Q2 2007 Results
Lancashire Holdings Limited
06 August 2007
Lancashire Holdings Limited
Fully converted book value grows 5.4% in Q2, 13.0% year to date
Gross written premiums grow 32.8% in Q2, 42.7% year to date
Combined ratio 56.6% in Q2, 52.2% year to date
Hamilton, Bermuda, 6 August 2007
Lancashire Holdings ('Lancashire' or 'the Company') today announces its results
for the second quarter of 2007 and the six month period ended 30 June 2007.
Despite a backdrop of significant industry insurance losses and challenging
investment markets, Lancashire has continued to generate excellent growth in
book value.
Financial highlights for the second quarter of 2007:
• Fully converted book value per share grows 5.4% over the quarter;
• Gross written premiums of $270.8 million, an increase of 32.8% from the
second quarter of 2006. Net written premiums increased 51.6%;
• Loss ratio of 34.4% and a combined ratio of 56.6%;
• Total annualised investment return of 3.8% for the second quarter,
including net investment income, realized gains and losses, and unrealized
gains and losses;
• Net income after tax of $82.5 million, $0.40 diluted earnings per share,
or £0.20 diluted earnings per share.
Financial highlights for the six months to 30 June 2007:
• Fully converted book value per share grows 13.0% for the first half of
2007, bringing the rolling 12 month growth in fully converted book value
per share to 27.1%;
• Gross written premiums of $451.5 million, an increase of 42.7% from the
first half of 2006. Net written premiums increased 53.3%;
• Loss ratio of 28.9% and a combined ratio of 52.2%;
• Total annualised investment return of 5.3% for the six months to 30 June
2007, including net investment income, realized gains and losses, and
unrealized gains and losses;
• Net income after tax of $170.4 million for the six months to 30 June,
2007, $0.83 diluted earnings per share, or £0.42 diluted earnings per
share.
Richard Brindle, Group Chief Executive Officer, commented:
'In both relative and absolute terms, Lancashire has enjoyed an excellent first
half of 2007. A 13% return on equity to date is evidence that our underwriting
judgment is sound and our risk management is robust. In addition to events in
Australia and Japan, we were tested by the June U.K. flooding; a loss which, on
current estimates, ranks in the top 10 of non-U.S. catastrophe events in recent
memory. Despite these events, Lancashire produced combined ratios of 56.6% and
52.2% for the quarter and year to date, respectively. Our investment portfolio
also stood up well, reflecting our strategy to keep duration short and credit
quality high. We maintain a low risk tolerance on investments, and do not
currently hold any sub-prime or CDO securities.'
'When we started this business, we chose a different path from other
post-Katrina market entrants and indeed from many existing companies. It was
assumed we would be a mono-line property cat reinsurer. In fact, the Lancashire
strategy is entirely different. Our approach is to write a diversified book of
direct specialty insurance. We have built an excellent team, broadened our
platform beyond Bermuda within nine months and established a sophisticated
framework of operations thoroughly grounded in enterprise-wide risk management
principles. Today, we're very pleased to have completed our transition to an
established major specialty insurer. Our start-up days are well and truly over.'
Underwriting results
Gross written premiums increased 32.8% in the second quarter of 2007 compared to
the same period in 2006. In 2007 to date, gross written premiums increased 42.7%
compared to the first six months of 2006. The main drivers were the UK operating
platform, which began underwriting in late 2006, and a substantial increase in
submission count. All segments experienced an increase in premiums written.
Direct and facultative property and worldwide energy classes in particular
experienced the largest growth.
In general, rates continue to soften and this is expected to continue in the
absence of significant industry losses. However, in the majority of classes
underwritten, rates and terms remain good overall.
In the quarter and for the year to date, the amount of premium ceded was similar
to the prior year periods, reflecting a slightly higher retention rate in 2007
than 2006. Net written premiums increased 51.6% in the second quarter of 2007
compared to the second quarter of 2006, and increased 53.3% year to date over
the same period in 2006.
Net earned premiums as a proportion of net written premiums were 75% in the
second quarter of 2007, and 78% in the six months to 30 June 2007. This ratio is
reflective of a growing portfolio and is expected to gradually increase as the
year progresses.
The loss ratios of 34.4% and 28.9% for the three and six months to 30 June 2007,
respectively, reflect a very good underwriting performance in all segments.
Lancashire does not currently expect to incur losses from the June UK flooding.
Investments
Net investment income was $18.6 million for the second quarter, an increase of
46.5% over the second quarter of 2006. Net investment income was $35.3 million
in the six months to 30 June 2007, an increase of 45.9% over the first half of
2006. The increase in investment income is primarily due to high net operating
cashflow, resulting in higher net invested assets.
Total investment return, including net investment income, net realized gains and
losses and net unrealized gains and losses, was $12.6 million in the quarter and
$30.5 million for the year to date. Total investment return was lower than net
investment income due primarily to weak fixed income markets in the second
quarter. This weakness was mitigated by Lancashire's strategy to maintain
duration short and credit quality high.
Capital
At 30 June 2007, total capital was $1.440 billion, comprising shareholders'
equity of $1.310 billion and $129 million of long-term debt. Leverage was 9.0%.
Guidance
2007 guidance on gross premiums and return on equity remains unchanged. Based on
anticipated terms and conditions, 2007 gross premiums written are expected to
increase by at least 20% over 2006. Fully converted book value per share is
projected to increase between 20 and 25% in 2007, including dividends, assuming
a normal level of losses.
Should Lancashire experience normal or lower than expected loss activity, and
underwriting opportunities consequently decrease, it is likely that a
significant proportion of 2007 profits will be returned to shareholders upon
approval by the Board of Directors.
Further detail of our 2007 second 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 presentation on the results at 1200UK time (BST) on
Monday 6 August at Financial Dynamics, Holborn Gate, 26 Southampton Buildings,
London WC2A 1PB. This presentation will be hosted by Richard Brindle, Chief
Executive Officer; Neil McConachie, Chief Financial Officer; and Simon Burton,
Deputy Chief Executive Officer. Those wishing to attend are asked to contact Rob
Bailhache or Nick Henderson at Financial Dynamics on +44 (0) 207 269 7200 /
robert.bailhache@fd.com or +44 (0) 207 269 7114 / nick.henderson@fd.com.
The presentation will also be accessible via a conference call for those unable
to attend in person. To dial-in please call 0845 245 5000 / 1 866 832 0717 (pass
code: 6408031)
There will also be a live webcast of the presentation at www.lancashiregroup.com
. A replay facility can also be accessed at www.lancashiregroup.com .
For further information, please contact:
Lancashire Holdings +1 441 278 8950
Neil McConachie
Financial Dynamics +44 20 7269 7114
Robert Bailhache
Nick Henderson
Kekst & Company Inc.
Michael Herley (1) 212 521 4897
Mark Semer (1) 212 521 4802
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) 30 June 2007
June 30, 2007 December 31, 2006
$m $m
assets
cash and cash equivalents 367.7 400.1
accrued interest receivable 10.5 7.5
investments
- fixed income securities
- available for sale 1,220.1 896.3
- at fair value through income 17.5 -
- equity securities, available for sale 68.7 70.3
- other investments 9.3 11.5
reinsurance assets
- unearned premium on premium ceded 63.5 19.1
- reinsurance recoveries 0.5 -
deferred acquisition costs 63.8 51.5
inwards premium receivable from insureds and cedants 252.1 173.7
investment in associate 21.4 23.2
other assets 16.5 9.5
total assets 2,111.6 1,662.7
liabilities
insurance contracts
- loss and loss adjustment expenses 121.7 39.1
- unearned premiums 454.1 325.7
- other payables 6.2 3.6
amounts payable to reinsurers 60.8 2.4
deferred acquisition costs ceded 7.1 2.5
other payables 22.2 23.2
long-term debt 129.3 128.6
total liabilities 801.4 525.1
shareholders' equity
share capital 97.9 97.9
share premium 40.2 33.6
contributed surplus 849.5 849.7
fair value and other reserves 4.5 8.7
retained earnings 318.1 147.7
total shareholders' equity attributable to equity
shareholders 1,310.2 1,137.6
total liabilities and shareholders' equity 2,111.6 1,662.7
basic book value per share $6.69 $5.81
fully converted book value per share $6.42 $5.68
Consolidated Income Statement
(Unaudited) to 30 June 2007
Q2 2007 Q2 2006 Ytd 2007 Ytd 2006
$m $m $m $m
gross premiums written 270.8 203.9 451.5 316.3
outwards reinsurance premiums (69.3) (71.0) (75.4) (71.0)
net premiums written 201.5 132.9 376.1 245.3
change in unearned premiums (100.8) (147.8) (128.4) (241.4)
change in unearned premiums on premium ceded 51.2 60.4 44.4 60.4
net premiums earned 151.9 45.5 292.1 64.3
net investment income 18.6 12.7 35.3 24.2
net realised gains (losses) and impairments 2.6 (3.2) 4.4 (3.4)
share of profit of associate 1.5 - 2.8 -
net foreign exchange gains (losses) 0.4 (0.5) 1.8 (1.1)
net other investment income (losses) (0.4) - (0.5) -
total net revenue 174.6 54.5 335.9 84.0
insurance losses and loss adjustment expenses 52.8 3.5 84.8 7.4
insurance losses and loss adjustment expenses recoverable (0.5) - (0.5) -
net insurance acquisition expenses 20.9 5.7 41.2 7.6
equity based compensation 2.7 4.6 6.4 10.6
other operating expenses 12.8 7.7 26.8 13.6
total expenses 88.7 21.5 158.7 39.2
profit before tax and finance costs 85.9 33.0 177.2 44.8
finance costs 3.1 3.0 6.1 5.5
profit before tax 82.8 30.0 171.1 39.3
tax 0.3 - 0.7 -
profit after tax for the period attributable to equity 82.5 30.0 170.4 39.3
shareholders
net loss ratio 34.4% 7.7% 28.9% 11.6%
net acquisition cost ratio 13.8% 12.5% 14.1% 11.8%
administrative expense ratio 8.4% 16.9% 9.2% 21.1%
combined ratio 56.6% 37.1% 52.2% 44.5%
basic earnings per share $0.42 $0.15 $0.87 $0.20
diluted earnings per share $0.40 $0.15 $0.83 $0.20
change in fully converted book value per 5.4% 3.1% 13.0% 4.3%
share
Consolidated Cash Flow Statement
(Unaudited to 30 June 2007)
Six months Twelve months
2007 2006
$m $m
cash flows from operating activities
profit before interest and tax 141.4 116.4
interest income 35.3 53.6
interest expense (5.6) (10.6)
tax (0.7) (0.2)
depreciation 0.7 0.6
amortisation of debt securities (0.7) (1.2)
employee benefit expense 6.4 22.5
foreign exchange (1.3) 1.9
share of profit of associate (2.8) (3.2)
net unrealised losses (gains) on derivative financial 0.8 (1.8)
instruments
net realised (gains) losses and impairments on investments (4.4) (0.8)
net fair value gains on investments at fair value through (0.3) -
income
unrealised (gains) losses on swaps (0.9) 0.9
accrued interest receivable (3.0) (5.6)
reinsurance assets
- unearned premium on premium ceded (44.4) (19.1)
- reinsurance recoveries (0.5) -
deferred acquisition costs (12.3) (51.0)
other receivables (6.3) (6.0)
inwards premium receivable from insureds and cedants (77.2) (171.4)
deferred tax asset (0.4) (0.8)
insurance contracts
- losses and loss adjustment expenses 82.7 39.1
- unearned premiums 128.4 323.1
- other payables 2.6 3.6
amounts payable to reinsurers 57.8 2.4
deferred acquisition costs ceded 4.6 2.5
other payables (1.1) 18.6
corporation tax payable 1.2 1.0
accrued interest payable (0.1) -
net cash flows from operating activities 299.9 314.5
cash flows from investing activities
purchase of property, plant and equipment (1.0) (2.6)
investment in associate - (20.0)
dividends received from associate 4.6 -
purchase of debt securities (942.5) (2,086.1)
purchase of equity securities (15.1) (76.1)
proceeds on maturity and disposal of debt securities 595.4 1,185.6
proceeds on disposal of equity securities 23.0 20.9
net purchase of other investments 2.1 (9.7)
net cash flows used in investing activities (333.5) (988.0)
net decrease in cash and cash equivalents (33.6) (673.5)
cash and cash equivalents at beginning of period 400.1 1,072.4
effect of exchange rate fluctuations on cash and cash equivalents 1.2 1.2
cash and cash equivalents at end of period 367.7 400.1
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', 'INTENDS',
'EXPECTS', 'ESTIMATES', 'PREDICTS', 'MAY', '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, 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; 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 AND OTHER SOURCES. JUDGMENTS IN RELATION TO
FLOOD 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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