment under a guaranteed residual value, in which case
the lease liability is re-measured by discounting the revised lease payments using the initial discount rate; or
• A lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is re-measured
by discounting the revised lease payments using a revised discount rate.
The right-of-use asset is initially measured at cost, which comprises the initial measurement of the corresponding lease liability adjusted for any lease
payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of any costs to be incurred at expiration
of the lease agreement.
Right-of-use assets are subsequently measured at cost less accumulated depreciation and any impairment losses. Straight-line depreciation is calculated
from the commencement date of the lease to the earlier of either the end date of the lease term or the useful life of the underlying asset.
Both the right-of-use assets and lease liabilities are presented as separate financial statement line items on the consolidated balance sheet.
EMPLOYEE BENEFITS
EQUITY COMPENSATION PLANS
The Group currently operates a 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 in the consolidated statement of comprehensive income,
and a corresponding adjustment is made to other reserves in shareholders’ equity over the remaining vesting period.
On exercise, the differences between the expense charged to the consolidated statement of comprehensive income and the actual cost to the Group,
if any, is transferred to other reserves in shareholders’ equity.
PENSIONS
The Group operates a defined contribution plan. On payment of contributions to the plan there is no further obligation for the Group. Contributions
are recognised as employee benefits in the consolidated statement of comprehensive income in the period when the services are rendered.
TAX
Income tax represents the sum of tax currently payable and any deferred tax. The tax payable is calculated based on taxable profit for the period using tax
rates and tax laws enacted or substantively enacted at the year end reporting date and any adjustments to tax payable in respect of prior periods. Taxable
profit for the period can differ from that reported in the consolidated statement of comprehensive income due to non-taxable income and certain items
which are not tax deductible or which are deferred to subsequent periods.
Deferred tax is recognised on all temporary differences between the carrying value of 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.
The Group determines, based on its tax compliance and transfer pricing study, the probability/certainty of the tax treatments being accepted by the
taxation authorities and accounts for these in line with its determination.
OWN SHARES
Own shares include shares repurchased under share repurchase authorisations and held in treasury, plus shares repurchased and held in trust, for the
purposes of employee equity based compensation schemes. Own shares are deducted from shareholders’ equity. No gain or loss is recognised on the
purchase, sale, cancellation or issue of own shares and any consideration paid or received is recognised directly in equity.
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Financial statements
R I S K D I S C L O S U R E S
For the year ended 31 December 2019
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 a monthly basis, management assesses the modelled potential catastrophe losses against the risk
tolerances and ensures 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 119 to 142.
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Annual Report & Accounts 2019
R I S K D I S C L O S U R E S
For the year ended 31 December 2019
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 a monthly basis, management assesses the modelled potential catastrophe losses against the risk
tolerances and ensures that risk levels are managed in accordance with them.
ECONOMIC CAPITAL MODELS
capital and solvency regulations.
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
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 119 to 142.
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.
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 Lancashire Syndicates segment, are Property, Energy, Aviation and Marine. These classes, plus the Group’s Lancashire Syndicates
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 over-riding business goals that the Board of Directors aims to achieve;
• a detailed business plan is produced annually, which includes expected premiums and combined ratios by class and considers risk-adjusted profitability,
capital usage and requirements. The plan is approved by the Board of Directors and is monitored, reviewed and updated on an ongoing basis;
• for LSL, the syndicates’ business forecasts and business plans are subject to review and approval by Lloyd’s;
• economic capital 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 LSL;
• sophisticated pricing and aggregation models are utilised in certain areas of the underwriting process;
• a number of 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 facultative, excess of loss treaty or proportional treaty basis.
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.
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Financial statements
R I S K D I S C L O S U R E S C O N T I N U E D
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 on a first occurrence return period basis. The exposure
to catastrophe losses that would result in an impairment to the investment in associate is included in the figures below.
As at 31 December 2019
Zones
Gulf of Mexico1
California
Non-Gulf of Mexico – U.S.
Pan-European
Japan
Japan
Pacific North West
1. Landing hurricane from Florida to Texas.
As at 31 December 2018
Zones
Gulf of Mexico1
California
Non-Gulf of Mexico – U.S.
Pan-European
Japan
Japan
Pacific North West
1. Landing hurricane from Florida to Texas.
Perils
Hurricane
Earthquake
Hurricane
Windstorm
Earthquake
Typhoon
Earthquake
Perils
Hurricane
Earthquake
Hurricane
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
139.7
85.2
72.8
59.8
51.3
26.8
12.7
10.3
6.3
5.3
4.4
3.8
2.0
0.9
311.0
161.1
307.8
88.1
165.7
36.4
56.1
22.8
11.8
22.6
6.5
12.2
2.7
4.1
100 year return period
estimated net loss
250 year return period
estimated net loss
$m
% of
tangible capital
$m
% of
tangible capital
163.2
78.0
110.2
70.7
45.0
36.3
22.7
13.2
6.3
8.9
5.7
3.6
2.9
1.8
242.8
129.5
241.6
118.0
81.2
49.1
73.1
19.6
10.5
19.5
9.5
6.6
4.0
5.9
%
29.5
20.3
18.6
8.0
4.5
2.1
1.3
15.7
100.0
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, the models contain loss scenarios which could cause a larger loss to capital than the
modelled expectation from the above return periods.
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
2019
$m
226.2
151.9
109.3
72.7
32.4
15.5
8.3
90.4
706.7
%
32.0
21.5
15.5
10.3
4.5
2.2
1.2
12.8
100.0
2018
$m
188.2
129.8
118.6
51.3
29.0
13.4
8.2
100.0
638.5
1. Worldwide, including the U.S. and Canada, comprises insurance and reinsurance contracts that insure or reinsure risks in more than one geographic area.
2. Worldwide, excluding the U.S. and Canada, comprises insurance and reinsurance contracts that insure or reinsure risks in more than one geographic area, but that specifically exclude
the U.S. and Canada.
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R I S K D I S C L O S U R E S C O N T I N U E D
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 on a first occurrence return period basis. The exposure
to catastrophe losses that would result in an impairment to the investment in associate is included in the figures below.
Details of annual gross premiums written by business segment are provided below:
Lancashire Syndicates
Property
Energy
Aviation
Marine
Total
2019
$m
297.5
223.8
94.9
53.2
37.3
706.7
%
42.1
31.7
13.4
7.5
5.3
100.0
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
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. LANCASHIRE SYNDICATES
Gross premiums written, for the year:
Property reinsurance
Property direct and facultative
Other aviation and satellite
Marine cargo
Energy
Aviation deductible
Terrorism
Total
2019
$m
80.6
71.2
47.9
39.6
33.2
18.5
6.5
2018
$m
82.3
74.4
37.7
31.9
19.0
6.4
5.1
297.5
256.8
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 2019
www.lancashiregroup.com
121
121
100 year return period
estimated net loss
250 year return period
estimated net loss
$m
tangible capital
$m
tangible capital
139.7
10.3
% of
6.3
5.3
4.4
3.8
2.0
0.9
% of
13.2
6.3
8.9
5.7
3.6
2.9
1.8
311.0
161.1
307.8
88.1
165.7
36.4
56.1
242.8
129.5
241.6
118.0
81.2
49.1
73.1
85.2
72.8
59.8
51.3
26.8
12.7
163.2
78.0
110.2
70.7
45.0
36.3
22.7
100 year return period
estimated net loss
250 year return period
estimated net loss
$m
tangible capital
$m
tangible capital
2019
$m
226.2
151.9
109.3
72.7
32.4
15.5
8.3
90.4
706.7
%
32.0
21.5
15.5
10.3
4.5
2.2
1.2
12.8
100.0
2018
$m
188.2
129.8
118.6
51.3
29.0
13.4
8.2
100.0
638.5
% of
22.8
11.8
22.6
6.5
12.2
2.7
4.1
% of
19.6
10.5
19.5
9.5
6.6
4.0
5.9
%
29.5
20.3
18.6
8.0
4.5
2.1
1.3
15.7
100.0
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, the models contain loss scenarios which could cause a larger loss to capital than the
modelled expectation from the above return periods.
Details of annual gross premiums written by geographic area of risks insured are provided below:
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
As at 31 December 2019
Zones
Gulf of Mexico1
California
Non-Gulf of Mexico – U.S.
Pan-European
Japan
Japan
Pacific North West
1. Landing hurricane from Florida to Texas.
As at 31 December 2018
Zones
Gulf of Mexico1
California
Non-Gulf of Mexico – U.S.
Pan-European
Japan
Japan
Pacific North West
1. Landing hurricane from Florida to Texas.
Perils
Hurricane
Earthquake
Hurricane
Windstorm
Earthquake
Typhoon
Earthquake
Perils
Hurricane
Earthquake
Hurricane
Windstorm
Earthquake
Typhoon
Earthquake
Worldwide, including the U.S. and Canada1
Worldwide, excluding the U.S. and Canada2
U.S. and Canada
Worldwide offshore
Europe
Far East
Middle East
Rest of world
Total
the U.S. and Canada.
120
Lancashire Holdings Limited
Annual Report & Accounts 2019
Financial statements
R I S K D I S C L O S U R E S C O N T I N U E D
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 yards 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 retrocession
Property risk excess of loss
Other property
Total
2019
$m
109.1
33.5
33.1
15.8
13.8
18.5
223.8
2018
$m
103.7
41.3
35.4
10.0
15.0
9.2
214.6
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 retrocession is written on an excess of loss basis through treaty arrangements and covers elemental risks. Cover may be on a worldwide
or regional basis and may cover specific risks or all catastrophe perils. Coverage may be given on a UNL basis, meaning that loss payments are linked
directly to the ceding company’s own loss, or on an ILW basis, meaning that loss payments are linked to the overall industry insured loss as measured
by independent third-party loss index providers.
Property risk excess of loss is written on an excess of loss basis through UNL treaty arrangements, predominantly covering fire and allied perils in addition
to natural catastrophe exposure. The portfolio is written on a worldwide basis, with particular focus on the U.S. market.
122
122 Lancashire Holdings Limited
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Annual Report & Accounts 2019
Annual Report & Accounts 2019
R I S K D I S C L O S U R E S C O N T I N U E D
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 yards 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 retrocession
Property risk excess of loss
Other property
Total
2019
$m
109.1
33.5
33.1
15.8
13.8
18.5
2018
$m
103.7
41.3
35.4
10.0
15.0
9.2
223.8
214.6
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 retrocession is written on an excess of loss basis through treaty arrangements and covers elemental risks. Cover may be on a worldwide
or regional basis and may cover specific risks or all catastrophe perils. Coverage may be given on a UNL basis, meaning that loss payments are linked
directly to the ceding company’s own loss, or on an ILW basis, meaning that loss payments are linked to the overall industry insured loss as measured
by independent third-party loss index providers.
Property risk excess of loss is written on an excess of loss basis through UNL treaty arrangements, predominantly covering fire and allied perils in addition
to natural catastrophe exposure. The portfolio is written on a worldwide basis, with particular focus on the U.S. market.
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 119 and 120.
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 proportional treaty arrangements may be entered into.
III. ENERGY
Gross premiums written, for the year:
Worldwide offshore energy
Onshore energy
Gulf of Mexico offshore energy
Energy liabilities
Construction energy
Other energy
Total
2019
$m
55.5
21.1
6.0
3.3
2.7
6.3
94.9
2018
$m
63.8
14.6
10.6
3.1
4.1
6.8
103.0
Energy risks are written mostly on a direct basis and may be ground-up or for primary or excess layers on either a first loss or full value basis. Worldwide
offshore energy policies are typically package policies which may include physical damage, business interruption and third-party liability sections.
Coverage can include fire and explosion and elemental risks. Individual assets covered can be high value and are therefore mostly written on a
subscription basis, meaning that coverage is placed with multiple risk carriers.
Onshore energy risks are generally those with an operational hydrocarbon risk – either processing and/or storage and/or transmission – and may
also include the production of chemicals and intermediates. Policies typically cover property for physical damage (including natural catastrophe)
and machinery breakdown perils plus consequential business interruption exposure and may be written on a proportional or excess of loss basis, often
with loss limits set at a level commensurate with a modelled estimated maximum loss scenario. The portfolio encompasses a global spread of accounts.
Critical natural catastrophe coverage is usually sub-limited, with underwriting assessment employing industry-accepted modelling tools to assess this
exposure where possible. The sector provides cover for operational assets, albeit some construction risk is covered where it is not deemed the policy’s
primary exposure. Third-party liabilities are not covered except where required under legislation for small sub-limited property damage.
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 119 and 120.
The Group writes energy liability business on a stand-alone basis. Unlike the liability contained within the energy packages that Lancashire writes,
stand-alone energy liability is written on an excess of loss basis only. Coverage is worldwide and provides coverage for all kinds of damages and loss
to third parties. Coverage is generally restricted to offshore assets.
Construction energy contracts generally cover all risks of platform and drilling units under construction at yards and offshore, during towing and
installation. Onshore construction contracts are generally not written.
Reinsurance protection may be purchased to protect a portion of loss from elemental and non-elemental energy claims, and from the accumulation
of smaller, attritional losses. Reinsurance is typically purchased on an excess of loss basis but, from time to time, proportional treaty arrangements
may be entered into. Reinsurance may be purchased on a facultative or treaty basis.
122
Lancashire Holdings Limited
Annual Report & Accounts 2019
Lancashire Holdings Limited
Annual Report & Accounts 2019
www.lancashiregroup.com
123
123
Financial statements
R I S K D I S C L O S U R E S C O N T I N U E D
IV. AVIATION
Gross premiums written, for the year:
Aviation deductible
AV52
Other aviation
Total
2019
$m
33.0
16.1
4.1
53.2
2018
$m
11.1
19.4
2.5
33.0
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.
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.
Other aviation includes airlines hull and liability and satellite lines of business.
Reinsurance may be purchased to mitigate exposures to an AV52 event loss. Reinsurance is typically purchased on a treaty excess of loss basis.
Proportional treaty 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 builders’ risk
Marine P&I clubs
Marine hull war
Marine excess of loss
Other marine
Total
2019
$m
12.3
10.7
8.2
3.6
(0.3 )
2.8
37.3
2018
$m
14.0
6.0
7.3
5.5
(3.9)
2.2
31.1
With the exception of the marine P&I clubs, where excess layers are written, most policies are written on a ground-up basis. Marine hull and total loss is
generally written on a direct basis and covers marine risks on a worldwide basis, primarily for physical damage. Marine builders’ risk covers the building of
ocean-going vessels in specialised yards worldwide and their testing and commissioning. Marine P&I clubs is mostly the reinsurance of the International Group
of Protection and Indemnity Clubs and covers marine liabilities. Marine hull war is mostly direct insurance of the 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 losses that may arise
from events that could cause unfavourable underwriting results 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 proportional treaty 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 reinsurance
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.
124
124 Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
R I S K D I S C L O S U R E S C O N T I N U E D
2019
$m
33.0
16.1
4.1
53.2
2019
$m
12.3
10.7
8.2
3.6
(0.3 )
2.8
37.3
2018
$m
11.1
19.4
2.5
33.0
2018
$m
14.0
6.0
7.3
5.5
(3.9)
2.2
31.1
IV. AVIATION
Gross premiums written, for the year:
Aviation deductible
Other aviation
AV52
Total
V. MARINE
Gross premiums written, for the year:
Marine hull and total loss
Marine builders’ risk
Marine P&I clubs
Marine hull war
Marine excess of loss
Other marine
Total
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.
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.
Other aviation includes airlines hull and liability and satellite lines of business.
Reinsurance may be purchased to mitigate exposures to an AV52 event loss. Reinsurance is typically purchased on a treaty excess of loss basis.
Proportional treaty reinsurance is typically used to reduce the Group’s exposure to aviation deductible business.
With the exception of the marine P&I clubs, where excess layers are written, most policies are written on a ground-up basis. Marine hull and total loss is
generally written on a direct basis and covers marine risks on a worldwide basis, primarily for physical damage. Marine builders’ risk covers the building of
ocean-going vessels in specialised yards worldwide and their testing and commissioning. Marine P&I clubs is mostly the reinsurance of the International Group
of Protection and Indemnity Clubs and covers marine liabilities. Marine hull war is mostly direct insurance of the 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
Reinsurance may be purchased to reduce the Group’s exposure to both large risk losses and an accumulation of smaller, attritional losses. Reinsurance
perils and to the costs for removal of wrecks.
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 losses that may arise
from events that could cause unfavourable underwriting results 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 proportional treaty 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 reinsurance
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.
124
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Annual Report & Accounts 2019
INSURANCE LIABILITIES
For most insurance and reinsurance companies, the most significant judgement made by management is the estimation of losses and loss adjustment
expenses. The estimation of the ultimate liability arising from claims made under insurance and reinsurance contracts is a critical estimate for the Group,
particularly given the nature of the business written.
Under GAAP, loss reserves are not permitted until the occurrence of an event which may give rise to a claim. As a result, only loss reserves applicable
to losses incurred up to the reporting date are established, with no allowance for the provision of a contingency reserve to account for expected future
losses or for the emergence of new types of latent claims. Claims arising from future events can be expected to require the establishment of substantial
reserves from time to time. All of the Group’s reserves are reported on an undiscounted basis.
Losses and loss adjustment expense reserves are maintained to cover the Group’s estimated liability for both reported and unreported claims. Reserving
methodologies that calculate a point estimate for the ultimate losses are utilised. 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,
their development and 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 is 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 across many of our classes 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 time lag.
UNCERTAINTY
As a result of the time lag described above, an estimate must be made of IBNR reserves, which consists 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 2019
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125
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Financial statements
R I S K D I S C L O S U R E S C O N T I N U E D
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 2019, management’s estimates for IBNR represented $168.2 million or 30.9% of total net loss reserves (31 December 2018 –
$233.0 million or 39.3%). The majority of the estimate relates to catastrophe events from 2017-2019, 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.
ii.
Insurance risk;
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 exit from the EU and the implications for ongoing 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 LSL;
• reviews outputs from the economic capital models to assess up-to-date profitability of classes and sectors;
• holds a fortnightly RRC meeting to discuss risk and reinsurance;
• holds a quarterly Underwriting and Underwriting Risk Committee meeting to review underwriting strategy; 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.
126
126 Lancashire Holdings Limited
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Annual Report & Accounts 2019
Annual Report & Accounts 2019
sheet date.
B. MARKET RISK
i.
ii.
Insurance risk;
Investment risk;
iii. Debt risk; and
iv. Currency risk.
I. INSURANCE RISK
lines, or across all lines;
R I S K D I S C L O S U R E S C O N T I N U E D
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 2019, management’s estimates for IBNR represented $168.2 million or 30.9% of total net loss reserves (31 December 2018 –
$233.0 million or 39.3%). The majority of the estimate relates to catastrophe events from 2017-2019, 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
The Group is at risk of loss due to movements in market factors. The main risks include:
These risks, and the management thereof, are described below.
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
• 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 exit from the EU and the implications for ongoing 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 LSL;
• reviews outputs from the economic capital models to assess up-to-date profitability of classes and sectors;
• holds a fortnightly RRC meeting to discuss risk and reinsurance;
• holds a quarterly Underwriting and Underwriting Risk Committee meeting to review underwriting strategy; 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.
II. INVESTMENT RISK
Movements in investments resulting from changes in interest and inflation rates and currency exchange rates, amongst other factors, may lead to an
adverse impact on the value of the Group’s investment portfolio. Investment guidelines are established by the Investment Committee of the Board of
Directors to manage this risk. Investment guidelines set parameters within which the Group’s external investment managers must operate. Important
parameters include guidelines on permissible asset classes, duration ranges, credit quality, currency, maturity, sectors, geographical, sovereign and issuer
exposures. Compliance with guidelines is monitored on a monthly basis. Any adjustments to the investment guidelines are approved by the Investment
Committee and the Board of Directors.
The Group’s fixed maturity portfolios are managed by four external investment managers. The Group also has a diversified low volatility multi-strategy
portfolio of hedge funds, a principal protected equity linked note, a credit funds and note and a private debt fund. 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, a private debt fund and hedge
funds. In general, the duration of the surplus portfolio is slightly longer than the core or core plus portfolios.
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.
126
Lancashire Holdings Limited
Annual Report & Accounts 2019
Lancashire Holdings Limited
Annual Report & Accounts 2019
www.lancashiregroup.com
127
127
Financial statements
R I S K D I S C L O S U R E S C O N T I N U E D
The investment mix of the fixed maturity portfolios is as follows:
Core
Core plus
Surplus
As at 31 December 2019
– 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
– Bank loans
– Corporate bonds
Total fixed maturity securities – AFS
Fixed maturity securities – at FVTPL
Total fixed maturity securities
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
$m
37.7
12.8
80.1
15.0
2.2
2.8
3.5
16.0
0.1
–
–
186.7
356.9
–
356.9
%
$m
%
$m
2.8
0.9
5.9
1.1
0.2
0.2
0.3
1.2
–
–
–
13.7
26.3
–
26.3
43.0
–
74.1
23.3
6.2
37.5
65.3
17.2
13.8
1.2
–
371.2
652.8
–
652.8
3.2
–
5.4
1.7
0.5
2.8
4.8
1.3
1.0
0.1
–
27.3
48.1
–
48.1
4.1
–
7.4
9.2
–
20.4
56.2
64.3
1.5
1.0
101.7
34.3
300.1
50.3
350.4
Core
Core plus
Surplus
$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
%
$m
%
$m
3.2
0.8
4.7
1.0
0.1
0.9
1.1
0.3
0.3
–
–
–
13.5
25.9
–
25.9
175.6
–
113.1
29.5
4.4
69.6
62.2
15.0
10.4
1.9
–
–
277.9
759.6
–
759.6
11.8
–
7.6
2.0
0.3
4.7
4.2
1.0
0.7
0.1
–
–
18.7
51.1
–
51.1
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
%
0.3
–
0.5
0.7
–
1.5
4.1
4.7
0.1
0.1
7.5
2.5
Total
$m
84.8
12.8
161.6
47.5
8.4
60.7
125.0
97.5
15.4
2.2
101.7
592.2
22.0
1,309.8
3.6
50.3
%
6.3
0.9
11.8
3.5
0.7
4.5
9.2
7.2
1.1
0.2
7.5
43.5
96.4
3.6
25.6
1,360.1
100.0
%
0.1
–
0.3
0.9
–
0.4
3.4
4.0
0.5
Total
$m
225.5
11.4
186.6
58.7
5.4
88.1
129.3
79.9
21.1
0.2
5.2
–
7.3
2.9
0.5
109.1
521.6
20.0
1,442.4
3.0
45.0
%
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
23.0
1,487.4
100.0
128
128 Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
R I S K D I S C L O S U R E S C O N T I N U E D
Core
Core plus
Surplus
Total
$m
Total fixed maturity securities
356.9
26.3
652.8
25.6
1,360.1
100.0
As at 31 December 2019
– 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
– Bank loans
– Corporate bonds
Total fixed maturity securities – AFS
Fixed maturity securities – at FVTPL
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
$m
37.7
12.8
80.1
15.0
2.2
2.8
3.5
16.0
0.1
–
–
186.7
356.9
–
$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
–
%
2.8
0.9
5.9
1.1
0.2
0.2
0.3
1.2
–
–
–
–
13.7
26.3
%
3.2
0.8
4.7
1.0
0.1
0.9
1.1
0.3
0.3
–
–
–
–
13.5
25.9
$m
43.0
–
74.1
23.3
6.2
37.5
65.3
17.2
13.8
1.2
–
371.2
652.8
–
$m
175.6
–
113.1
29.5
4.4
69.6
62.2
15.0
10.4
1.9
–
–
–
277.9
759.6
%
3.2
–
5.4
1.7
0.5
2.8
4.8
1.3
1.0
0.1
–
27.3
48.1
–
48.1
%
11.8
–
7.6
2.0
0.3
4.7
4.2
1.0
0.7
0.1
–
–
–
18.7
51.1
$m
4.1
–
7.4
9.2
–
20.4
56.2
64.3
1.5
1.0
101.7
34.3
300.1
50.3
350.4
$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
22.0
1,309.8
3.6
50.3
Total
$m
%
0.3
–
0.5
0.7
–
1.5
4.1
4.7
0.1
0.1
7.5
2.5
%
0.1
–
0.3
0.9
–
0.4
3.4
4.0
0.5
0.2
–
7.3
2.9
84.8
12.8
161.6
47.5
8.4
60.7
125.0
97.5
15.4
2.2
101.7
592.2
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
20.0
1,442.4
3.0
45.0
%
6.3
0.9
11.8
3.5
0.7
4.5
9.2
7.2
1.1
0.2
7.5
43.5
96.4
3.6
%
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
Total fixed maturity securities
384.7
25.9
759.6
51.1
23.0
1,487.4
100.0
128
Lancashire Holdings Limited
Annual Report & Accounts 2019
The investment mix of the fixed maturity portfolios is as follows:
Bank loans, corporate bonds, fixed maturity securities at FVTPL and other government bonds by country are as follows:
As at 31 December 2019
United States
United Kingdom
Canada
France
Japan
Netherlands
Switzerland
Sweden
Spain
Germany
Italy
Australia
Supranational
Luxembourg
China
Other
Total
Financials
$m
Other
industries
$m
185.9
41.8
17.3
15.5
10.7
5.8
9.6
5.7
9.4
1.3
4.7
8.3
7.2
–
1.7
5.8
330.7
325.6
21.2
8.7
11.4
13.4
5.6
5.5
–
–
5.1
3.8
–
–
7.0
1.2
5.0
413.5
Core
Core plus
Surplus
Includes bank loans, corporate bonds and fixed maturity securities at FVTPL.
1.
2. Includes bank loans, corporate bonds, fixed maturity securities at FVTPL and other government bonds.
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
Includes bank loans, corporate bonds and fixed maturity securities at FVTPL.
1.
2. Includes bank loans, corporate bonds, fixed maturity securities at FVTPL and other government bonds.
Total1
$m
511.5
63.0
26.0
26.9
24.1
11.4
15.1
5.7
9.4
6.4
8.5
8.3
7.2
7.0
2.9
10.8
744.2
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
Other
government
bonds
$m
–
5.6
20.6
0.6
–
6.9
–
5.0
–
3.0
–
–
–
–
1.2
4.6
47.5
Other
government
bonds
$m
–
0.1
19.8
–
7.2
1.8
–
7.5
–
6.1
3.4
–
–
–
0.5
12.3
58.7
Total2
$m
511.5
68.6
46.6
27.5
24.1
18.3
15.1
10.7
9.4
9.4
8.5
8.3
7.2
7.0
4.1
15.4
791.7
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
Lancashire Holdings Limited
Annual Report & Accounts 2019
www.lancashiregroup.com
129
129
Financial statements
R I S K D I S C L O S U R E S C O N T I N U E D
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
2019
$m
390.4
323.5
23.1
7.2
744.2
%
52.5
43.5
3.1
0.9
100.0
2018
$m
344.8
293.0
30.9
7.0
675.7
%
51.0
43.4
4.6
1.0
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, the 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 an equity linked note and has invested in a private debt fund. 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)
2019
$m
(26.8)
(20.1)
(13.4)
(6.7)
7.5
15.0
22.5
29.9
%
(2.0 )
(1.5 )
(1.0 )
(0.5 )
0.5
1.1
1.6
2.2
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
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.
2019
years
1.9
1.9
2.0
1.9
2018
years
1.8
1.7
1.3
1.6
The overall duration for fixed maturity, internally and externally managed cash and cash equivalents and certain derivatives is 1.8 years (2018 – 1.5 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.
130
130 Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
R I S K D I S C L O S U R E S C O N T I N U E D
As at 31 December
Industrial
Financial
Utility
Supranationals
Total
2019
$m
390.4
323.5
23.1
7.2
744.2
%
52.5
43.5
3.1
0.9
100.0
2018
$m
344.8
293.0
30.9
7.0
675.7
%
51.0
43.4
4.6
1.0
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, the 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 an equity linked note and has invested in a private debt fund. 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:
2019
$m
(26.8)
(20.1)
(13.4)
(6.7)
7.5
15.0
22.5
29.9
%
(2.0 )
(1.5 )
(1.0 )
(0.5 )
0.5
1.1
1.6
2.2
2018
$m
(22.4 )
(16.8 )
(11.2 )
(5.6 )
6.4
12.7
19.1
25.5
2019
years
1.9
1.9
2.0
1.9
%
(1.5)
(1.1)
(0.8)
(0.4)
0.4
0.9
1.3
1.7
2018
years
1.8
1.7
1.3
1.6
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,
The overall duration for fixed maturity, internally and externally managed cash and cash equivalents and certain derivatives is 1.8 years (2018 – 1.5 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.
As at 31 December
Immediate shift in yield (basis points)
100
75
50
25
(25)
(50)
(75)
(100)
are as follows:
As at 31 December
Core portfolio
Core plus portfolio
Surplus portfolio1
Overall external portfolio1
1.
Including duration overlay.
130
Lancashire Holdings Limited
Annual Report & Accounts 2019
The sector allocation of bank loans, corporate bonds and fixed maturity securities at FVTPL is as follows:
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% 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.
2019
2018
$m
32.2
% of shareholders’
equity
2.7
$m
26.0
% 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 are as follows:
As at 31 December 2019
Interest rate futures
Forward foreign currency contracts
Interest rate swaps
Total
As at 31 December 2018
Interest rate futures
Forward foreign currency contracts
Interest rate swaps
Total
Net realised
gains
$m
Net foreign
exchange
gains
$m
0.1
–
–
0.1
Net realised
losses
$m
(1.0 )
–
–
(1.0 )
–
0.4
–
0.4
Net foreign
exchange
gains
$m
–
1.6
–
1.6
Financing
losses
$m
–
–
(1.0)
(1.0)
Financing
gains
$m
–
–
0.9
0.9
Lancashire Holdings Limited
Annual Report & Accounts 2019
www.lancashiregroup.com
131
131
Financial statements
R I S K D I S C L O S U R E S C O N T I N U E D
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
2019
2018
Other
investments
$m
Other
receivables
$m
(0.5 )
–
(0.5 )
1.4
–
1.4
Other
payables
$m
(0.6)
–
(0.6)
Interest
rate swaps
$m
Other
investments
$m
Other
receivables
$m
–
(1.1)
(1.1)
(0.3)
–
(0.3)
1.1
–
1.1
Other
payables
$m
(1.0)
–
(1.0)
Interest
rate swaps
$m
–
(0.4)
(0.4)
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
107.2
107.2
2019
Notional
short
$m
15.4
15.4
Net notional
long (short)
$m
91.8
91.8
Notional
long
$m
69.1
69.1
2018
Notional
short
$m
94.1
94.1
Net notional
long (short)
$m
(25.0)
(25.0)
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 2019 and 2018.
The investment guidelines also restrict the maximum notional options exposure as a percentage of the investment portfolio’s estimated fair value.
132
132 Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
R I S K D I S C L O S U R E S C O N T I N U E D
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
A. FUTURES
investments
receivables
Interest
rate swaps
Other
investments
Other
receivables
Other
$m
(0.5 )
–
(0.5 )
2019
Other
$m
1.4
–
1.4
Other
payables
$m
(0.6)
–
(0.6)
$m
–
(1.1)
(1.1)
$m
(0.3)
–
(0.3)
2018
$m
1.1
–
1.1
Other
payables
$m
(1.0)
–
(1.0)
Interest
rate swaps
$m
–
(0.4)
(0.4)
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:
Notional
long
$m
107.2
107.2
2019
Notional
short
$m
15.4
15.4
Net notional
long (short)
$m
91.8
91.8
Notional
long
$m
69.1
69.1
2018
Notional
short
$m
94.1
94.1
Net notional
long (short)
$m
(25.0)
(25.0)
As at 31 December
Interest rate futures
Total
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 2019 and 2018.
The investment guidelines also restrict the maximum notional options exposure as a percentage of the investment portfolio’s estimated fair value.
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
–
–
–
–
–
0.4
3.9
69.2
73.5
2019
Notional
short
$m
Net notional
long (short)
$m
Notional
long
$m
2018
Notional
short
$m
Net notional
long (short)
$m
20.7
27.0
5.1
7.1
2.7
–
–
1.8
64.4
(20.7)
(27.0)
(5.1)
(7.1)
(2.7)
0.4
3.9
67.4
9.1
–
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
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 2019 and 2018. 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 2019 the notional amount of interest rate swaps held
for hedging purposes was $123.9 million (31 December 2018 – $124.5 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 2019 or 31 December 2018.
132
Lancashire Holdings Limited
Annual Report & Accounts 2019
Lancashire Holdings Limited
Annual Report & Accounts 2019
www.lancashiregroup.com
133
133
Financial statements
R I S K D I S C L O S U R E S C O N T I N U E D
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%. 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 Group has a fixed interest rate of 5.80% on the LHL subordinated loan notes due in 2035, until 15 December 2020, when the interest rate swaps expires.
The senior unsecured notes maturing 1 October 2022 bear interest at a fixed rate of 5.70% 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 CCHL’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.
The FCA has announced that it will no longer publish the LIBOR benchmark interest rate from 2021. LIBOR is used as a reference rate in some of the
Group’s long-term debt and financing arrangements (see note 18). The Group has determined that it currently has limited exposure to the transition
from LIBOR and will continue to monitor the risks and challenges of a potential replacement of LIBOR.
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 133 for a listing of the Group’s open forward foreign currency contracts.
134
134 Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
III. DEBT RISK
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
Right-of-use assets
Deferred acquisition costs
Intangible assets
U.S.$
$m
242.9
7.0
1,415.3
276.5
362.8
40.8
108.3
0.4
3.6
57.8
153.8
Sterling
$m
14.3
0.1
18.1
22.4
40.3
10.7
–
0.8
14.6
5.2
0.7
Euro
$m
29.4
0.1
60.5
37.0
26.0
0.1
–
–
–
13.2
–
Japanese Yen
$m
5.4
–
3.4
2.0
1.8
–
–
–
–
1.0
–
Total assets as at 31 December 2019
2,669.2
127.2
166.3
13.6
R I S K D I S C L O S U R E S C O N T I N U E D
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%. 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:
Maturity date
Interest hedged
15 December 2035
15 June 2035
100%
100%
The Group has a fixed interest rate of 5.80% on the LHL subordinated loan notes due in 2035, until 15 December 2020, when the interest rate swaps expires.
The senior unsecured notes maturing 1 October 2022 bear interest at a fixed rate of 5.70% and therefore the Group is not exposed to cash flow interest
The Group is subject to interest rate risk on the coupon payments on CCHL’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
The FCA has announced that it will no longer publish the LIBOR benchmark interest rate from 2021. LIBOR is used as a reference rate in some of the
Group’s long-term debt and financing arrangements (see note 18). The Group has determined that it currently has limited exposure to the transition
from LIBOR and will continue to monitor the risks and challenges of a potential replacement of LIBOR.
Subordinated loan notes $97.0 million
Subordinated loan notes €24.0 million
rate risk on this long-term debt.
$0.7 million on an annual basis.
IV. CURRENCY RISK
denominated in U.S. dollars.
The Group underwrites from two locations, Bermuda and London, although risks are assumed on a worldwide basis. Risks assumed are predominantly
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 133 for a listing of the Group’s open forward foreign currency contracts.
Sterling
$m
Euro
$m
Japanese Yen
$m
Liabilities
Losses and loss adjustment expenses
Unearned premiums
Insurance contracts – other payables
Amounts payable to reinsurers
Deferred acquisition costs ceded
Other payables
Corporation tax payable
Deferred tax liability
Interest rate swap
Lease liabilities
Long-term debt
U.S.$
$m
670.7
299.5
22.1
93.5
12.3
16.7
–
7.8
0.4
3.7
284.4
92.3
22.9
2.7
10.2
0.2
30.7
2.4
1.8
–
18.2
–
54.7
53.6
1.2
18.7
4.6
–
–
–
0.7
–
39.1
22.8
8.3
–
2.2
0.1
–
–
–
–
–
–
33.4
Total liabilities as at 31 December 2019
1,411.1
181.4
172.6
Other
$m
28.4
–
27.8
12.6
3.0
0.1
–
–
–
4.5
–
76.4
Other
$m
34.0
22.1
1.4
2.0
0.4
0.1
–
–
–
–
–
60.0
Total
$m
320.4
7.2
1,525.1
350.5
433.9
51.7
108.3
1.2
18.2
81.7
154.5
3,052.7
Total
$m
874.5
406.4
27.4
126.6
17.6
47.5
2.4
9.6
1.1
21.9
323.5
1,858.5
134
Lancashire Holdings Limited
Annual Report & Accounts 2019
Lancashire Holdings Limited
Annual Report & Accounts 2019
www.lancashiregroup.com
135
135
Financial statements
R I S K D I S C L O S U R E S C O N T I N U E D
Assets
Cash and cash equivalents
Accrued interest receivable
Investments
Inwards premiums receivable from insureds and
cedants
Reinsurance assets
Other receivables
Investment in associate
Property, plant and equipment
Deferred acquisition costs
Intangible assets
U.S.$
$m
86.0
6.6
1,546.0
270.9
361.1
26.7
67.1
0.2
48.4
153.8
Total assets as at 31 December 2018
2,566.8
Liabilities
Losses and loss adjustment expenses
Unearned premiums
Insurance contracts – other payables
Amounts payable to reinsurers
Deferred acquisition costs ceded
Other payables
Corporation tax payable
Deferred tax liability
Interest rate swap
Long-term debt
U.S.$
$m
685.4
265.8
26.9
75.8
4.7
23.9
–
7.8
(0.8)
284.4
Sterling
$m
15.2
0.1
18.0
11.2
13.6
8.2
–
1.2
8.0
–
75.5
Euro
$m
19.4
0.1
69.8
20.6
12.1
–
–
–
11.6
–
Japanese Yen
$m
9.0
–
–
5.3
–
–
–
–
1.0
–
133.6
15.3
Sterling
$m
Euro
$m
Japanese Yen
$m
59.5
25.4
4.7
2.8
–
21.0
0.9
3.4
–
–
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
Total liabilities as at 31 December 2018
1,373.9
117.7
The impact on net income of a proportional foreign exchange movement of 10.0% up and 10.0% down against the U.S. dollar at the year end spot rates
would be an increase or decrease of $0.6 million (2018 – $5.4 million).
136
136 Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
R I S K D I S C L O S U R E S C O N T I N U E D
Assets
Cash and cash equivalents
Accrued interest receivable
Investments
cedants
Reinsurance assets
Other receivables
Investment in associate
Property, plant and equipment
Deferred acquisition costs
Intangible assets
Total assets as at 31 December 2018
Liabilities
Losses and loss adjustment expenses
Unearned premiums
Insurance contracts – other payables
Amounts payable to reinsurers
Deferred acquisition costs ceded
Other payables
Corporation tax payable
Deferred tax liability
Interest rate swap
Long-term debt
U.S.$
$m
86.0
6.6
1,546.0
270.9
361.1
26.7
67.1
0.2
48.4
153.8
2,566.8
U.S.$
$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
Euro
$m
19.4
0.1
69.8
20.6
12.1
–
–
–
–
11.6
133.6
Euro
$m
113.7
43.3
2.9
2.5
2.1
0.4
–
–
1.2
39.9
206.0
Japanese Yen
$m
9.0
–
–
5.3
–
–
–
–
1.0
–
15.3
–
–
–
–
–
–
–
–
Japanese Yen
$m
19.7
10.4
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
–
–
–
–
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
Total liabilities as at 31 December 2018
30.1
64.5
The impact on net income of a proportional foreign exchange movement of 10.0% up and 10.0% down against the U.S. dollar at the year end spot rates
would be an increase or decrease of $0.6 million (2018 – $5.4 million).
Inwards premiums receivable from insureds and
Exposures in relation to insurance activities are as follows:
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.
• large catastrophic events, or multiple medium-sized events in quick succession, resulting in a requirement to pay a large value of claims within
a relatively short time frame or fund trust accounts;
• failure of insureds or cedants to meet their contractual obligations with respect to the payment of premiums in a timely manner; and
• failure of reinsurers to meet their contractual obligations with respect to the payment of claims in a timely manner.
Exposures in relation to investment activities are as follows:
• adverse market movements and /or a duration mismatch to obligations, resulting in investments being disposed of at a significant realised loss; and
• an inability to liquidate investments due to market conditions.
The maturity dates of the Group’s fixed maturity portfolio are as follows:
As at 31 December 2019
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 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
Core
$m
106.6
81.4
56.8
42.8
32.9
16.8
19.6
356.9
Core
$m
100.2
104.9
76.2
30.0
34.4
13.5
25.5
384.7
Core plus
$m
139.6
113.3
123.6
74.7
71.3
32.8
97.5
652.8
Core plus
$m
245.3
156.0
89.1
66.4
75.3
38.0
89.5
759.6
Surplus
$m
35.4
16.2
15.1
24.8
28.7
107.2
123.0
350.4
Surplus
$m
11.9
35.3
20.5
18.0
28.4
108.0
121.0
343.1
Total
$m
281.6
210.9
195.5
142.3
132.9
156.8
240.1
1,360.1
Total
$m
357.4
296.2
185.8
114.4
138.1
159.5
236.0
1,487.4
136
Lancashire Holdings Limited
Annual Report & Accounts 2019
Lancashire Holdings Limited
Annual Report & Accounts 2019
www.lancashiregroup.com
137
137
Financial statements
R I S K D I S C L O S U R E S C O N T I N U E D
The maturity profile of the insurance contracts and financial liabilities of the Group is as follows:
As at 31 December 2019
Losses and loss adjustment expenses
Insurance contracts – other payables
Amounts payable to reinsurers
Other payables
Interest rate swap
Long-term debt1
Total
1. The maturity profile of long-term debt includes interest.
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
1. The maturity profile of long-term debt includes interest.
Years until liability becomes due – undiscounted values
Balance sheet
$m
Less than one
$m
One to three
$m
Three to five
$m
874.5
27.4
126.6
47.5
1.1
323.5
1,400.6
467.8
27.1
126.6
47.5
1.1
14.6
684.7
278.8
0.3
–
–
–
164.4
443.5
87.5
–
–
–
–
19.7
107.2
Years until liability becomes due – undiscounted values
Balance sheet
$m
Less than one
$m
One to three
$m
Three to five
$m
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
Over five
$m
40.4
–
–
–
–
313.2
353.6
Over five
$m
57.8
–
–
–
–
344.3
402.1
Total
$m
874.5
27.4
126.6
47.5
1.1
511.9
1,589.0
Total
$m
915.0
36.0
81.3
45.4
0.4
557.8
1,635.9
Actual maturities of the above may differ from contractual maturities because certain borrowers have the right to call or prepay certain obligations
with or without call or prepayment penalties. 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 it deems necessary.
138
138 Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
R I S K D I S C L O S U R E S C O N T I N U E D
The maturity profile of the insurance contracts and financial liabilities of the Group is as follows:
As at 31 December 2019
$m
$m
Balance sheet
Less than one
One to three
Three to five
Years until liability becomes due – undiscounted values
Losses and loss adjustment expenses
Insurance contracts – other payables
Amounts payable to reinsurers
Other payables
Interest rate swap
Long-term debt1
Total
1. The maturity profile of long-term debt includes interest.
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
1. The maturity profile of long-term debt includes interest.
874.5
27.4
126.6
47.5
1.1
323.5
1,400.6
$m
915.0
36.0
81.3
45.4
0.4
324.3
1,402.4
467.8
27.1
126.6
47.5
1.1
14.6
684.7
$m
497.9
35.7
81.3
45.4
0.1
16.2
676.6
$m
278.8
0.3
–
–
–
164.4
443.5
$m
269.4
0.3
–
–
0.3
37.3
307.3
$m
87.5
–
–
–
–
19.7
107.2
Three to five
$m
89.9
–
–
–
–
Over five
$m
40.4
313.2
353.6
Over five
$m
57.8
–
–
–
–
–
–
–
–
Total
$m
874.5
27.4
126.6
47.5
1.1
511.9
1,589.0
Total
$m
915.0
36.0
81.3
45.4
0.4
160.0
249.9
344.3
402.1
557.8
1,635.9
Balance sheet
Less than one
One to three
Years until liability becomes due – undiscounted values
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 it deems 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% 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% 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 124.
The table below presents an analysis of the Group’s major exposures to counterparty credit risk, based on their rating. The table includes amounts due
from policyholders and unsettled investment trades. The quality of these receivables is not graded but, based on management’s historical experience,
there is limited default risk associated with these amounts.
As at 31 December 2019
AAA
AA+, AA, AA-
A+, A, A-
BBB+, BBB, BBB-
Other1
Total
1. Reinsurance recoveries classified as ‘other’ include $111.6 million of reserves that are fully collateralised.
As at 31 December 2018
AAA
AA+, AA, AA-
A+, A, A-
BBB+, BBB, BBB-
Other1
Total
1. Reinsurance recoveries classified as ‘other’ include $100.5 million of reserves that are fully collateralised.
The counterparty to the Group’s long-term debt interest rate swaps is currently rated A by S&P.
Cash and fixed
maturity securities
$m
Inwards
premiums
receivable and
other receivables
$m
409.6
471.2
509.6
204.9
85.2
1,680.5
–
–
133.2
–
285.9
419.1
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
Reinsurance
recoveries
$m
–
–
200.3
–
127.2
327.5
Reinsurance
recoveries
$m
–
3.6
208.3
–
111.0
322.9
138
Lancashire Holdings Limited
Annual Report & Accounts 2019
Lancashire Holdings Limited
Annual Report & Accounts 2019
www.lancashiregroup.com
139
139
Financial statements
R I S K D I S C L O S U R E S C O N T I N U E D
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
2019
$m
13.2
5.1
2.9
21.2
2018
$m
8.5
5.5
8.4
22.4
Provisions of $4.1 million (31 December 2018 – $2.9 million) have been made for impaired or irrecoverable balances and $1.2 million (2018 – $0.5 million)
was charged to the consolidated statement of comprehensive income in respect of bad debts.
E. OPERATIONAL RISK
Operational risk is the risk of loss resulting from inadequate or failed internal processes, personnel, systems or external events. 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 LSL
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 reviewed quarterly. Frequency of consideration for audit for all other areas
varies from quarterly at the most frequent to a minimum of once every four years, on a rotational basis.
F. STRATEGIC RISK
The Group has identified several strategic risks. These include:
• the risks that either the poor execution of the business plan or an inappropriate business plan in itself results in a strategy that fails to adequately
reflect the trading environment, resulting in an inability to optimise performance, including reputational risk;
• the risks of the failure to maintain adequate capital, accessing capital at an inflated cost or the inability to access capital. This includes unanticipated
changes in vendor, regulatory and/or rating agency models that could result in an increase in capital requirements or a change in the type of capital
required; and
• the risks of succession planning, staff retention and key man risks.
I. BUSINESS PLAN RISK
The Group addresses the risks associated with the planning and execution of the business plan through a combination of the following:
• an iterative annual forward-looking business planning process with cross departmental involvement;
• evaluation and approval of the annual business plan by the Board of Directors;
• regular monitoring of actual versus planned results; and
• periodic review and re-forecasting as market conditions change.
140
140 Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
R I S K D I S C L O S U R E S C O N T I N U E D
The following table shows inwards premiums receivable that are past due but not impaired:
2019
$m
13.2
5.1
2.9
21.2
2018
$m
8.5
5.5
8.4
22.4
Less than 90 days past due
Between 91 and 180 days past due
Over 180 days past due
Total
E. OPERATIONAL RISK
Provisions of $4.1 million (31 December 2018 – $2.9 million) have been made for impaired or irrecoverable balances and $1.2 million (2018 – $0.5 million)
was charged to the consolidated statement of comprehensive income in respect of bad debts.
Operational risk is the risk of loss resulting from inadequate or failed internal processes, personnel, systems or external events. 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 LSL
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 reviewed quarterly. Frequency of consideration for audit for all other areas
varies from quarterly at the most frequent to a minimum of once every four years, on a rotational basis.
F. STRATEGIC RISK
The Group has identified several strategic risks. These include:
• the risks that either the poor execution of the business plan or an inappropriate business plan in itself results in a strategy that fails to adequately
reflect the trading environment, resulting in an inability to optimise performance, including reputational risk;
• the risks of the failure to maintain adequate capital, accessing capital at an inflated cost or the inability to access capital. This includes unanticipated
changes in vendor, regulatory and/or rating agency models that could result in an increase in capital requirements or a change in the type of capital
• the risks of succession planning, staff retention and key man risks.
required; and
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; and
• periodic review and re-forecasting as market conditions change.
140
Lancashire Holdings Limited
Annual Report & Accounts 2019
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
2019
$m
1,193.6
323.5
1,517.1
(154.5)
1,362.6
2018
$m
1,067.2
324.3
1,391.5
(153.8)
1,237.7
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 LSL 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, rating agency 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 long term. The return is generated within a broad framework of
risk parameters. The return is measured by management in terms of the IRR of the increase in FCBVS in the period, adjusted for dividends accrued. This
aim is a long-term goal, acknowledging that management expects both higher and lower results in the shorter term. The cyclicality and volatility of the
insurance market is expected to be the largest driver of this pattern. Management monitors these peaks and troughs – adjusting the Group’s portfolio
to make the most effective use of available capital and seeking to maximise the risk-adjusted return.
IRR achieved is as follows:
31 December 2019
31 December 2018
IRR achieved in excess of the three-month treasury yield is as follows:
31 December 2019
31 December 2018
Annual
return
%
14.1
2.4
Annual
return
%
12.0
0.5
Compound
annual return
%
17.4
17.5
Compound
annual return
%
16.3
16.4
Inception to
date return
%
847.5
716.3
Inception to
date return
%
830.0
701.1
Lancashire Holdings Limited
Annual Report & Accounts 2019
www.lancashiregroup.com
141
141
Financial statements
R I S K D I S C L O S U R E S C O N T I N U E D
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.
Effective 1 January 2019, the Company’s supervisory and tax domiciles are in Bermuda and as such regulatory supervision of the Group is overseen by
the BMA. 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.
Both the Group and LICL are regulated by the BMA and are required to monitor their enhanced capital requirement under the BMA’s regulatory
framework, which has been assessed as equivalent to the EU’s Solvency II regime. The Group and LICL’s capital requirement are calculated using the
BSCR standard formula model. For the years ended 31 December 2019 and 2018, both the Group and LICL were more than adequately capitalised under
the BMA’s regulatory regime.
The Group’s UK regulated insurance companies are required to comply with the EU’s Solvency II regime and are regulated by the PRA and FCA. LSL is also
regulated by Lloyd’s. Under Solvency II, the basis for assessing capital and solvency comprises a market-consistent economic balance sheet and an SCR,
determined using either an internal model or the standard formula.
LUK calculates its SCR using the standard formula. LUK’s Solvency II own funds are primarily comprised of Tier 1 items for the years ended 31 December
2019 and 31 December 2018. 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 2019 and 2018 LUK was more than adequately capitalised under the Solvency II 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% 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 2020 calendar year
the Group’s corporate member’s FAL requirement was set at 66.8% (2019 – 67.8%) 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 £222.3 million as at 31 December 2019 (31 December 2018 – £187.8 million).
For the years ended 31 December 2019 and 2018 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.
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N O T E S T O T H E A C C O U N T S
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 2019 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 24.
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
Lancashire Syndicates. 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 121 to 124. 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.
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.
Effective 1 January 2019, the Company’s supervisory and tax domiciles are in Bermuda and as such regulatory supervision of the Group is overseen by
the BMA. 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.
the BMA’s regulatory regime.
Both the Group and LICL are regulated by the BMA and are required to monitor their enhanced capital requirement under the BMA’s regulatory
framework, which has been assessed as equivalent to the EU’s Solvency II regime. The Group and LICL’s capital requirement are calculated using the
BSCR standard formula model. For the years ended 31 December 2019 and 2018, both the Group and LICL were more than adequately capitalised under
The Group’s UK regulated insurance companies are required to comply with the EU’s Solvency II regime and are regulated by the PRA and FCA. LSL is also
regulated by Lloyd’s. Under Solvency II, the basis for assessing capital and solvency comprises a market-consistent economic balance sheet and an SCR,
determined using either an internal model or the standard formula.
LUK calculates its SCR using the standard formula. LUK’s Solvency II own funds are primarily comprised of Tier 1 items for the years ended 31 December
2019 and 31 December 2018. 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 2019 and 2018 LUK was more than adequately capitalised under the Solvency II 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% 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 2020 calendar year
the Group’s corporate member’s FAL requirement was set at 66.8% (2019 – 67.8%) 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 £222.3 million as at 31 December 2019 (31 December 2018 – £187.8 million).
For the years ended 31 December 2019 and 2018 the capital requirements of all the Group’s regulatory jurisdictions were met.
III. RETENTION RISK
controls, including:
• training schemes.
Risks associated with succession planning, staff retention and key man risks are mitigated through a combination of resource planning processes and
• 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
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Financial statements
N O T E S T O T H E A C C O U N T S C O N T I N U E D
2. SEGMENTAL REPORTING CONTINUED
REVENUE AND EXPENSE BY OPERATING SEGMENT
For the year ended 31 December 2019
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
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
104.7
26.4
0.1
32.3
17.3
5.0
1.0
37.0
223.8
(112.1)
(4.6)
14.6
121.7
(80.2)
69.5
(29.5)
6.9
88.4
6.3
3.6
71.9
2.6
1.3
4.3
3.2
1.7
94.9
(32.2)
4.2
(0.4)
66.5
(17.7)
8.3
(22.7)
0.7
35.1
–
–
37.3
–
–
–
–
–
37.3
(11.1)
1.2
1.0
28.4
(0.3)
(3.4)
(8.9)
0.2
16.0
–
53.2
–
–
–
–
–
–
53.2
(24.0 )
(13.4 )
7.8
23.6
(18.0 )
9.4
(8.6 )
3.1
9.5
Lancashire
Syndicates
$m
115.2
68.7
–
37.8
13.8
6.2
4.1
51.7
297.5
(102.6 )
(23.2 )
9.8
181.5
(148.3 )
50.9
(54.7 )
8.1
37.5
8.8 %
18.6 %
–
27.4 %
14.1 %
33.1 %
–
47.2 %
13.0 %
30.6 %
–
43.6 %
36.4 %
23.3 %
–
59.7 %
53.7 %
25.7 %
–
79.4 %
Total
$m
226.2
151.9
109.3
72.7
32.4
15.5
8.3
90.4
706.7
(282.0)
(35.8)
32.8
421.7
(264.5)
134.7
(124.4)
19.0
186.5
(67.0)
119.5
30.8 %
25.0 %
25.1 %
80.9 %
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.
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N O T E S T O T H E A C C O U N T S C O N T I N U E D
2. SEGMENTAL REPORTING CONTINUED
REVENUE AND EXPENSE BY OPERATING SEGMENT
For the year ended 31 December 2019
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
Net unallocated income and expenses
Profit before tax
Net loss ratio
Net acquisition cost ratio
Expense ratio
Combined ratio
the U.S. and Canada.
Property
$m
Energy
$m
Marine
$m
Aviation
$m
104.7
26.4
0.1
32.3
17.3
5.0
1.0
37.0
223.8
(112.1)
(4.6)
14.6
121.7
(80.2)
69.5
(29.5)
6.9
88.4
6.3
3.6
71.9
2.6
1.3
4.3
3.2
1.7
94.9
(32.2)
4.2
(0.4)
66.5
(17.7)
8.3
(22.7)
0.7
35.1
37.3
–
–
–
–
–
–
–
37.3
(11.1)
1.2
1.0
28.4
(0.3)
(3.4)
(8.9)
0.2
16.0
Lancashire
Syndicates
$m
115.2
68.7
–
37.8
13.8
6.2
4.1
51.7
297.5
(102.6 )
(23.2 )
9.8
181.5
50.9
(54.7 )
8.1
37.5
53.2
–
–
–
–
–
–
–
53.2
(24.0 )
(13.4 )
7.8
23.6
9.4
(8.6 )
3.1
9.5
8.8 %
18.6 %
–
14.1 %
33.1 %
–
13.0 %
30.6 %
–
36.4 %
23.3 %
–
53.7 %
25.7 %
–
27.4 %
47.2 %
43.6 %
59.7 %
79.4 %
Total
$m
226.2
151.9
109.3
72.7
32.4
15.5
8.3
90.4
706.7
(282.0)
(35.8)
32.8
421.7
134.7
(124.4)
19.0
186.5
(67.0)
119.5
30.8 %
25.0 %
25.1 %
80.9 %
(18.0 )
(148.3 )
(264.5)
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
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
34.0%
23.9%
–
57.9%
(27.1%)
44.3%
–
17.2%
102.3%
55.8%
–
158.1%
2.2 %
47.2 %
–
49.4 %
Lancashire
Syndicates
$m
107.5
59.7
–
22.0
13.2
5.1
1.5
47.8
256.8
(69.9)
(26.0)
5.5
166.4
Total
$m
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
(162.3)
(307.4)
43.5
(41.3)
0.4
6.7
71.4%
24.6%
–
96.0%
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
1. Worldwide, including the U.S. and Canada, comprises insurance and reinsurance contracts that insure or reinsure risks in more than one geographic area.
2. Worldwide, excluding the U.S. and Canada, comprises insurance and reinsurance contracts that insure or reinsure risks in more than one geographic area, but that specifically exclude
the U.S. and Canada.
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Financial statements
N O T E S T O T H E A C C O U N T S C O N T I N U E D
3. INVESTMENT RETURN
The total investment return for the Group is as follows:
For the year ended 31 December 2019
Fixed maturity securities – AFS
Fixed maturity securities – at FVTPL
Equity securities – AFS
Hedge funds – at FVTPL
Other investments
Cash and cash equivalents
Total investment return
Net investment
income and net
other investment
income (losses)1
$m
Net realised gains
(losses)
and impairments
$m
Net change
in unrealised
gains/losses on AFS2
$m
Total investment
return excluding
foreign exchange
$m
Net foreign
exchange gains
(losses)
$m
Total investment
return including
foreign exchange
$m
33.4
3.9
–
1.8
2.3
4.3
45.7
(0.3)
1.4
6.5
1.2
0.1
–
8.9
31.3
–
(2.7)
–
–
–
28.6
64.4
5.3
3.8
3.0
2.4
4.3
83.2
(0.5 )
–
–
–
0.3
1.6
1.4
63.9
5.3
3.8
3.0
2.7
5.9
84.6
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 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 income
(losses)1
$m
Net realised gains
(losses)
and impairments
$m
Net change
in unrealised
gains/losses on AFS2
$m
Total investment
return excluding
foreign exchange
$m
Net foreign exchange
gains
(losses)
$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.
Net investment income includes $39.7 million (2018 – $36.6 million) of interest income on our AFS investment portfolio and cash and cash equivalents.
Net realised gains (losses) and impairments includes impairment losses of $0.3 million (2018 – $0.4 million) recognised on fixed maturity securities.
Refer to pages 131 to 133 in the risk disclosures section for the estimated fair values of the Group’s derivative instruments. Realised gains and losses
on futures and options contracts are included in net realised gains (losses) and impairments.
Included in net investment income and net other investment income is $4.4 million (2018 – $4.4 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
2019
$m
131.9
(7.5 )
(29.5 )
10.5
105.4
2018
$m
128.5
2.5
(9.2)
4.6
126.4
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N O T E S T O T H E A C C O U N T S C O N T I N U E D
3. INVESTMENT RETURN
The total investment return for the Group is as follows:
For the year ended 31 December 2019
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 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
income (losses)1
Net realised gains
(losses)
Net change
in unrealised
and impairments
gains/losses on AFS2
Total investment
return excluding
foreign exchange
Total investment
return including
foreign exchange
Net foreign
exchange gains
(losses)
$m
(0.5 )
$m
33.4
3.9
–
1.8
2.3
4.3
45.7
$m
31.8
(0.7)
–
(4.7)
1.2
2.9
30.5
$m
(0.3)
1.4
6.5
1.2
0.1
–
8.9
$m
(6.4)
–
–
2.3
(1.0)
–
(5.1)
$m
31.3
(2.7)
–
–
–
–
28.6
$m
(12.4)
(0.5)
–
–
–
–
(12.9)
$m
64.4
5.3
3.8
3.0
2.4
4.3
83.2
$m
13.0
(0.7 )
(0.5 )
(2.4 )
0.2
2.9
12.5
–
–
–
0.3
1.6
1.4
gains
(losses)
$m
(5.4 )
–
–
–
3.8
(0.3 )
(1.9 )
$m
63.9
5.3
3.8
3.0
2.7
5.9
84.6
$m
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.
Net investment income includes $39.7 million (2018 – $36.6 million) of interest income on our AFS investment portfolio and cash and cash equivalents.
Net realised gains (losses) and impairments includes impairment losses of $0.3 million (2018 – $0.4 million) recognised on fixed maturity securities.
Refer to pages 131 to 133 in the risk disclosures section for the estimated fair values of the Group’s derivative instruments. Realised gains and losses
on futures and options contracts are included in net realised gains (losses) and impairments.
Included in net investment income and net other investment income is $4.4 million (2018 – $4.4 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
2019
$m
131.9
(7.5 )
(29.5 )
10.5
105.4
2018
$m
128.5
2.5
(9.2)
4.6
126.4
5. OTHER INCOME
Lancashire Capital Management
– underwriting fees
– profit commission
Lancashire Syndicates
– managing agency fees
– consortium fees
– consortium profit commission
– profit commission
Total other income
2019
$m
7.9
1.0
1.1
0.7
0.7
–
2018
$m
6.6
–
1.2
0.5
1.4
2.7
11.4
12.4
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 investment
income and net other
investment income
Net realised gains
(losses)
Net change
in unrealised
(losses)1
and impairments
gains/losses on AFS2
return excluding
foreign exchange
Total investment
Net foreign exchange
Total investment
return including
foreign exchange
As at 31 December 2019, contract assets in relation to other income amounted to $9.4 million (31 December 2018 – $10.9 million).
6. RESULTS OF OPERATING ACTIVITIES
Results of operating activities are stated after charging the following amounts:
Depreciation on owned assets
Auditor’s remuneration
– Group audit fees
– Other services
Total
2019
$m
1.3
1.2
0.4
2.9
2018
$m
1.4
1.7
–
3.1
During 2019, KPMG provided non-audit services in relation to Solvency II and Lloyd’s reporting. Fees for non-audit services provided in 2019 totalled
$0.4 million. 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.
7. EMPLOYEE BENEFITS
Wages and salaries
Pension costs
Bonus and other benefits
Total cash compensation
RSS – performance
RSS – ordinary
RSS – bonus deferral
RSS – LSL acquisition grant
Total equity based compensation
Total employee benefits
2019
$m
39.3
3.2
26.4
68.9
3.4
5.7
0.5
–
9.6
78.5
2018
$m
32.4
2.6
14.0
49.0
1.5
5.0
1.0
0.4
7.9
56.9
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.
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N O T E S T O T H E A C C O U N T S C O N T I N U E D
7. EMPLOYEE BENEFITS CONTINUED
The following table lists the assumptions used in the stochastic model for the RSS awards granted during the years ended 31 December 2019 and 2018:
Assumptions
Dividend yield
Expected volatility1
Risk-free interest rate2
Expected average life of options
Share price
2019
–
24.3 %
0.7 %
3.0 years
$8.39
2018
–
24.1%
0.8%
3.0 years
$7.95
1. The expected volatility of the LHL share price is calculated based on the movement in the share price 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 annum prior to vesting,
with subsequent adjustments to reflect actual experience.
RSS – PERFORMANCE
The performance RSS options vesting periods range from one to three years from the date of grant and are dependent on certain performance criteria.
A maximum of 85.0% (2018 – 85.0%) 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% (2018 – 15.0%) of the performance RSS options will vest only on the achievement of an absolute TSR 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.
Outstanding as at 31 December 2017
Granted
Exercised
Forfeited
Lapsed
Outstanding as at 31 December 2018
Granted
Exercised
Forfeited
Lapsed
Outstanding as at 31 December 2019
Exercisable as at 31 December 2018
Exercisable as at 31 December 2019
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
3,458,211
1,041,567
(381,359)
(47,260)
(1,090,376)
2,980,783
978,331
(81,137)
(113,828)
(811,957)
2,952,192
183,141
145,658
2019
2018
Total
restricted stock
Total
restricted stock
8.0 years
$7.63
$9.38
8.0 years
$6.96
$8.14
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.
The 2016 awards became exercisable in February 2019.
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7. EMPLOYEE BENEFITS CONTINUED
The following table lists the assumptions used in the stochastic model for the RSS awards granted during the years ended 31 December 2019 and 2018:
1. The expected volatility of the LHL share price is calculated based on the movement in the share price over a period prior to the grant date, equal in length to the expected life of
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 annum prior to vesting,
with subsequent adjustments to reflect actual experience.
RSS – PERFORMANCE
The performance RSS options vesting periods range from one to three years from the date of grant and are dependent on certain performance criteria.
A maximum of 85.0% (2018 – 85.0%) 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% (2018 – 15.0%) of the performance RSS options will vest only on the achievement of an absolute TSR 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.
Assumptions
Dividend yield
Expected volatility1
Risk-free interest rate2
Expected average life of options
Share price
the award.
Outstanding as at 31 December 2017
Outstanding as at 31 December 2018
Granted
Exercised
Forfeited
Lapsed
Granted
Exercised
Forfeited
Lapsed
Outstanding as at 31 December 2019
Exercisable as at 31 December 2018
Exercisable as at 31 December 2019
2019
–
24.3 %
0.7 %
3.0 years
$8.39
2018
–
24.1%
0.8%
3.0 years
$7.95
Total number of
restricted stock
3,458,211
1,041,567
(381,359)
(47,260)
(1,090,376)
2,980,783
978,331
(81,137)
(113,828)
(811,957)
2,952,192
183,141
145,658
2018
Total
$6.96
$8.14
restricted stock
restricted stock
8.0 years
8.0 years
2019
Total
$7.63
$9.38
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
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.
The 2016 awards became exercisable in February 2019.
Outstanding as at 31 December 2017
Granted
Forfeited
Outstanding as at 31 December 2018
Granted
Exercised
Forfeited
Outstanding as at 31 December 2019
Exercisable as at 31 December 2019
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
1,286,746
1,018,951
(205,500)
2,100,197
809,397
(324,860)
(101,290)
2,483,444
159,999
2019
2018
Total
restricted stock
Total
restricted stock
8.1 years
$8.44
$8.59
8.4 years
$7.96
–
RSS – BONUS DEFERRAL
The bonus deferral RSS options vesting periods range from one to three years from the date of grant and do not have associated performance criteria
for vesting. An amount equivalent to the dividends paid between the grant date and the exercise date accrues and is paid at the time of exercise.
Outstanding as at 31 December 2017
Granted
Exercised
Outstanding as at 31 December 2018
Forfeited
Granted
Exercised
Outstanding as at 31 December 2019
Forfeited
Exercisable as at 31 December 2019
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
547,638
31,941
(220,047)
(18,943)
340,589
35,060
(177,135)
(1,993)
196,521
73,963
66,269
2019
2018
Total
restricted stock
Total
restricted stock
7.3 years
$8.39
$8.73
7.7 years
$7.95
$8.25
RSS – LANCASHIRE SYNDICATES LIMITED ACQUISITION
The LSL acquisition RSS options vesting periods ranged from three to five years and were dependent on certain performance criteria. A maximum of
75.0% of the LSL acquisition RSS options vested on the achievement of a combined ratio for Cathedral Capital Limited, the ultimate holding company of
LSL, below a required amount. A maximum of 25.0% of the LSL acquisition RSS options vested 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 vested.
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N O T E S T O T H E A C C O U N T S C O N T I N U E D
7. EMPLOYEE BENEFITS CONTINUED
Outstanding as at 31 December 2017
Exercised
Forfeited
Outstanding as at 31 December 2018
Exercised
Outstanding as at 31 December 2019
Exercisable as at 31 December 2018
Exercisable as at 31 December 2019
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 losses (gains) on interest rate swaps
Interest expense on lease liabilities
Other financing costs
Total
Total number of
restricted stock
369,478
(199,370)
(1,850)
168,258
(61,016)
107,242
168,258
107,242
2019
2018
Total
restricted stock
Total
restricted stock
3.9 years
$13.01
$8.51
4.9 years
$13.01
$7.99
2019
$m
18.5
1.0
1.3
1.0
21.8
2018
$m
18.1
(0.9)
–
2.9
20.1
Refer to note 18 for details of long-term debt and financing arrangements.
9. TAX
BERMUDA
LHL, LICL, LUK and LCM 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
From 1 January 2019, LHL ceased to be tax resident in the UK and subject to UK corporation tax. The UK subsidiaries of LHL are subject to normal UK
corporation tax on all their taxable profits.
Corporation tax charge for the period
Adjustments in respect of prior period corporation tax
Deferred tax credit for the period
Adjustments in respect of prior period deferred tax
Total tax charge (credit)
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2019
$m
5.8
(2.0 )
(3.0 )
0.5
1.3
2018
$m
2.9
(1.9)
(5.1)
0.1
(4.0)
N O T E S T O T H E A C C O U N T S C O N T I N U E D
7. EMPLOYEE BENEFITS CONTINUED
Outstanding as at 31 December 2017
Exercised
Forfeited
Exercised
Outstanding as at 31 December 2018
Outstanding as at 31 December 2019
Exercisable as at 31 December 2018
Exercisable as at 31 December 2019
Weighted average remaining contractual life
Weighted average fair value at date of grant
Weighted average share price at date of exercise during the year
Refer to note 18 for details of long-term debt and financing arrangements.
8. FINANCING COSTS
Interest expense on long-term debt
Net losses (gains) on interest rate swaps
Interest expense on lease liabilities
Other financing costs
Total
9. TAX
BERMUDA
UNITED KINGDOM
corporation tax on all their taxable profits.
Corporation tax charge for the period
Adjustments in respect of prior period corporation tax
Deferred tax credit for the period
Adjustments in respect of prior period deferred tax
Total tax charge (credit)
Total number of
restricted stock
369,478
(199,370)
(1,850)
168,258
(61,016)
107,242
168,258
107,242
2019
Total
2018
Total
restricted stock
restricted stock
3.9 years
4.9 years
$13.01
$8.51
$13.01
$7.99
2019
$m
18.5
1.0
1.3
1.0
21.8
2019
$m
5.8
(2.0 )
(3.0 )
0.5
1.3
2018
$m
18.1
(0.9)
–
2.9
20.1
2018
$m
2.9
(1.9)
(5.1)
0.1
(4.0)
LHL, LICL, LUK and LCM 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.
From 1 January 2019, LHL ceased to be tax resident in the UK and subject to UK corporation tax. The UK subsidiaries of LHL are subject to normal UK
Tax reconciliation1
Profit before tax
Tax calculated at the standard corporation tax rate applicable in Bermuda 0%
(2018 – United Kingdom 19.0%)
Non-taxable income
Effect of income taxed at a higher rate
Adjustments in respect of prior period
Differences related to equity based compensation
Other expense permanent differences
Total tax charge (credit)
1. All tax reconciling balances have been classified as recurring items.
2019
$m
119.5
–
–
1.0
(1.5)
(0.6)
2.4
1.3
2018
$m
33.6
6.4
(13.3)
–
(1.8)
0.4
4.3
(4.0)
The current tax charge (credit) as a percentage of the Group’s profit before tax is 1.1% (2018 – 11.9% credit). Non-taxable income relates to profits
of companies within the Group that are non-tax resident in the UK and the share of profit (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 income (loss) within shareholders’ equity.
10. CASH AND CASH EQUIVALENTS
Cash at bank and in hand
Cash equivalents
Total cash and cash equivalents
2019
$m
167.7
152.7
320.4
2018
$m
97.5
57.1
154.6
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 $196.6 million
(31 December 2018 – $83.7 million).
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Financial statements
N O T E S T O T H E A C C O U N T S C O N T I N U E D
11. INVESTMENTS
As at 31 December 2019
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
– Bank loans
– Corporate bonds
Total fixed maturity securities – AFS
Fixed maturity securities – at FVTPL
Private debt fund – at FVTPL
Hedge funds – at FVTPL
Other investments
Total investments
Cost or
amortised cost
$m
Unrealised
gains
$m
Unrealised
losses
$m
Estimated
fair value1
$m
84.8
12.8
160.8
47.1
8.2
59.5
127.8
96.8
15.4
2.2
101.7
581.2
1,298.3
45.7
15.5
140.6
–
1,500.1
–
–
0.9
0.5
0.2
1.3
0.5
1.1
–
–
0.6
11.4
16.5
4.6
–
14.5
–
35.6
–
–
(0.1 )
(0.1 )
–
(0.1 )
(3.3 )
(0.4 )
–
–
(0.6 )
(0.4 )
(5.0 )
–
–
(5.1 )
(0.5 )
84.8
12.8
161.6
47.5
8.4
60.7
125.0
97.5
15.4
2.2
101.7
592.2
1,309.8
50.3
15.5
150.0
(0.5)
(10.6 )
1,525.1
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.
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11. INVESTMENTS
As at 31 December 2019
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
Private debt fund – at FVTPL
Hedge funds – at FVTPL
Other investments
Total investments
in the estimated fair value.
– U.S. government agency mortgage backed securities
– Non-agency mortgage backed securities
– Agency commercial mortgage backed securities
Cost or
amortised cost
$m
84.8
12.8
160.8
47.1
8.2
59.5
127.8
96.8
15.4
2.2
101.7
581.2
45.7
15.5
140.6
–
1,298.3
1,500.1
gains
$m
–
–
0.9
0.5
0.2
1.3
0.5
1.1
–
–
0.6
11.4
16.5
4.6
–
14.5
–
35.6
losses
$m
–
–
(0.1 )
(0.1 )
–
(0.1 )
(3.3 )
(0.4 )
(0.6 )
(0.4 )
(5.0 )
–
–
–
–
(5.1 )
(0.5 )
(10.6 )
Estimated
fair value1
$m
84.8
12.8
161.6
47.5
8.4
60.7
125.0
97.5
15.4
2.2
101.7
592.2
1,309.8
50.3
15.5
150.0
(0.5)
1,525.1
Unrealised
Unrealised
As at 31 December 2018
Cost or
amortised cost
$m
Unrealised
gains
$m
Unrealised
losses
$m
Estimated
fair value1
$m
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
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
–
–
–
0.3
0.1
–
0.4
1.0
0.2
–
–
–
0.1
1.0
3.1
–
2.7
9.3
0.1
–
–
(1.2)
(1.2)
–
(0.5)
(2.8)
(2.5)
(0.2)
(0.1)
–
(5.7)
(8.2)
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
(22.4)
1,442.4
(0.7)
–
(3.1)
(0.4)
45.0
22.7
149.2
(0.3)
1,670.4
15.2
(26.6)
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
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.
Accumulated other comprehensive income (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 on fixed maturity securities – AFS
Tax provision
Accumulated other comprehensive income (loss)
2019
$m
16.5
(5.0)
2.6
(0.6)
13.5
2018
$m
5.8
(22.4)
2.1
0.2
(14.3)
Fixed maturity securities are presented in the risk disclosures section on page 137. 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 via 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. Various recognised reputable pricing sources are used including pricing vendors and
broker-dealers. 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.
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11. INVESTMENTS CONTINUED
LEVEL (II)
Level (ii) investments are securities with quoted prices in active markets for similar assets or liabilities or securities valued using other valuation
techniques for which all significant inputs are based on observable market data. Instruments included in Level (ii) are valued via independent external
sources using directly observable inputs to models or other valuation methods. The valuation methods used are typically industry accepted standards
and include broker-dealer quotes and pricing models including present values and future cash flows with inputs such as yield curves, interest rates,
prepayment speeds and default rates.
LEVEL (III)
Level (iii) investments are securities for which valuation techniques are not based on observable market data and require significant management
judgement. The Group determines securities classified as Level (iii) to include hedge funds and the private debt fund.
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 invested in a private debt fund on 20 December 2019. The original investment cost, where pricing was based on fair value, is the best
approximation of fair value as at 31 December 2019.
During 2019, the Company engaged a third-party service provider to assess the levelling of our investment portfolio. This resulted in a refinement in
our levelling methodology with securities from the same asset class being included in multiple levelling categories. The Company determines whether
transfers have occurred between levels of the fair value hierarchy by re-assessing the categorisation at the end of each reporting period. Transfers
between Level (i) to (ii) securities amounted to $nil and transfers from Level (ii) to (i) securities amounted to $169.2 million during the year ended
31 December 2019.
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11. INVESTMENTS CONTINUED
LEVEL (II)
prepayment speeds and default rates.
LEVEL (III)
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 directly observable inputs to models or other valuation methods. The valuation methods used are typically industry accepted standards
and include broker-dealer quotes and pricing models including present values and future cash flows with inputs such as yield curves, interest rates,
Level (iii) investments are securities for which valuation techniques are not based on observable market data and require significant management
judgement. The Group determines securities classified as Level (iii) to include hedge funds and the private debt fund.
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 invested in a private debt fund on 20 December 2019. The original investment cost, where pricing was based on fair value, is the best
approximation of fair value as at 31 December 2019.
During 2019, the Company engaged a third-party service provider to assess the levelling of our investment portfolio. This resulted in a refinement in
our levelling methodology with securities from the same asset class being included in multiple levelling categories. The Company determines whether
transfers have occurred between levels of the fair value hierarchy by re-assessing the categorisation at the end of each reporting period. Transfers
between Level (i) to (ii) securities amounted to $nil and transfers from Level (ii) to (i) securities amounted to $169.2 million during the year ended
31 December 2019.
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The fair value hierarchy of the Group’s investment holdings is as follows:
As at 31 December 2019
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
– Bank loans
– Corporate bonds
Total fixed maturity securities – AFS
Fixed maturity securities – at FVTPL
Private debt fund – at FVTPL
Hedge funds – at FVTPL
Other investments
Total 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
Level (i)
$m
Level (ii)
$m
Level (iii)
$m
Total
$m
80.7
–
161.6
13.2
–
50.6
–
–
–
–
0.8
225.4
532.3
–
–
–
–
4.1
12.8
–
34.3
8.4
10.1
125.0
97.5
15.4
2.2
100.9
366.8
777.5
50.3
–
–
(0.5 )
532.3
827.3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
15.5
150.0
–
165.5
84.8
12.8
161.6
47.5
8.4
60.7
125.0
97.5
15.4
2.2
101.7
592.2
1,309.8
50.3
15.5
150.0
(0.5)
1,525.1
Level (i)
$m
Level (ii)
$m
Level (iii)
$m
Total
$m
216.8
–
186.6
–
–
–
–
–
–
–
–
–
–
403.4
–
22.7
–
–
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 )
426.1
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
Lancashire Holdings Limited
Annual Report & Accounts 2019
www.lancashiregroup.com
155
155
Financial statements
N O T E S T O T H E A C C O U N T S C O N T I N U E D
11. INVESTMENTS CONTINUED
The table below analyses the movements in investments classified as Level (iii) investments:
As at 31 December 2017
Purchases
Sales
Total net realised and unrealised losses recognised in profit or loss
As at 31 December 2018
Purchases
Sales
Total net realised and unrealised gains recognised in profit or loss
As at 31 December 2019
12. INTERESTS IN STRUCTURED ENTITIES
CONSOLIDATED STRUCTURED ENTITIES
The Group’s two consolidated structured entities are the EBT and the Orange Fund.
Private
debt fund
$m
–
–
–
–
–
15.5
–
–
15.5
Hedge
funds
$m
154.0
17.6
(21.5 )
(0.9 )
149.2
17.7
(21.3 )
4.4
150.0
Total
$m
154.0
17.6
(21.5)
(0.9)
149.2
33.2
(21.3)
4.4
165.5
• 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 24).
• the investment in the Orange Fund was exited during 2019. The Group was the only investor in the Orange Fund which held short duration high-
quality cash equivalents and fixed maturity securities. The primary objectives of the fund were to preserve capital and to 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 unconsolidated structured entities is as follows:
Investments
$m
Interest
in associate
$m
125.0
97.5
15.4
2.2
240.1
15.5
150.0
165.5
–
405.6
–
–
–
–
–
–
–
–
108.3
108.3
Total
$m
125.0
97.5
15.4
2.2
240.1
15.5
150.0
165.5
108.3
513.9
As at 31 December 2019
Fixed maturity securities
– Asset backed securities
– U.S. government agency mortgage backed securities
– Non-agency mortgage backed securities
– Agency commercial mortgage backed securities
Total fixed maturity securities
Investment funds
– Private debt fund
– Hedge funds
Total investment funds
Specialised investment vehicles
– KHL (note 16)
Total
156
156 Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
N O T E S T O T H E A C C O U N T S C O N T I N U E D
11. INVESTMENTS CONTINUED
The table below analyses the movements in investments classified as Level (iii) investments:
As at 31 December 2017
Purchases
Sales
Purchases
Sales
Total net realised and unrealised losses recognised in profit or loss
As at 31 December 2018
Total net realised and unrealised gains recognised in profit or loss
As at 31 December 2019
12. INTERESTS IN STRUCTURED ENTITIES
CONSOLIDATED STRUCTURED ENTITIES
The Group’s two consolidated structured entities are the EBT and the Orange Fund.
Private
debt fund
$m
–
–
–
–
–
–
–
15.5
15.5
Hedge
funds
$m
154.0
17.6
(21.5 )
(0.9 )
149.2
17.7
(21.3 )
4.4
150.0
Total
$m
154.0
17.6
(21.5)
(0.9)
149.2
33.2
(21.3)
4.4
165.5
• 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 24).
• the investment in the Orange Fund was exited during 2019. The Group was the only investor in the Orange Fund which held short duration high-
quality cash equivalents and fixed maturity securities. The primary objectives of the fund were to preserve capital and to provide liquidity to support
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
A summary of the Group’s interest in unconsolidated structured entities is as follows:
Investments
$m
Interest
in associate
$m
125.0
97.5
15.4
2.2
240.1
15.5
150.0
165.5
–
405.6
–
–
–
–
–
–
–
–
108.3
108.3
Total
$m
125.0
97.5
15.4
2.2
240.1
15.5
150.0
165.5
108.3
513.9
the Group’s operations.
structured entities.
As at 31 December 2019
Fixed maturity securities
– Asset backed securities
– U.S. government agency mortgage backed securities
– Non-agency mortgage backed securities
– Agency commercial mortgage backed securities
Total fixed maturity securities
Investment funds
– Private debt fund
– Hedge funds
Total investment funds
Specialised investment vehicles
– KHL (note 16)
Total
156
Lancashire Holdings Limited
Annual Report & Accounts 2019
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
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 the 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 are
provided on pages 127 to 139. 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 2019 and 31 December 2018. 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 2019 the Group has a commitment of $100.0 million (31 December 2018 – $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
2019 is $59.6 million (31 December 2018 – $54.4 million), which currently remains unfunded. The maximum exposure to the credit facility funds is
$100.0 million and as at 31 December 2019 there have been no defaults under these facilities.
Lancashire Holdings Limited
Annual Report & Accounts 2019
www.lancashiregroup.com
157
157
Financial statements
N O T E S T O T H E A C C O U N T S C O N T I N U E D
13. 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
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 2019
Losses and
loss adjustment
expenses
$m
Reinsurance
recoveries
$m
Net losses and
loss adjustment
expenses
$m
933.5
(284.1 )
649.4
(124.4 )
431.8
(7.2 )
300.2
261.5
57.2
318.7
915.0
(66.0 )
330.5
5.3
269.8
269.6
40.7
310.3
874.5
(2.5 )
(139.5 )
0.6
(141.4 )
(99.1 )
(3.5 )
(102.6 )
(322.9 )
(22.0 )
(112.7 )
(1.8 )
(136.5 )
(126.3 )
(5.6 )
(131.9 )
(327.5 )
(126.9)
292.3
(6.6)
158.8
162.4
53.7
216.1
592.1
(88.0)
217.8
3.5
133.3
143.3
35.1
178.4
547.0
Further information on the calculation of loss reserves and the risks associated with them is provided in the risk disclosures section from page 125.
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% increase in estimated losses would lead to a $174.9 million (31 December 2018 – $183.0 million) increase in gross loss reserves. There
was no change to the Group’s reserving methodology during the year. The split of losses and loss adjustment expenses between notified outstanding
losses, ACR assessed by management and IBNR is shown below:
As at 31 December
Outstanding losses
Additional case reserves
Losses incurred but not reported
Total
2019
$m
352.0
138.8
383.7
874.5
%
40.2
15.9
43.9
100.0
2018
$m
315.2
210.5
389.3
915.0
%
34.4
23.0
42.6
100.0
The Group’s reserve as at 31 December 2019 and 2018 had an estimated duration of approximately two years.
158
158 Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
N O T E S T O T H E A C C O U N T S C O N T I N U E D
13. LOSSES AND LOSS ADJUSTMENT EXPENSES
Incurred losses and loss adjustment expenses
Paid losses and loss adjustment expenses
As at 31 December 2017
Net incurred losses for:
Prior years
Current year
Exchange adjustments
Net paid losses for:
Prior years
Current year
As at 31 December 2018
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 2019
Losses and
loss adjustment
Reinsurance
recoveries
$m
(284.1 )
Net losses and
loss adjustment
expenses
$m
649.4
expenses
$m
933.5
(124.4 )
431.8
(7.2 )
300.2
261.5
57.2
318.7
915.0
(66.0 )
330.5
5.3
269.8
269.6
40.7
310.3
874.5
(2.5 )
(139.5 )
0.6
(141.4 )
(99.1 )
(3.5 )
(102.6 )
(322.9 )
(22.0 )
(112.7 )
(1.8 )
(136.5 )
(126.3 )
(5.6 )
(131.9 )
(327.5 )
(126.9)
292.3
(6.6)
158.8
162.4
53.7
216.1
592.1
(88.0)
217.8
3.5
133.3
143.3
35.1
178.4
547.0
Further information on the calculation of loss reserves and the risks associated with them is provided in the risk disclosures section from page 125.
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% increase in estimated losses would lead to a $174.9 million (31 December 2018 – $183.0 million) increase in gross loss reserves. There
was no change to the Group’s reserving methodology during the year. The split of losses and loss adjustment expenses between notified outstanding
losses, ACR assessed by management and IBNR is shown below:
As at 31 December
Outstanding losses
Additional case reserves
Losses incurred but not reported
Total
2019
$m
352.0
138.8
383.7
874.5
%
40.2
15.9
43.9
100.0
2018
$m
315.2
210.5
389.3
915.0
%
34.4
23.0
42.6
100.0
The Group’s reserve as at 31 December 2019 and 2018 had an estimated duration of approximately two years.
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 LSL 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
2009
and prior
$m
2010
$m
2011
$m
2012
$m
2013
$m
2014
$m
2015
$m
2016
$m
2017
$m
2018
$m
2019
$m
Total
$m
332.4
298.5 580.1 429.7
310.7 547.1 462.0
274.4 511.3
235.0
276.0
214.6
196.2
189.6
184.1
274.8
226.7
206.0
196.5
193.4
192.4
280.0
259.8
224.0
224.4
222.1
218.4
213.7
250.3
350.4
338.8
326.9
313.3
308.7
299.5
292.8
711.8 297.4 397.0
607.3 209.4 371.9
526.1 204.2 447.0
511.8 235.8 450.4
592.9 229.4 460.0
579.0 231.4 450.7
569.6 229.8 452.6
585.7 229.6 446.9
583.3 228.3 446.0
552.7 236.6
543.5
Current estimate of cumulative
liability
543.5 236.6 446.0
292.8
213.7
192.4
184.1
235.0 511.3 462.0
332.4
3,649.8
Paid
(516.9 ) (221.6 ) (425.8) (271.4) (202.6) (177.9) (164.6) (203.6 ) (325.0 ) (225.2)
(40.7) (2,775.3)
Total Group gross liability
26.6
15.0
20.2
21.4
11.1
14.5
19.5
31.4 186.3 236.8
291.7
874.5
1. Adjusted for revaluation of foreign currencies at the exchange rate as at 31 December 2019.
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
2009
and prior
$m
52.7
47.9
44.9
41.9
79.8
76.0
71.7
71.2
68.9
65.3
57.4
2010
$m
2011
$m
2012
$m
2013
$m
2014
$m
2015
$m
2016
$m
2017
$m
2018
$m
2019
$m
Total
$m
114.6
73.1 177.6 139.3
98.5 185.0 189.9
96.7 179.7
76.5
15.3
12.2
12.6
13.0
13.0
17.8
14.1
13.1
11.5
11.9
9.6
9.9
8.9
8.8
8.0
8.0
8.0
7.4
48.9
121.8
122.0
121.2
121.2
121.2
120.9
120.9
56.2
33.8
52.6
23.6
92.4
24.1
33.5
88.9
34.4 103.3
34.6 102.8
35.7 106.1
36.2 105.4
36.5 105.5
44.0
57.4
44.0 105.5
120.9
7.4
9.6
13.0
76.5 179.7 189.9
114.6
918.5
Paid
(46.3 )
(38.5 ) (102.5) (118.1)
(7.4)
(8.7)
(12.8)
(71.7 ) (106.9 )
(72.5)
(5.6)
(591.0)
Total Group gross recovery
11.1
5.5
3.0
2.8
–
0.9
0.2
4.8
72.8 117.4
109.0
327.5
1. Adjusted for revaluation of foreign currencies at the exchange rate as at 31 December 2019.
158
Lancashire Holdings Limited
Annual Report & Accounts 2019
Lancashire Holdings Limited
Annual Report & Accounts 2019
www.lancashiregroup.com
159
159
Financial statements
N O T E S T O T H E A C C O U N T S C O N T I N U E D
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
2009
and prior
$m
2010
$m
2011
$m
2012
$m
2013
$m
2014
$m
2015
$m
2016
$m
2017
$m
2018
$m
2019
$m
Total
$m
402.5 290.4 217.8
362.1 272.1
331.6
225.4
212.2
177.7
158.5
260.7
202.4
183.6
176.6
171.1
257.0
212.6
192.9
185.0
181.5
182.8
270.1
250.9
215.2
216.4
214.1
210.4
206.3
201.4
228.6
216.8
205.7
192.1
187.5
178.6
171.9
659.1 263.6 340.8
559.4 185.8 319.3
481.2 180.1 354.6
469.9 202.3 361.5
513.1 195.0 356.7
503.0 196.8 347.9
497.9 194.1 346.5
514.5 193.4 341.5
514.4 191.8 340.5
487.4 192.6
486.1
486.1 192.6 340.5
171.9
206.3
182.8
171.1
158.5
331.6 272.1 217.8
2,731.3
Paid
(470.6) (183.1 ) (323.3) (153.3) (195.2) (169.2) (151.8) (131.9) (218.1 ) (152.7 )
(35.1) (2,184.3)
Total Group net liability
15.5
9.5
17.2
18.6
11.1
13.6
19.3
26.6
113.5 119.4 182.7
547.0
1. Adjusted for revaluation of foreign currencies at the exchange rate as at 31 December 2019.
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:
2009 accident year and prior
2010 accident year
2011 accident year
2012 accident year
2013 accident year
2014 accident year
2015 accident year
2016 accident year
2017 accident year
2018 accident year
Total favourable development
2019
$m
3.3
(0.9 )
1.4
6.6
4.2
(1.3 )
5.7
19.3
30.8
18.9
88.0
2018
$m
27.0
1.6
4.7
8.8
3.5
3.4
6.6
33.3
38.0
–
126.9
The favourable prior year development in both 2019 and 2018 was primarily due to general IBNR releases across most lines of business due to a lack of
reported claims. In 2019, the Group also benefited from favourable development on the 2017 catastrophe loss events partially offset by 2018 accident
year claims in the energy and Lancashire Syndicates segments. 2018 also included reductions on some prior accident year property and energy reserves.
There were no individually significant net loss events for the year ended 31 December 2019 and 31 December 2018.
14. INSURANCE, REINSURANCE AND OTHER RECEIVABLES
All receivables are considered current other than $39.5 million (31 December 2018 – $54.1 million) of inwards premiums receivable related to multi-year
contracts. The carrying value approximates fair value due to the short-term nature of the receivables. There are no significant concentrations of credit risk
within the Group’s receivables.
160
160 Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
N O T E S T O T H E A C C O U N T S C O N T I N U E D
2009
and prior
$m
2010
$m
2011
$m
2012
$m
2013
$m
2014
$m
2015
$m
2016
$m
2017
$m
2018
$m
2019
$m
Total
$m
Accident year
Net Group losses
Estimate of ultimate liability1
At end of accident year
659.1 263.6 340.8
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
257.0
212.6
192.9
185.0
181.5
182.8
270.1
250.9
215.2
216.4
214.1
210.4
206.3
201.4
228.6
216.8
205.7
192.1
187.5
178.6
171.9
559.4 185.8 319.3
481.2 180.1 354.6
469.9 202.3 361.5
513.1 195.0 356.7
503.0 196.8 347.9
497.9 194.1 346.5
514.5 193.4 341.5
514.4 191.8 340.5
487.4 192.6
486.1
402.5 290.4 217.8
362.1 272.1
331.6
225.4
212.2
177.7
158.5
260.7
202.4
183.6
176.6
171.1
Current estimate of cumulative
liability
Paid
486.1 192.6 340.5
171.9
206.3
182.8
171.1
158.5
331.6 272.1 217.8
2,731.3
(470.6) (183.1 ) (323.3) (153.3) (195.2) (169.2) (151.8) (131.9) (218.1 ) (152.7 )
(35.1) (2,184.3)
Total Group net liability
15.5
9.5
17.2
18.6
11.1
13.6
19.3
26.6
113.5 119.4 182.7
547.0
1. Adjusted for revaluation of foreign currencies at the exchange rate as at 31 December 2019.
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:
2009 accident year and prior
2010 accident year
2011 accident year
2012 accident year
2013 accident year
2014 accident year
2015 accident year
2016 accident year
2017 accident year
2018 accident year
Total favourable development
2019
$m
3.3
(0.9 )
1.4
6.6
4.2
(1.3 )
5.7
19.3
30.8
18.9
88.0
2018
$m
27.0
1.6
4.7
8.8
3.5
3.4
6.6
33.3
38.0
–
126.9
The favourable prior year development in both 2019 and 2018 was primarily due to general IBNR releases across most lines of business due to a lack of
reported claims. In 2019, the Group also benefited from favourable development on the 2017 catastrophe loss events partially offset by 2018 accident
year claims in the energy and Lancashire Syndicates segments. 2018 also included reductions on some prior accident year property and energy reserves.
There were no individually significant net loss events for the year ended 31 December 2019 and 31 December 2018.
14. INSURANCE, REINSURANCE AND OTHER RECEIVABLES
All receivables are considered current other than $39.5 million (31 December 2018 – $54.1 million) of inwards premiums receivable related to multi-year
contracts. The carrying value approximates fair value due to the short-term nature of the receivables. There are no significant concentrations of credit risk
within the Group’s receivables.
13. LOSSES AND LOSS ADJUSTMENT EXPENSES CONTINUED
15. PROVISION FOR DEFERRED TAX
Equity based compensation
Claims equalisation reserves
Syndicate underwriting profits
Syndicate participation rights
Other temporary differences
Net deferred tax liability
2019
$m
(4.1)
3.9
(1.6)
12.5
(1.1)
9.6
2018
$m
(2.5)
6.2
(3.6)
12.7
(1.6)
11.2
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 2020 and subsequent years to utilise the deferred tax assets recognised when the
underlying temporary differences reverse.
For the years ended 31 December 2019 and 2018, 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% from 1 April 2020.
All deferred tax assets and liabilities are classified as non-current.
16. INVESTMENT IN ASSOCIATE
The Group holds a 10.0% 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
2019, the carrying value of the Group’s investment in KHL was $108.3 million (31 December 2018 – $67.1 million). The Group’s share of comprehensive
income (loss) for KHL for the period was $5.9 million (2018 – $7.1 million loss). Key financial information for KHL is as follows:
Assets
Liabilities
Shareholders’ equity
Gross premium earned
Comprehensive income (loss)
2019
$m
1,266.7
183.4
1,083.3
99.9
59.0
2018
$m
905.2
234.2
671.0
81.9
(71.2)
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 LCM 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 24 for details of transactions between the Group and its associate.
17. INTANGIBLE ASSETS
Net book value as at 31 December 2018 and 2017
Additions
Net book value as at 31 December 2019
Syndicate
participation
rights
$m
82.6
0.7
83.3
Goodwill
$m
71.2
–
71.2
Total
$m
153.8
0.7
154.5
On 24 October 2019, the Group’s corporate member acquired additional syndicate participation rights in Syndicate 2010, increasing its share on the
2020 year of account from 57.8% to 59.7%.
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 LSL’s CGU.
160
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Annual Report & Accounts 2019
Lancashire Holdings Limited
Annual Report & Accounts 2019
www.lancashiregroup.com
161
161
Financial statements
N O T E S T O T H E A C C O U N T S C O N T I N U E D
17. INTANGIBLE ASSETS CONTINUED
The recoverable amount of the LSL’s CGU is determined based on value in use. Value in use is calculated using projected cash flows of the LSL’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 7.5%
(2018 – 6.4%) 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% (2018 – 3.0%) 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 therefore been recognised for the years ending 31 December
2019 and 2018.
18. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
LONG-TERM DEBT
On 5 October 2012, LHL issued $130.0 million 5.70% 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%, 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%, 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 LSL 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%, 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%, 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%, 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%, 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%, 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
2019
$m
130.0
97.0
26.9
12.2
10.0
23.7
23.7
323.5
2018
$m
130.0
97.0
27.5
12.4
10.0
23.7
23.7
324.3
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 134 to 136.
162
162 Lancashire Holdings Limited
Lancashire Holdings Limited
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Annual Report & Accounts 2019
N O T E S T O T H E A C C O U N T S C O N T I N U E D
17. INTANGIBLE ASSETS CONTINUED
The recoverable amount of the LSL’s CGU is determined based on value in use. Value in use is calculated using projected cash flows of the LSL’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 7.5%
(2018 – 6.4%) 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% (2018 – 3.0%) 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 therefore been recognised for the years ending 31 December
2019 and 2018.
LONG-TERM DEBT
18. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
On 5 October 2012, LHL issued $130.0 million 5.70% 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%, 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%, 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 LSL 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
• $10.0 million floating rate subordinated loan note issued on 26 November 2004 and repayable in September 2034, paying interest quarterly based
• $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,
• $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, 3.75%, above the three-month EURIBOR;
on a set margin, 3.75%, above the three-month LIBOR;
3.25%, above the three-month LIBOR; and
on a set margin, 3.25%, 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
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%, 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
dates.
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:
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
2019
$m
130.0
97.0
26.9
12.2
10.0
23.7
23.7
2018
$m
130.0
97.0
27.5
12.4
10.0
23.7
23.7
323.5
324.3
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
on pages 134 to 136.
162
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Annual Report & Accounts 2019
The fair value of the long-term debt is estimated as $375.3 million (31 December 2018 – $359.2 million). The fair value measurement is classified
within Level (ii) of the fair value hierarchy. The fair value is estimated by reference to similar financial instruments quoted in active markets.
The interest accrued on the long-term debt was $2.4 million (31 December 2018 – $2.4 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.
INTEREST RATE SWAPS
The Group hedges 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 133 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 $1.1 million (31 December 2018 – $0.4 million). Further information is provided
on pages 131 to 133. Cash settlements are completed on a quarterly basis and the total of the next cash settlements in the first quarter of 2020 on these
instruments is $0.2m. 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.
2019
$m
38.2
2018
$m
30.2
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 2019 and 2018.
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%, 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 $31.0 million uncollateralised facility has been in place since 30 July 2019, for an original amount of $31.0 million. The facility was increased from
$31.0 million to $44.0 million on 25 October 2019 and will expire on 31 December 2023. It is available for utilisation by LICL and guaranteed by LHL
for FAL purposes. As at 31 December 2019 $44.0 million of LOCs were issued under this facility.
The terms of the $44.0 million 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%, where the subordinated loan notes are excluded from this calculation;
• a maximum subordinated unsecured indebtedness of $350.0 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 2019 and 2018, 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. With effect from 1 January 2020, while up to $80.0 million in aggregate can be utilised by way of an LoC or an RCF to
assist Syndicate 2010’s gross funding requirements, only $40.0 million of this amount can be utilised by way of an RCF.
Lancashire Holdings Limited
Annual Report & Accounts 2019
www.lancashiregroup.com
163
163
Financial statements
N O T E S T O T H E A C C O U N T S C O N T I N U E D
18. LONG-TERM DEBT AND FINANCING ARRANGEMENTS CONTINUED
There are no balances outstanding under the Syndicate bank facility as at 31 December 2019 or 2018. 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 2019 and 2018, 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 2019 and 2018, 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 142 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 142 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
FAL
MBRT accounts
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 2019 and 2018
Allocated, called up and fully paid
As at 31 December 2017
Shares issued
As at 31 December 2018
Shares issued
As at 31 December 2019
Cash and cash
equivalents
$m
2019
Fixed maturity
securities
$m
3.4
48.7
72.1
2.7
2.9
1.9
131.7
308.9
125.9
93.7
39.4
23.0
–
590.9
Cash and cash
equivalents
$m
2018
Fixed maturity
securities
$m
6.2
1.4
15.9
2.3
3.4
1.4
30.6
306.7
174.7
90.4
38.7
24.9
–
635.4
Total
$m
312.3
174.6
165.8
42.1
25.9
1.9
722.6
Total
$m
312.9
176.1
106.3
41.0
28.3
1.4
666.0
Number
$m
3,000,000,000
1,500.0
Number
$m
201,341,918
600,000
201,941,918
1,000,000
202,941,918
100.7
0.3
101.0
0.5
101.5
The new common shares issued during 2019 and 2018 were to fund future RSS exercises. Refer to note 24 for further details on the share issuance.
164
164 Lancashire Holdings Limited
Lancashire Holdings Limited
Annual Report & Accounts 2019
Annual Report & Accounts 2019
N O T E S T O T H E A C C O U N T S C O N T I N U E D
18. LONG-TERM DEBT AND FINANCING ARRANGEMENTS CONTINUED
There are no balances outstanding under the Syndicate bank facility as at 31 December 2019 or 2018. 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 2019 and 2018, 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 2019 and 2018, 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 142 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 142 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
Own shares
As at 31 December 2017
Shares distributed
Shares purchased by trust
As at 31 December 2018
Shares distributed
Shares purchased by trust
As at 31 December 2019
Number held
in trust
1,333,227
(800,776)
600,000
1,132,451
(644,148)
1,000,000
1,488,303
$m
12.1
(7.3 )
4.6
9.4
(5.4 )
9.3
Total number
of own shares
1,333,227
(800,776)
600,000
1,132,451
(644,148 )
1,000,000
13.3
1,488,303
$m
12.1
(7.3)
4.6
9.4
(5.4 )
9.3
13.3
The number of common shares in issue with voting rights (allocated share capital less shares held in treasury) as at 31 December 2019 was 202,941,918
(31 December 2018 – 201,941,918).
SHARE REPURCHASES
At the AGM held on 1 May 2019, LHL’s shareholders approved a renewal of the Repurchase Programme authorising the repurchase of a maximum
of 20,194,192 shares, with such authority to expire on the conclusion of the 2020 AGM or, if earlier, 15 months from the date the resolution approving
the Repurchase Programme was passed. There were no share repurchases during either 2019 or 2018.
DIVIDENDS
The Board of Directors have authorised the following dividends:
Cash and cash
equivalents
2019
Fixed maturity
securities
$m
$m
3.4
48.7
72.1
2.7
2.9
1.9
131.7
308.9
125.9
93.7
39.4
23.0
–
590.9
2018
Cash and cash
equivalents
Fixed maturity
securities
$m
6.2
1.4
15.9
2.3
3.4
1.4
30.6
$m
306.7
174.7
90.4
38.7
24.9
–
635.4
Total
$m
312.3
174.6
165.8
42.1
25.9
1.9
722.6
Total
$m
312.9
176.1
106.3
41.0
28.3
1.4
666.0
100.7
0.3
101.0
0.5
101.5
Number
$m
3,000,000,000
1,500.0
Number
$m
201,341,918
600,000
201,941,918
1,000,000
202,941,918
Type
Final
Interim
Special
Final
Interim
20. OTHER RESERVES
Other reserves consist of the following:
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
As at 31 December 2018
Shares purchased by the trust
Distributed by the trust
Equity based compensation – exercises
Equity based compensation
As at 31 December 2019
The new common shares issued during 2019 and 2018 were to fund future RSS exercises. Refer to note 24 for further details on the share issuance.
otherwise restricted:
As at 31 December
FAL
MBRT accounts
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 2019 and 2018
Allocated, called up and fully paid
As at 31 December 2017
Shares issued
As at 31 December 2018
Shares issued
As at 31 December 2019
164
Lancashire Holdings Limited
Annual Report & Accounts 2019
Per share amount
Record date
Payment date
$0.10 23 Feb 2018 21 Mar 2018
$0.05 17 Aug 2018 12 Sep 2018
$0.20
9 Nov 2018 12 Dec 2018
$0.10 22 Feb 2019 27 Mar 2019
6 Sep 2019
$0.05
9 Aug 2019
Contributed
surplus
$m
839.1
4.3
(9.9 )
(0.1 )
10.3
–
843.7
8.8
(6.7 )
8.1
–
853.9
Equity based
compensation
$m
27.1
–
–
–
(10.3)
8.5
25.3
–
–
(8.1)
10.2
27.4
$m
20.0
10.1
40.1
20.1
10.1
Total other
reserves
$m
866.2
4.3
(9.9)
(0.1)
–
8.5
869.0
8.8
(6.7)
–
10.2
881.3
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Financial statements
N O T E S T O T H E A C C O U N T S C O N T I N U E D
21. LEASES
The Group leases three properties and several items of office equipment.
RIGHT-OF-USE ASSETS
For the year ended 31 December 2019 the Group had the following right-of-use assets in relation to leases entered into.
As at 31 December 2018
Initial application of IFRS 16
Additions
Depreciation charge
As at 31 December 2019
LEASE LIABILITIES
As at 31 December 2019
Due in less than one year
Due between one and five years
Due in more than five years
Total undiscounted lease liabilities
Total discounted lease liabilities
Current
Non-current
The Group does not face a significant liquidity risk with regards to its lease liabilities.
AMOUNTS RECOGNISED IN PROFIT OR LOSS
Depreciation of right-of-use assets
Interest expense on lease liabilities
Expenses relating to short-term leases, low value leases and variable leases
Total
Property
Equipment
$m
–
16.0
4.4
(2.4 )
18.0
$m
–
0.4
–
(0.2 )
0.2
Total
$m
–
16.4
4.4
(2.6 )
18.2
$m
3.6
13.0
10.7
27.3
21.9
2.5
19.4
2019
$m
2.6
1.3
1.2
5.1
Total lease payments included in the consolidated cash flow statement amounted to $3.6 million for the year ended 31 December 2019.
22. COMMITMENTS AND CONTINGENCIES
CREDIT FACILITY FUND
As at 31 December 2019 the Group has a commitment of $100.0 million (31 December 2018 – $100.0 million) relating to two credit facility funds
(refer to note 12).
PRIVATE DEBT FUND
On 5 November 2019, the Group entered into an agreement to invest in a private debt fund. The initial commitment was $25.0 million in addition
to rebalancing amounts and fees and expenses. As at 31 December 2019, there was a remaining undrawn commitment in the amount of $9.8 million.
This remaining capital commitment is expected to be drawn in the first quarter of 2020.
LEGAL PROCEEDINGS AND REGULATIONS
The Group operates in the insurance industry and is subject to legal proceedings in the normal course of business. While it is not practicable to estimate
or determine the final results of all pending or threatened legal proceedings, management does not believe that such proceedings (including litigation)
will have a material effect on its results and financial position.
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N O T E S T O T H E A C C O U N T S C O N T I N U E D
21. LEASES
RIGHT-OF-USE ASSETS
The Group leases three properties and several items of office equipment.
For the year ended 31 December 2019 the Group had the following right-of-use assets in relation to leases entered into.
23. EARNINGS PER SHARE
The following reflects the profit and share data used in the basic and diluted earnings per share computations:
Profit for the year attributable to equity shareholders of LHL
Basic weighted average number of shares
Dilutive effect of RSS
Diluted weighted average number of shares
Earnings per share
Basic
Diluted
2019
$m
117.9
2019
Number
of shares
2018
$m
37.5
2018
Number
of shares
201,240,104
2,629,528
200,655,440
1,960,322
203,869,632
202,615,762
2019
$0.59
$0.58
2018
$0.19
$0.19
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.
24. RELATED PARTY DISCLOSURES
The consolidated financial statements include LHL and the entities listed below:
Name
Subsidiaries1
CCHL
CCL
CCL 1998
CCL 1999
LSL
LCM2
LCMMSL
LICL
LIHL
LIMSL
LISL
LMSCL
LUK
ORANGE FUND3
Associate
KHL4
Other controlled entities
EBT
LHFT
Principal Business
Domicile
Investment company
Holding company
Lloyd’s corporate member
Non trading
Lloyd’s managing agent
Insurance agent services
Support services
General insurance business
Holding company
Insurance mediation activities
Support services
Support services
General insurance business
Investment fund
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
Holding company
Bermuda
Trust
Trust
Jersey
United States
1. Unless otherwise stated, the Group owns 100% of the ordinary share capital and voting rights in its subsidiaries listed below.
2. 93.5% owned by the Group.
3. The investment in the Orange Fund was exited during 2019.
4. 10.0% interest in the preference shares of each segregated account of KHL.
As at 31 December 2018
Initial application of IFRS 16
Additions
Depreciation charge
As at 31 December 2019
LEASE LIABILITIES
As at 31 December 2019
Due in less than one year
Due between one and five years
Due in more than five years
Total undiscounted lease liabilities
Total discounted lease liabilities
Current
Non-current
Property
Equipment
$m
–
16.0
4.4
(2.4 )
18.0
$m
–
0.4
–
(0.2 )
0.2
Total
$m
–
16.4
4.4
(2.6 )
18.2
$m
3.6
13.0
10.7
27.3
21.9
2.5
19.4
2019
$m
2.6
1.3
1.2
5.1
The Group does not face a significant liquidity risk with regards to its lease liabilities.
AMOUNTS RECOGNISED IN PROFIT OR LOSS
Depreciation of right-of-use assets
Interest expense on lease liabilities
Total
Expenses relating to short-term leases, low value leases and variable leases
22. COMMITMENTS AND CONTINGENCIES
CREDIT FACILITY FUND
(refer to note 12).
PRIVATE DEBT FUND
Total lease payments included in the consolidated cash flow statement amounted to $3.6 million for the year ended 31 December 2019.
As at 31 December 2019 the Group has a commitment of $100.0 million (31 December 2018 – $100.0 million) relating to two credit facility funds
On 5 November 2019, the Group entered into an agreement to invest in a private debt fund. The initial commitment was $25.0 million in addition
to rebalancing amounts and fees and expenses. As at 31 December 2019, there was a remaining undrawn commitment in the amount of $9.8 million.
This remaining capital commitment is expected to be drawn in the first quarter of 2020.
LEGAL PROCEEDINGS AND REGULATIONS
The Group operates in the insurance industry and is subject to legal proceedings in the normal course of business. While it is not practicable to estimate
or determine the final results of all pending or threatened legal proceedings, management does not believe that such proceedings (including litigation)
will have a material effect on its results and financial position.
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Financial statements
N O T E S T O T H E A C C O U N T S C O N T I N U E D
24. RELATED PARTY DISCLOSURES CONTINUED
The Group has issued subordinated loan notes via a trust vehicle – LHFT, refer to note 18. The Group effectively has 100.0% 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 2019,
the Group had made advances of $nil (2018 – $1.5 million) to the EBT under the terms of the Facility.
During the year ended 31 December 2019, the Group issued 1,000,000 common shares to the EBT at a par value of $0.5 million and a total value of
$9.3 million at the prevailing market rate. During the year ended 31 December 2018, the Group issued 600,000 common 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.
LICL holds $203.3 million (31 December 2018 – $191.9 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% of the required FAL to support
the underwriting activities of Syndicate 2010 and 3010 and holds $265.4 million (31 December 2018 – $267.9 million) of cash and cash equivalents
and fixed maturity securities in FAL in relation to intra-group reinsurance agreements.
The senior management team shareholding in LCM represents a minority interest of 6.5% (2018 – 6.5%). This investment represents the non-controlling
interest listed in the Group’s consolidated balance sheet.
As at 31 December 2019 and 2018, Mr Alex Maloney, a Director of LHL, had a 1.2% (2018 – 1.2%) interest in LCM.
Mr Maloney and his spouse acquired 100.0% 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 LSL. Nameco has provided $0.2 million of capacity to Syndicate 2010 for the 2020 year
of account (2019 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
2019
$m
4.6
2.0
2.2
8.8
2018
$m
2.3
1.2
1.9
5.4
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 AND ITS SUBSIDIARY
In 2013, LCM 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 2019, the Group recognised
$8.9 million (2018 – $6.6 million) of service fees and profit commissions in other income (refer to note 5) in relation to this agreement.
During 2019, the Group committed an additional $48.0 million (31 December 2018 – $35.8 million) of capital to KHL. During 2019, KHL returned
$12.7 million (31 December 2018 – $21.0 million) of capital to the Group.
Refer to note 16 for further details on the Group’s investment in associate.
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24. RELATED PARTY DISCLOSURES CONTINUED
During 2019, the Group entered into a reinsurance agreement with KRL. The following balances are included in the Group’s consolidated financial statements:
Consolidated balance sheet
Unearned premiums on premiums ceded
Amounts payable to reinsurers
Deferred acquisition cost ceded
Consolidated statement of comprehensive income
Outwards reinsurance premiums
Change in unearned premiums on premiums ceded
Insurance acquisition expenses ceded
2019
$m
3.8
3.3
0.5
2019
$m
(7.6 )
3.8
0.5
25. SUBSEQUENT EVENTS
DIVIDEND
On 12 February 2020, the Board of Directors declared the payment of an ordinary dividend of $0.10 per common share, subject to a shareholder vote
of approval at the AGM on 29 April 2020, which will result in an aggregate payment of approximately $20.1 million. On the basis that the final dividend
is so approved by the shareholders at the AGM, then the dividend will be paid on 5 June 2020 to shareholders of record on 11 May 2020. 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.
N O T E S T O T H E A C C O U N T S C O N T I N U E D
The Group has issued subordinated loan notes via a trust vehicle – LHFT, refer to note 18. The Group effectively has 100.0% 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 2019,
the Group had made advances of $nil (2018 – $1.5 million) to the EBT under the terms of the Facility.
During the year ended 31 December 2019, the Group issued 1,000,000 common shares to the EBT at a par value of $0.5 million and a total value of
$9.3 million at the prevailing market rate. During the year ended 31 December 2018, the Group issued 600,000 common 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.
LICL holds $203.3 million (31 December 2018 – $191.9 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% of the required FAL to support
the underwriting activities of Syndicate 2010 and 3010 and holds $265.4 million (31 December 2018 – $267.9 million) of cash and cash equivalents
and fixed maturity securities in FAL in relation to intra-group reinsurance agreements.
The senior management team shareholding in LCM represents a minority interest of 6.5% (2018 – 6.5%). This investment represents the non-controlling
interest listed in the Group’s consolidated balance sheet.
As at 31 December 2019 and 2018, Mr Alex Maloney, a Director of LHL, had a 1.2% (2018 – 1.2%) interest in LCM.
Mr Maloney and his spouse acquired 100.0% 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 LSL. Nameco has provided $0.2 million of capacity to Syndicate 2010 for the 2020 year
of account (2019 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
performance or pension plans.
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,
TRANSACTIONS WITH ASSOCIATE AND ITS SUBSIDIARY
In 2013, LCM 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 2019, the Group recognised
$8.9 million (2018 – $6.6 million) of service fees and profit commissions in other income (refer to note 5) in relation to this agreement.
During 2019, the Group committed an additional $48.0 million (31 December 2018 – $35.8 million) of capital to KHL. During 2019, KHL returned
$12.7 million (31 December 2018 – $21.0 million) of capital to the Group.
Refer to note 16 for further details on the Group’s investment in associate.
2019
$m
4.6
2.0
2.2
8.8
2018
$m
2.3
1.2
1.9
5.4
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Financial statements
S H A R E H O L D E R I N F O R M A T I O N
Annual General Meeting
The Company’s AGM is scheduled for 29 April 2020 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 and
Accounts, 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 typhoon Hagibis in
the fourth quarter of 2019, hurricane Dorian and typhoon Faxai in the
third quarter of 2019, 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
170 Lancashire Holdings Limited
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Annual Report & Accounts 2019
frequency of large events; potentially unusual loss frequency; the
impact that the Group’s future operating results, capital position
and rating agency and other considerations may have on the execution
of any capital management initiatives or dividends; the possibility
of greater frequency or severity of claims and loss activity than
the Group’s underwriting, reserving or investment practices have
anticipated; the reliability of, and changes in assumptions to,
catastrophe pricing, accumulation and estimated loss models;
increased competition from existing alternative capital providers and
insurance-linked funds and collateralised special purpose insurers, and
the related demand and supply dynamics as contracts come up for
renewal; the effectiveness of its loss limitation methods; the potential
loss of key personnel; a decline in the Group’s operating subsidiaries’
rating with A.M. Best, S&P Global Ratings, Moody’s or other rating
agencies; increased competition on the basis of pricing, capacity,
coverage terms or other factors; cyclical downturns of the industry;
the impact of a deteriorating credit environment for issuers of fixed
maturity investments; the impact of swings in market interest rates,
currency exchange rates and securities prices; changes by central
banks regarding the level of interest rates; the impact of inflation or
deflation in relevant economies in which the Group operates; the
effect, timing and other uncertainties surrounding future business
combinations within the insurance and reinsurance industries; the
impact of terrorist activity in the countries in which the Group writes
risks; a rating downgrade of, or a market decline in, securities in its
investment portfolio; changes in governmental regulations or tax
laws in jurisdictions where the Group conducts business; Lancashire
or its Bermudian subsidiaries becoming subject to income taxes in the
United States or 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.
G L O S S A R Y
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
BSCR
Bermuda Solvency Capital Requirement
BSX
Bermuda Stock Exchange
CCHL
Cathedral Capital Holdings Limited
CCL
Cathedral Capital Limited
CCL 1998
Cathedral Capital (1998) Limited
CCL 1999
Cathedral Capital (1999) Limited
Ceded
Accumulations of insurance loss exposures which result from
underwriting multiple risks that are exposed to common causes of loss
To transfer insurance risk from a direct insurer to a reinsurer
and/or from a reinsurer to a retrocessionaire
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
APMs
Alternative performance measures
BMA
Bermuda Monetary Authority
Board of Directors; Board
Unless otherwise stated refers to the LHL Board of Directors
Book value per share (BVS)
Calculated by dividing the value of the total shareholders’ equity
by the sum of all common voting shares outstanding
BREEAM
Building Research Establishment Environmental
Assessment Method
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
Consolidated financial statements
Includes the independent auditor’s report, consolidated primary
statements, accounting policies, risk disclosures and related notes
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Additional InformationAdditional Information G L O S S A R Y C O N T I N U E D
Consolidated primary statements
Duration
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
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 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
ESG
Environmental, Social and Governance matters
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
172 Lancashire Holdings Limited
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Annual Report & Accounts 2019
Annual Report & Accounts 2019
Fully converted book value per share (FCBVS)
International Accounting Standard(s) (IAS)
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)
IFRS 9
International Financial Reporting Standard on Financial Instruments
IFRS 17
International Financial Reporting Standard on Insurance Contracts
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
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
KHL
Kinesis Holdings I Limited
Kinesis
The Group’s third-party capital management division encompassing
LCM, LCMMSL 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 Foundation or Foundation
The Lancashire Foundation is a charity registered in England and Wales
LCM
Lancashire Capital Management Limited. Formerly Kinesis Capital
Management Limited
LCMMSL
LCM Marketing Services Limited. Formerly KCM Marketing Services
Limited
LHFT
Lancashire Holdings Financing Trust I Limited
LHL (The Company)
Lancashire Holdings Limited
LIBOR
London Interbank Offered Rate
LICL
Lancashire Insurance Company Limited
LIHL
Lancashire Insurance Holdings (UK) Limited
LIMSL
Lancashire Insurance Marketing Services Limited
www.lancashiregroup.com
www.lancashiregroup.com
173
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Additional InformationAdditional Information G L O S S A R Y C O N T I N U E D
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
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
LSL
Lancashire Syndicates Limited. Formerly Cathedral Underwriting
Limited
LUK
Lancashire Insurance Company (UK) Limited
Managed cash
Managed cash includes both cash managed by external investment
managers and non-operating cash managed internally
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
NAV
Net asset value
Net acquisition cost ratio
Ratio, in per cent, of net insurance acquisition expenses to net
premiums earned
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RDS
Realistic Disaster Scenarios
Retrocession
The insurance of a reinsurance account
Return on Equity (RoE)
SCR
Solvency Capital Requirement
Syndicate 2010
Lloyd’s Syndicate 2010, managed by LSL. The Group provides capital
to support 59.7% of the stamp for the 2020 underwriting year
The IRR of the change in FCBVS in the period plus accrued dividends
Syndicate 3010
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
Renewal Price Index (RPI)
The RPI is an internal methodology that management uses to track
trends in premium rates of a portfolio of insurance and reinsurance
contracts. The RPI written in the respective segments is calculated
on a per-contract basis and reflects management’s assessment of
relative changes in price, terms, conditions and limits 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
judgment in relation to comparability of contracts and assessment
noted above. To enhance the RPI methodology, management may
revise the methodology assumptions underlying the RPI, so that the
trends in premium rates reflected in the RPI may not be comparable
over time. Consideration is only given to renewals of a comparable
nature so it does not reflect every contract in the portfolio of
contracts. The future profitability of the portfolio of contracts within
the RPI is dependent upon many factors besides the trends in premium
rates. RPIs are expressed as an approximate percentage of pricing
achieved on similar contracts written in the corresponding year.
Lloyd’s Syndicate 3010, managed by LSL. The Group provides capital
to support 100.0% of the stamp
The syndicates
Syndicate 2010 and 3010
TOBA
Terms of business agreement
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
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
UNEP FI
The United Nations Environment Programme Finance Initiative
RRC
Risk and Return Committee
RSC
Reinsurance Security Committee
RSS
Restricted share scheme
S&P Global Ratings (S&P)
UNL
Ultimate net loss
uSCR
Ultimate solvency capital requirement
U.S.
United States of America
U.S. GAAP
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
Accounting principles generally accepted in the United States
UURC
The Underwriting and Underwriting Risk Committee, a committee
of the Board
Value at Risk (VaR)
A measure of the risk of loss of a specific portfolio of financial assets
www.lancashiregroup.com
www.lancashiregroup.com
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Additional InformationAdditional Information A L T E R N A T I V E P E R F O R M A N C E M E A S U R E S
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.
Refer to pages 171 to 175 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
Relevance
Net loss ratio
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
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.
Combined ratio (KPI)
The Group aims to price its business to ensure that the combined ratio across the cycle is significantly less
than 100%.
Accident year loss ratio
This ratio shows the amount of claims expected to be paid out per $1.00 of net premium earned in an
accident year.
Fully converted book value per
share (‘FCBVS’) attributable to
the Group
Shows the Group net asset value on a diluted per share basis for comparison to the market value per share.
Return on equity (‘RoE’) (KPI)
The Group’s aim is to maximise risk-adjusted returns for shareholders across the cycle.
(RoE is also sometimes
referred to as the change in
FCBVS adjusted for dividends)
Total investment return (KPI)
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.
Total shareholder return (KPI)
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.
Comprehensive income
returned to shareholders (KPI)
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.
Dividend yield (KPI)
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.
176 Lancashire Holdings Limited
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Annual Report & Accounts 2019
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
Lancashire Syndicates Limited
Lancashire Syndicates Limited
29th Floor
20 Fenchurch Street
London EC3M 3BY
United Kingdom
Phone: + 44 (0) 20 7170 9000
Fax: + 44 (0) 20 7170 9001
C O N T A C T I N F O R M A T I O N
Lancashire Capital Management
Lancashire 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:
Walkers (Bermuda) Limited
Park Place
55 Par-la-Ville Road
Third Floor
Hamilton HM11
Bermuda
Auditors
KPMG LLP
15 Canada Square
London E14 5GL
United Kingdom
Registrar
Link Market Services (Jersey) Limited
12 Castle Street
St Helier
Jersey JE2 3RT
Channel Islands
Depositary
Link Market Services Trustees Limited
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
United Kingdom
www.lancashiregroup.com
177
Additional Information Holdings Limited
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