7th Aug 2006 07:00
Lancashire Holdings Limited07 August 2006 Hamilton, Bermuda, 7 August 2006 Lancashire Holdings Limited Unaudited results for the 6 month period to 30 June 2006 Operating income of $42.7 million for the first half of 2006 • Operating income of $42.7 million(1)• Operating income per common share of $0.22• Net income of $39.3 million• Net income per common share of $0.19• Gross written premium of $316.3 million• Loss ratio of 11.6% (1) Operating income excludes $3.4 million in net realized investment losses Richard Brindle, Chief Executive Officer and Chief Underwriting Officer,commented: "Lancashire has had an excellent first half of 2006. We experienced strongtrading conditions and claims activity was low. From a standing start we arevery pleased to have established Lancashire as a significant market participantin a wide range of specialty classes. The operational and financial resultsachieved by the team in such a short period of time have been remarkable." Financial Highlights Property Energy Marine Aviation TotalBound premium 129.3 158.2 22.8 39.0 349.3 Gross premium written 129.3 151.2 21.7 14.0 316.3Net premium written 89.6 120.0 21.7 14.0 245.3Net premium earned 30.6 24.4 6.2 3.1 64.3Losses and loss expenses (2.1) (3.5) (1.8) - (7.4)Acquisition costs (3.1) (2.9) (1.0) (0.6) (7.6)Underwriting income 25.4 18.0 3.4 2.5 49.3Investment income 24.2Realised gains (losses) (3.4)Foreign exchange (1.1)Operating expenses (13.6)Warrants and options (10.6)Financing costs (5.5)Profit after taxes 39.3 Loss ratio (2) 6.9% 14.3% 29.0% 0.0% 11.6%Acquisition cost ratio (2) 10.1% 11.9% 16.1% 19.4% 11.8%Expense ratio (2) 21.1%Combined ratio (2) 44.5% (2) Based on net earned premium Chief Executive's Statement Lancashire has emerged as a highly selective specialty insurer that is carefullybuilding a robust and diversified book that will stand the company in good steadover the long term. Our underwriting approach is unique and clear: We concentrate on classes ofbusiness with the most attractive risk return characteristics available in themarket, including those classes most dislocated by the loss events of 2004 and2005. The Lancashire underwriting team - highly regarded and well known expertsin our areas of focus - has strong broker relationships and boasts an impressiverecord in producing market leading returns through hard and soft market cycles. Our strategy has four cornerstones: (i) underwriting comes first; (ii) maintaina strong balance sheet; (iii) stay nimble; and (iv) manage capital through thecycle. We believe this strategy, successfully executed, will deliver ouroverriding aim: to create attractive long-term growth in book value for ourshareholders. As the year has progressed we have gradually deployed our capital towards thebest underwriting opportunities. Notwithstanding a generally favorableenvironment, our disciplined strategy has entailed declining a large number ofrisks which haven't met our return requirements. However, as we anticipated atthe beginning of the year, pricing and terms have steadily improved and we havebeen patient to ensure we make most efficient use of our balance sheet. While wehave allocated the majority of our risk capital at this stage, we havedeliberately held back a proportion of capacity. We intend to use thisopportunistically in the event of further market dislocation or severe capacityshortages in the market. In the second half of the year, we generally expect continued strong pricing andterms for the classes we write. While we will continue to expand our diversifiedbook through 2006 and into 2007, we will not compromise underwriting disciplinefor top-line growth. If trading conditions unfold as expected, we expect boundpremium of between $675 and $750 million. This translates to GAAP gross writtenpremium for 2006 of between approximately $615 million and $680 million, and netwritten premium between approximately $540 million and $610 million. We are also very excited about the opening of our London underwriting operation.Lancashire UK is an accretive, organic addition to our existing operation, onewhich will greatly increase the flexibility of our operations and afford usaccess to a wider pool of high quality risks. We expect to see the benefits ofthis almost immediately, and we look forward to capitalising on these benefitsas we move into 2007 and beyond." Looking forward, we expect that a combination of our larger underwriting basetogether with continued strong trading conditions in our core lines of businesswill result in an increasing number of attractive underwriting opportunities forLancashire in the medium term. At this time, we continue to target a 2006 ROE of16 to 20 percent, assuming a normal level of losses. Dividends We are finding ample opportunities to fully deploy our capital, and expect to beable to continue to do so for the remainder of 2006 at a minimum. As such, wehave not declared an interim dividend at 30 June 2006. We continually assess ourcapital adequacy and structure to best match the projected underwritingopportunities and will make any adjustments necessary as the environmentevolves, including the payment of dividends as and when appropriate. Operating and Financial Review Gross written premiums for the half year were $316.3 million. Overall tradingconditions in the classes written by Lancashire have been very good,particularly in classes impacted by the loss events of 2005. In 2006, weanticipate that premium for risks exposed to natural catastrophes will representapproximately 55% of our total written premium. Lancashire writes premium,mostly on a direct basis, in four lines: property, energy, marine and aviation. Property This line contains property retrocession, direct and facultative property andterrorism. Pricing has been excellent, as have terms and conditions,particularly in the retrocession and direct and facultative classes. Tradingconditions in these classes steadily improved through the six months to 30 June2006 and are expected to remain at levels at least this good for the remainderof 2006. Trading conditions in terrorism are reasonably good. Lancashire expectsto increase its terrorism book in the latter half of 2006 and into 2007following the arrival of our new terrorism specialist to the team in mid August.We have also written a handful of political risk contracts. Energy The energy line includes offshore and onshore energy written on a worldwidebasis. The Gulf of Mexico offshore energy class represents approximately 75% ofenergy premium written through 30 June 2006. Trading conditions in this classhave been unprecedented. Pricing is consistently up several hundred percentaccompanied by dramatic tightening in terms and conditions. Trading conditionselsewhere in the world have also improved markedly, albeit not to the extremeamounts seen in the U.S. Marine This line includes marine excess of loss and a number of marine hull, marinewar, marine P&I and other miscellaneous marine classes. As reported in earliertrading statements, marine excess of loss renewal prices were disappointing inJanuary and we declined to participate to any great extent. To date, this hasbeen the most disappointing major class of business written by Lancashire and wedo not foresee a significant amount of attractive opportunities for theremainder of 2006. It is too early to forecast 2007 conditions. Direct marinerates have been better than seen in the reinsurance classes, and we aregradually building our book. However, based on projected trading conditions forthe remainder of 2006 marine will represent a smaller proportion of our overallbook than anticipated. Aviation To date, our aviation focus has been centered on AV52 aviation war carve-outbusiness. We do not write general aviation business at this time, as we believepricing is inadequate. AV52 pricing has been reasonably strong, and we predictit will continue though October renewals. We also plan to write a small numberof Aviation ILW contracts. Reinsurance Outwards reinsurance premiums ceded in the six month period were $71.0 million,including $22.2 million ceded to Sirocco Reinsurance Limited, a newly formedBermuda reinsurer in which Lancashire invested $20.0 million in June 2006.Sirocco and Lancashire have entered into a rolling one year quota shareagreement in respect of Gulf of Mexico offshore energy risks. Sirocco does notwrite risks directly at this time. Lancashire is entitled to a ceding commissionand profit commission from Sirocco, depending on the underwriting results of theceded business. Net premiums earned were $64.3 million for the first half of 2006. As a newlyformed company with no existing book of unearned policies, there is asubstantial difference between the relative size of premiums written andpremiums earned because policies written generally earn over a twelve monthperiod. This relative difference is largest in periods immediately followinginception but will reduce in the second half of 2006. The loss ratio for the six months to 30 June 2006 was 11.6%, driven by therelative absence of large loss events in the major classes written byLancashire. All but a de minimus amount of the loss expense recorded is inrespect of losses incurred but not reported. The acquisition cost ratio for the period was 11.8% and the underwritingoperating expense ratio was 21.1%. The underwriting operating expense ratio forthe first half of 2006 is significantly higher than the expected long term ratiodue to the lag in net premiums earned at this early stage in the Company's life. Net investment income for the first half of 2006 was $24.2 million. The fixedincome portfolio is currently yielding 5.6%. During the period, we realized $3.4million of net losses. The portfolio incurred an unrealized loss of $5.7 millionfor the six months to 30 June 2006. The split of assets at 30 June 2006 wasfixed income 75%, cash 18% and equities 7%. The weighted average duration andcredit quality was 2.6 years and AAA, respectively. Employee warrants and option expense is the accrual of the fair value ofwarrants and options granted to employees since inception. The fair value iscalculated on the grant date and will be expensed over the vesting period ofeach security, which is between three and four years. The fair value is expensedin the income statement and there is a corresponding credit to share premium inthe balance sheet resulting in a net zero impact on total shareholders' equity. Total capital at 30 June 2006 was $1.1 billion, comprising $991.3 million ofcommon equity and $127.1 million of long-term debt. Leverage is 11.4%. Fullyconverted book value per share at 30 June 2006 was $5.06 compared to $4.84 at 31December 2005, representing a growth of 4.5% in the six months to 30 June 2006.Based on projected opportunities for the remainder of 2006, we believe the leveland mix of capital is appropriate. This will be reassessed by management as thetrading environment evolves. Consolidated Balance Sheet (unaudited) at 30 June 2006 2006 2005 $m $mAssetscash and cash equivalents 215.0 1,072.4debt securities 866.5 -equity securities 86.9 -total cash and investments 1,168.4 1,072.4 unearned premium on premium ceded 60.4 -accrued interest receivable 7.9 2.0inwards premium receivable from insureds and cedants 165.0 2.1deferred acquisition costs 29.7 0.5investment in associate 20.0 -other assets 4.0 0.7pending trades - receivable 77.2 -total assets 1,532.6 1,077.7 Liabilitiesloss reserves 7.4 -unearned premiums 244.0 2.6reinsurance payable 32.0 -deferred acquisition costs ceded 5.6 -accounts payable, accrued expenses and other liabilities 6.3 2.6long-term debt 127.1 125.4pending trades - payable 118.9 - total liabilities 541.3 130.6 Equityshare capital 97.9 97.9share premium 871.4 860.8fair value and other reserves (5.7) -retained earnings (deficit) 27.7 (11.6)total shareholders' equity attributable to equity 991.3 947.1shareholderstotal liabilities and shareholders' equity 1,532.6 1,077.7 Consolidated Income Statement (unaudited) to 30 June 2006 2006 $munderwriting revenuesgross premiums written 316.3outwards reinsurance premiums (71.0)net premiums written 245.3change in unearned premiums (241.4)change in unearned premiums on premium ceded 60.4net premiums earned 64.3insurance losses and loss adjustment expenses (7.4)insurance acquisition expenses (7.6)other operating expenses (13.6)net underwriting income 35.7 net investment income 24.2net realised gains (losses) (3.4)net foreign exchange gains (losses) (1.1)investment income and expenses 19.7fair value of warrants & options issued (10.6)interest expense on long term debt (5.5)corporate expenses (16.1)net income 39.3 loss ratio 11.6%acquisition cost ratio 11.8%expense ratio 21.1%combined ratio 44.5% Basic earnings per share ($) $0.20Diluted earnings per share ($) $0.19 Consolidated Cash Flow Statement (unaudited) to 30 June 2006 2006 $mcash flows from operating activitiesprofit (loss) on ordinary activities before interest income and expense 39.3employee benefits expense 10.6foreign exchange 1.1realized (gains) losses on investments 3.4accrued interest receivable (5.9)unearned premium on premium ceded (60.4)deferred acquisition costs (29.2)other receivables (80.6)inwards premium receivable from insureds and cedants (162.6)losses and loss adjustment expenses 7.4unearned premiums 241.4deferred acquisition costs ceded 5.6amounts payable to reinsurers 32.0accrued interest payable 0.1other payables 122.4net cash flows from (used in) operating activities 124.6cash flows from investing activitiesinvestment in associates (20.0)purchase of debt securities (1,528.5)purchase of equity securities (88.2)proceeds on maturity and disposal of debt securities 650.0proceeds on disposal of equity securities 4.4net cash flows used in investing activities (982.3)net (decrease) increase in cash and cash equivalents (857.7)cash and cash equivalents at beginning of period 1,072.4effect of exchange rate fluctuations on cash and 0.3 cash equivalentscash and cash equivalents at end of period 215.0 The Company expects to issue a complete set of interim financial statementstogether with a review opinion by the Company's auditors by August 31, 2006.Lancashire expects to issue a further trading update in the fourth quarter of2006. Investor Presentation There will be an investor presentation on the results at 1130 UK time (BST) onMonday 7 August at Financial Dynamics, Holborn Gate, 26 Southampton Buildings,London WC2A 1PB. This presentation will be hosted by Richard Brindle, ChiefExecutive Officer and Chief Underwriting Officer; Neil McConachie, ChiefFinancial Officer and Chief Operating Officer; and Simon Burton, Deputy ChiefUnderwriting Officer. Those wishing to attend are asked to contact Rob Bailhacheor Nick Henderson at Financial Dynamics on +44 (0) 207 269 7200 /[email protected] or +44 (0) 207 269 7114 / [email protected]. The presentation will also be accessible via a conference call for those unableto attend in person. To dial-in please call +44 (0) 1452 562 717. There will also be a live webcast of the presentation at www.lancashire.bm. Areplay facility can also be accessed at www.lancashire.bm. For further information, please contact: Lancashire Holdings +1 441 278 8950Neil McConachie Financial DynamicsRob Bailhache +44 20 7269 7200Nick Henderson +44 20 7269 7114 Investor enquiries and questions can also be directed to [email protected] by accessing the Company's website www.lancashire.bm. About Lancashire Lancashire was established in late 2005 as a new insurance and reinsurancebusiness to take advantage of the favourable underwriting conditions arisingarise from the large insured losses incurred in 2004 and 2005. The Company hasan A.M. Best rating of A- (Excellent) with a stable outlook. Lancashire was admitted to AIM on 16 December 2005 following an Offer of CommonShares to investors. The Common Shares trade under the ticker symbol LRE. NOTE REGARDING FORWARD-LOOKING STATEMENTS CERTAIN STATEMENTS MADE IN THIS ANNOUNCEMENT OR ON THE CONFERENCE CALL THAT ARENOT BASED ON CURRENT OR HISTORICAL FACTS ARE FORWARD-LOOKING IN NATUREINCLUDING, WITHOUT LIMITATION, STATEMENTS CONTAINING WORDS "BELIEVES","ANTICIPATES", "PLANS", "PROJECTS", "INTENDS", "EXPECTS", "ESTIMATES","PREDICTS", "MAY", "WILL", "SEEKS", "SHOULD" OR, IN EACH CASE, THEIR NEGATIVE ORCOMPARABLE TERMINOLOGY. ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICALFACTS INCLUDING, WITHOUT LIMITATION, THOSE REGARDING THE GROUP'S FINANCIALPOSITION, RESULTS OF OPERATIONS, LIQUIDITY, PROSPECTS, GROWTH, BUSINESSSTRATEGY, PLANS AND OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS (INCLUDINGDEVELOPMENT PLANS AND OBJECTIVES RELATING TO THE GROUP'S INSURANCE BUSINESS) AREFORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN ANDUNKNOWN RISKS, UNCERTAINTIES AND OTHER IMPORTANT FACTORS THAT COULD CAUSE THEACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE GROUP TO BE MATERIALLYDIFFERENT FROM FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIEDBY SUCH FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS SPEAK ONLYAS AT THE DATE OF THIS ANNOUNCEMENT OR OTHER INFORMATION CONCERNED. LANCASHIREHOLDINGS LIMITED EXPRESSLY DISCLAIMS ANY OBLIGATION OR UNDERTAKING (SAVE ASREQUIRED TO COMPLY WITH ANY LEGAL OR REGULATORY OBLIGATIONS (INCLUDING THE AIMRULES)) TO DISSEMINATE ANY UPDATES OR REVISIONS TO ANY FORWARD-LOOKINGSTATEMENTS CONTAINED HEREIN TO REFLECT ANY CHANGES IN THE GROUP'S EXPECTATIONSWITH REGARD THERETO OR ANY CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES ONWHICH ANY SUCH STATEMENT IS BASED. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Lancashire Holdings