Lancashire Holdings Regulatory News (LRE)

27 Oct 2008 07:00

LANCASHIRE HOLDINGS LIMITED

 

Hamilton, Bermuda, 27 October 2008

 

Lancashire Holdings Limited ("Lancashire" or "the Company") today announces its results for the third quarter of 2008 and the nine month period ended 30 September 2008. 

 

As previously disclosed, Hurricanes Gustav and Ike, together with extremely difficult investment market conditions, have negatively impacted Lancashire's results for the third quarter of 2008. At the same time, these two factors are expected to drive significantly improved trading conditions for 2009.

 

Financial highlights for the third quarter of 2008:

Fully converted book value per share of $6.33 at 30 September 2008, compared to $6.91 at 30 June 2008, a reduction of 8.4%;

Gross written premiums of $124.6 million. Net written premiums of $120.3 million;

Loss ratio of 152.5% and a combined ratio of 178.2%;

Total annualised investment loss of 1.7%, including net investment income, realised gains and losses, impairments, and unrealised gains and losses;

Net operating loss of $105.7 million, or $0.61 diluted operating loss per share; and

Net loss after tax of $119.4 million, or $0.69 diluted loss per share.

 

Financial highlights for the nine months to 30 September 2008:

 

Fully converted book value per share of $6.33 at 30 September 2008, compared to $6.38 at 31 December 2007, a reduction of 0.8%. Compound annual return on equity since inception of 16.2%;

Gross written premiums of $508.0 million. Net written premiums of $444.6 million;

Loss ratio of 77.2% and a combined ratio of 101.9%;

Total annualised investment return of 1.2% including net investment income, realised gains and losses, impairments, and unrealised gains and losses;

Net operating profit of $21.1 million, or $0.11 diluted operating earnings per share; and

Net income after tax of $16.4 million, or $0.09 diluted earnings per share.

 

Richard Brindle, Group Chief Executive Officer, commented:

 

"As a result of summer hurricanes and financial market turmoil, Lancashire has experienced its first quarterly loss since inception. The total impact on our results from the hurricanes is approximately $150 million. While this has negatively impacted our return on equity in the short-term, we believe these market events will better help us achieve our long-term aim of generating a strong return for shareholders. The financial fallout from the credit crisis in particular is having a very significant impact on capacity in the industry as a whole. If the current malaise afflicting all financial markets continues throughout the fourth quarter, we can expect a sea of red ink for the industry's full year results.

 

There is now no question that the market has turned. In many areas of our portfolio, conditions could be similar, or even better, than what would have been in place in 2002 due in part to large improvements in terms and condition since that time. Our balance sheet is strong and we look forward with optimism."

 

Neil McConachie, Chief Financial Officer and Chief Risk Officer, commented:

 

"In some of the most challenging investment markets in recent memory, our highly conservative strategy helped Lancashire achieve a positive total investment return for the nine months through 30 September 2008, and to limit total investment losses in the third quarter to $7.4 million. Our investment approach will remain very defensive throughout this difficult period.

 

As we look ahead to 2009, we are confident there are great opportunities to grow book value per share at an attractive rate and we plan to take full advantage of this."

 

Underwriting results

 

Gross written premiums decreased by 15.4% in the third quarter of 2008 compared to the same period in 2007. In 2008 to date, gross written premiums decreased by 15.2% compared to the first nine months of 2007.

 

The reduction in written premiums, both for the quarter and the year to date, is largely attributable to lower rates than in previous periods, and a corresponding greater proportion of submissions declined. Lancashire's Renewal Price Index, which considers both pricing and terms and conditions, shows the following renewal comparisons between the third quarter of 2008 and the same period in 2007: Property 88%; Energy 94%; Marine 104%; Aviation (AV52, aviation war and satellite only) 91%; Overall 92%. 

 

We ceded less premium out in the third quarter of 2008 compared to the third quarter of 2007. Ceded premium fell from $6.8 million in the third quarter of 2007 to $4.3 million in the third quarter of 2008. Ceded premium fell from $82.2 million in the nine months to 30 September 2007 to $63.4 million for the same period in 2008. Contributing factors were lower rates, together with the reduction in the purchase of protection against natural catastrophes, including the commutation of the quota share cession to the Lancashire sponsored energy sidecar, Sirocco Re, at the end of 2007. This was partially offset by an increase in reinsurance purchased to mitigate losses from events other than natural disasters, most of which was purchased in the first quarter of 2008.

 

Net written premium decreased 14.4% and 13.9% for the quarter and year to date, respectively, compared to the same periods in 2007. This was chiefly due to lower gross written premiums, offset somewhat by lower purchases of reinsurance.

 

Net earned premiums as a proportion of net written premiums were 122.9% in the third quarter of 2008 compared to 114.2% in the same period in 2007. Net earned premiums as a proportion of net written premiums were 104.7% in the nine months to 30 September 2008 compared to 87.6% in the same period in 2007. The increases reflect that, after reaching its third year of operations, Lancashire has built a mature portfolio of business, whereas in 2007 the portfolio was still in a growth phase.

 

Investments

 

Net investment income was $15.5 million for the third quarter, a decrease of 25.8% from the third quarter of 2007. Net investment income was $46.1 million in the nine months to 30 September 2008, a decrease of 18.0% over the same period in 2007. The decrease in net investment income is primarily due to lower yields on the bond portfolio. The lower yields were driven to a large extent by reductions in U.S. interest rates throughout 2008, together with the tactical decision to exit certain higher yielding fixed income classes, including all non-agency structured products, in the fourth quarter of 2007.

 

Total investment return, including net investment income, net realised gains and losses and net change in unrealised gains and losses, was a loss of $7.4 million in the quarter and a positive return of $17.0 million for the year to date. Total investment return was negatively impacted in the quarter by weak bond and equity markets. The limited loss in the third quarter, and the positive return in the nine months to date, was achieved by our strategy to hold an overweight position in cash and by maintaining a high quality, short duration bond portfolio with underweight allocations to structured products and the financial sector. It was also helped by maintaining only a modest allocation to equities.

 

At 30 September 2008 the fixed income portfolio plus managed cash had a duration of 1.6 years, a credit quality of AA+ and a market yield of 3.3%. Investment assets were comprised of 69.5% fixed income, 3.8% equities and 26.7% cash. Lancashire has no holdings in hedge funds or other alternative investments.

 

Capital

 

 

Outlook

 

Lancashire aims to achieve a cross-cycle return of 13% above a risk free rate. This is unchanged from previous guidance.

 

 

Further detail of our 2008 third quarter results can be obtained from our Financial Supplement. This can be accessed via our website www.lancashiregroup.com.

 

Investor Presentation and Earnings Call

 

There will be an investor conference call on the results at 1.00pm UK time / 9.00am EST on Monday 27 October 2008. This call will be hosted by Richard Brindle, Chief Executive Officer; Simon Burton, Deputy Chief Executive Officer; and Neil McConachie, Chief Financial Officer and Chief Risk Officer. 

 

The call can be accessed by dialing +44 (0)20 7806 1950 / +1 718 354 1387 with the passcode 3769284. The call can also be accessed via webcast, please go to our website (www.lancashiregroup.com) to access.

 

A replay facility will be available for two weeks until Monday 10 November 2008. The dial in number for the replay facility is +44 (0)20 7806 1970 / +1 718 354 1112 and the passcode is 3769284#. A replay facility can also be accessed at www.lancashiregroup.com .

 

For further information, please contact:

 

Lancashire Holdings	+ 44 (0)20 7264 4000
Jonathan Creagh Coen
Financial Dynamics	+44 (0)20 7269 7114
Robert Bailhache
Nick Henderson

 

Investor enquiries and questions can also be directed to investors@lancashiregroup.com or by accessing the Company's website www.lancashiregroup.com.

 

consolidated balance sheet

unaudited audited

				september 30, 2008			december 31, 2007
				$m			$m
assets
cash and cash equivalents				567.5			737.3
accrued interest receivable				9.3			9.8
investments
- fixed income securities
- available for sale				1,292.5			1,069.7
- at fair value through income				18.0			23.5
- equity securities, available for sale				71.5			71.6
- other investments				3.5			4.4
reinsurance assets
- unearned premium on premium ceded				26.2			19.6
- reinsurance recoveries				43.8			3.6
- other receivables				-			8.2
deferred acquisition costs				65.1			57.8
inwards premium receivable from insureds and cedants				154.8			198.2
investment in associate				-			22.9
other assets				47.5			8.1
total assets				2,299.7			2,234.7
liabilities
insurance contracts
- loss and loss adjustment expenses				545.5			179.6
- unearned premiums				367.6			381.8
- other payables				9.8			16.5
amounts payable to reinsurers				11.5			5.7
deferred acquisition costs ceded				3.7			3.1
other payables				75.2			300.1
long-term debt				131.7			132.3
total liabilities				1,145.0			1,019.1
shareholders' equity
share capital				91.1			91.1
treasury shares				(58.0)			-
share premium				51.3			49.5
contributed surplus				754.8			754.8
fair value and other reserves				(0.5)			20.7
dividends				0.1			(239.1)
retained earnings			315.9		538.6
total shareholders' equity attributable to equity shareholders				1,154.7			1,215.6
total liabilities and shareholders' equity				2,299.7			2,234.7
basic book value per share				$6.68			$6.67
fully converted book value per share				$6.33			$6.38

 

 

consolidated income statement

			unaudited quarter 3  2008		unaudited quarter 3  2007		unaudited ytd  2008		unaudited   ytd  2007
			$m		$m		$m		$m
gross premiums written			124.6		147.3		508.0		598.8
outwards reinsurance premiums			(4.3)		(6.8)		(63.4)		(82.2)
			120.3		140.5		444.6		516.6
net premiums written
change in unearned premiums			40.0		35.5		14.2		(92.9)
change in unearned premiums on premium ceded			(12.4)		(15.5)		6.6		28.9
			147.9		160.5		465.4		452.6
net premiums earned
net investment income			15.5		20.9		46.1		56.2
net realised gains (losses) and impairments			(13.1)		2.3		(7.0)		6.7
share of profit (loss) of associate			-		1.1		(0.2)		3.9
net foreign exchange gains (losses)			(4.5)		1.7		(4.2)		3.5
net other investment losses			(0.2)		(2.0)		(0.9)		(2.5)
			145.6		184.5		499.2		520.4
total net revenue
insurance losses and loss adjustment expenses			260.4		38.1		400.4		122.9
insurance losses and loss adjustment expenses recoverable			(34.8)		(1.0)		(41.2)		(1.5)
net insurance acquisition expenses			23.9		21.2		74.4		62.4
equity based compensation			0.4		4.4		1.7		10.8
other operating expenses			14.0		12.3		40.7		39.1
total expenses			263.9		75.0		476.0		233.7
profit (loss) before tax and finance costs			(118.3)		109.5		23.2		286.7
finance costs			3.4		4.4		8.7		10.5
profit (loss) before tax			(121.7)		105.1		14.5		276.2
tax			2.3		0.1		1.9		(0.6)
profit (loss) after tax			(119.4)		105.2		16.4		275.6
net loss ratio			152.5%		23.1%		77.2%		26.8%
net acquisition cost ratio			16.2%		13.2%		16.0%		13.8%
administrative expense ratio			9.5%		7.7%		8.7%		8.6%
combined ratio			178.2%		44.0%		101.9%		49.2%
basic earnings (loss) per share			(0.69)		0.54		0.09		1.41
diluted earnings (loss) per share			(0.69)		0.51		0.09		1.34
change in fully converted book value per share			-8.4%		7.9%		-0.8%		22.0%

 

 

 

consolidated cash flow statement				unaudited nine months 2008		unaudited nine months 2007		audited  twelve months 2007
				$m		$m		$m
cash flows from operating activities
profit before tax				14.5		276.2		391.9
tax paid depreciation				(0.8) 0.8		(0.8) 1.0		(2.4) 1.4
interest expense interest and dividend income amortisation of fixed income securities				7.6 (45.3) (0.7)		8.5 (56.9) (0.8)		11.6 (79.3) (0.7)
employee benefit expense				1.7		10.8		14.4
foreign exchange				6.4		(2.4)		(3.1)
share of loss (profit) of associate				0.2		(3.9)		(6.2)
net unrealised losses (gains) on other investments				(0.2)		2.3		(9.1)
net realised losses (gains) and impairments on investments				7.0		(6.7)		3.3
net fair value losses (gains) on investments at fair value through income				1.1		0.2		(0.4)
unrealised loss on interest rate swaps				-		0.1		1.3
reinsurance assets
- unearned premium on premium ceded				(6.6)		(28.9)		(0.5)
- reinsurance recoveries				(40.2)		(1.5)		(3.5)
- other receivables				8.1		(23.4)		(8.2)
deferred acquisition costs				(7.3)		(9.5)		(6.3)
other receivables				(38.7)		-		2.4
inwards premium receivable from insureds and cedants				41.2		(1.2)		(23.8)
insurance contracts
- losses and loss adjustment expenses				368.1		118.7		140.0
- unearned premiums				(14.2)		92.9		56.2
- other payables				(7.3)		3.4		11.3
amounts payable to reinsurers				5.8		26.9		4.9
deferred acquisition costs ceded				0.6		4.1		0.5
other payables				25.3		45.4		25.8
net cash flows from operating activities				327.1		454.5		521.5
cash flows used in investing activities interest and dividends received				45.8		53.9		77.0
purchase of property, plant and equipment				(0.2)		(1.3)		(1.3)
dividends received from associate				22.7		5.4		6.5
purchase of fixed income securities				(2,601.8)	(1,628.7)		(2,143.3)
purchase of equity securities				(31.7)		(21.9)		(30.9)
proceeds on maturity and disposal of debt securities				2,373.5		1,252.4		1,960.4
proceeds on disposal of equity securities				13.5		26.3		36.9
net proceeds on other investments				1.4		3.3		5.1
net cash flows used in investing activities				(176.8)		(310.6)		(89.6)
cash flows used in financing activities interest paid dividends paid shares repurchased				(7.7) (238.2) (68.3)		(8.5) - -		(11.6) - (89.3)
net cash flows used in financing activities				(314.2)		(8.5)		(100.9)
net decrease in cash and cash equivalents				(163.9)		135.4		331.0
cash and cash equivalents at beginning of period				737.3		400.1		400.1
effect of exchange rate fluctuations on cash and cash equivalents				(5.9)		4.0		6.2
cash and cash equivalents at end of period				567.5		539.5		737.3

 

 

 

About Lancashire

 

Lancashire, through its UK and Bermuda-based insurance subsidiaries, is a global provider of specialty insurance products. Its insurance subsidiaries carry the Lancashire group rating of A minus (Excellent) from A.M. Best with a stable outlook. Lancashire has capital in excess of $1 billion and its Common Shares trade on AIM under the ticker symbol LRE. Lancashire is headquartered at Mintflower Place, 8 Par-La-Ville Road, Hamilton HM 08, Bermuda. The mailing address is Lancashire Holdings Limited, P.O. Box HM 2358, Hamilton HM HX, Bermuda. For more information on Lancashire, visit the company's website at www.lancashiregroup.com

 

NOTE REGARDING FORWARD-LOOKING STATEMENTS:

 

CERTAIN STATEMENTS AND INDICATIVE PROJECTIONS MADE IN THIS ANNOUNCEMENT AND ON THE CONFERENCE CALL THAT ARE NOT BASED ON CURRENT OR HISTORICAL FACTS ARE

FORWARD-LOOKING IN NATURE INCLUDING WITHOUT LIMITATION, STATEMENTS CONTAINING WORDS 'BELIEVES', 'ANTICIPATES', 'PLANS', 'PROJECTS', 'FORECASTS', 'GUIDANCE', 'INTENDS', 'EXPECTS', 'ESTIMATES', 'PREDICTS', 'MAY', 'CAN', 'WILL', 'SEEKS', 'SHOULD', OR, IN EACH CASE, THEIR NEGATIVE OR COMPARABLE TERMINOLOGY. ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDING, WITHOUT LIMITATION, THOSE REGARDING THE GROUP'S FINANCIAL POSITION, RESULTS OF OPERATIONS, LIQUIDITY, PROSPECTS, GROWTH, CAPITAL MANAGEMENT PLANS, BUSINESS STRATEGY, PLANS AND OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS (INCLUDING DEVELOPMENT PLANS AND OBJECTIVES RELATING TO THE GROUP'S INSURANCE BUSINESS) ARE FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER IMPORTANT FACTORS THAT COULD CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE GROUP TO BE MATERIALLY DIFFERENT FROM FUTURE RESULTS, PERFORMANCE OR ACHIEVMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THESE FACTORS INCLUDE, BUT ARE NOT LIMITED TO: THE NUMBER AND TYPE OF INSURANCE AND REINSURANCE CONTRACTS THAT WE WRITE; THE PREMIUM RATES AVAILABLE AT THE TIME OF SUCH RENEWALS WITHIN OUR TARGETED BUSINESS LINES; THE ABSENCE OF LARGE OR UNUSUALLY FREQUENT LOSS EVENTS; THE IMPACT THAT OUR FUTURE OPERATING RESULTS, CAPITAL POSITION AND RATING AGENCY AND OTHER CONSIDERATIONS HAVE ON THE EXECUTION OF ANY CAPITAL MANAGEMENT INITIATIVES; THE POSSIBILITY OF GREATER FREQUENCY OR SEVERITY OF CLAIMS AND LOSS ACTIVITY THAN OUR UNDERWRITING, RESERVING OR INVESTMENT PRACTICES HAVE ANTICIPATED; THE RELIABILITY OF, AND CHANGES IN ASSUMPTIONS TO, CATASTROPHE PRICING, ACCUMULATION AND ESTIMATED LOSS MODELS; LOSS OF KEY PERSONNEL; A DECLINE IN OUR OPERATING SUBSIDIARIES' RATING WITH A.M. BEST COMPANY; INCREASED COMPETITION ON THE BASIS OF PRICING, CAPACITY, COVERAGE TERMS OR OTHER FACTORS; A CYCLICAL DOWNTURN OF THE INDUSTRY; THE IMPACT OF A DETERIORATING CREDIT ENVIRONMENT CREATED BY THE SUB-PRIME AND CREDIT CRISIS; A RATING DOWNGRADE OF, OR A MARKET DECLINE IN, SECURITES IN OUR INVESTMENT PORTFOLIO; CHANGES IN GOVERNMENTAL REGULATIONS OR TAX LAWS IN JURISDICTIONS WHERE LANCASHIRE CONDUCTS BUSINESS; LANCASHIRE OR ITS BERMUDIAN SUBSIDIARY BECOMING SUBJECT TO INCOME TAXES IN THE UNITED STATES OR THE UNITED KINGDOM; AND THE EFFECTIVENESS OF OUR LOSS LIMITATION METHODS. ANY ESTIMATES RELATING TO LOSS EVENTS INVOLVE THE EXERCISE OF CONSIDERABLE JUDGMENT AND REFLECT A COMBINATION OF GROUND-UP EVALUATIONS, INFORMATION AVAILABLE TO DATE FROM BROKERS AND INSUREDS, MARKET INTELLIGENCE, INITIAL TENTATIVE LOSS REPORTS, ASSUMPTIONS FROM MODELING FIRMS ABOUT AGGREGATE INDUSTRY LOSSES, AND OTHER SOURCES. JUDGMENTS IN RELATION TO FLOOD AND STORM SURGE LOSSES INVOLVE COMPLEX FACTORS POTENTIALLY CONTRIBUTING TO THIS TYPE OF LOSS, AND WE CAUTION AS TO THE PRELIMINARY NATURE OF THE INFORMATION USED TO PREPARE ANY SUCH ESTIMATES.

 

THESE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS AT THE DATE OF PUBLICATION OF THIS DOCUMENT. LANCASHIRE HOLDINGS LIMITED EXPRESSLY DISCLAIMS ANY OBLIGATION OR UNDERTAKING (SAVE AS REQUIRED TO COMPLY WITH ANY LEGAL OR REGULATORY OBLIGATIONS (INCLUDING THE AIM RULES)) TO DISSEMINATE ANY UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENTS TO REFLECT ANY CHANGES IN THE GROUP'S EXPECTATIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENT IS BASED.

 

 

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