10th Aug 2007 07:00
Lancashire Holdings Limited10 August 2007 Hamilton, Bermuda, 10 August 2007 LANCASHIRE HOLDINGS LIMITED UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS This disclosure should be read in conjunction with Lancashire Holdings Limited's prior announcement of interim results for the six month period ended 30 June 2007 on 6 August 2007. Upon receipt of an opinion review letter from auditors, Ernst & Young Ltd., Lancashire today discloses its full unaudited condensed interim consolidated financial statements for the six month period 30 June 2007, including theconsolidated income statement, the consolidated balance sheet, the consolidatedcash flow statement and relevant notes to the consolidated financial statements. There is no material change in the results for the six month period ended 30 June 2007 from the prior announcement on 6 August 2007. condensed interim consolidated income statementfor the six months ended june 30, 2007 notes six six twelve months months months 2007 2006 2006 $m $m $mgross premiums written 451.5 316.3 626.0outwards reinsurance premiums 17 (75.4) (71.0) (78.5)net premiums written 376.1 245.3 547.5change in unearned premiums 12 (128.4) (241.4) (323.1)change in unearned premiums on premium ceded 12 44.4 60.4 19.1net premiums earned 292.1 64.3 243.5net investment income 3 35.3 24.2 54.2net other investment (losses) income 3, 14 (0.8) - 1.8net realised gains (losses) and impairments 3 4.4 (3.4) 0.8net fair value gains on investments at fair value through 3 0.3 - -incomeshare of profit of associate 11 2.8 - 3.2net foreign exchange gains (losses) 1.8 (1.1) (1.3)total net revenue 335.9 84.0 302.2insurance losses and loss adjustment expenses 12 84.8 7.4 39.1insurance losses and loss adjustment expenses recoverable 12 (0.5) - -net insurance losses 84.3 7.4 39.1net insurance acquisition expenses 4, 17 41.2 7.6 34.9other operating expenses 5, 6, 17 33.2 24.2 56.4total expenses 158.7 39.2 130.4 results of operating activities 177.2 44.8 171.8finance costs 13, 14 6.1 5.5 12.3profit before tax 171.1 39.3 159.5tax 7, 8 0.7 - 0.2profit for the period attributable to equity shareholders 170.4 39.3 159.3 earnings per sharebasic 16 $0.87 $0.20 $0.81diluted 16 $0.83 $0.20 $0.79 condensed interim consolidated balance sheetas at june 30, 2007 notes jun 30, jun 30, dec 31, 2007 2006 2006 $m $m $massetscash and cash equivalents 9 367.7 215.0 400.1accrued interest receivable 10.5 7.9 7.5investments- fixed income securities - available for sale 10, 13 1,220.1 885.8 896.3 - at fair value through income 10 17.5 - -- equity securities 10 68.7 67.6 70.3- other investments 10, 14 9.3 - 11.5reinsurance assets- unearned premium on premium ceded 12, 17 63.5 60.4 19.1- reinsurance recoveries 12 0.5 - -deferred acquisition costs 63.8 29.7 51.5other receivables 12.6 80.6 6.3inwards premium receivable from insureds and cedants 252.1 165.0 173.7deferred tax asset 7, 8 1.2 - 0.8investment in associate 11 21.4 20.0 23.2property, plant and equipment 2.7 0.6 2.4total assets 2,111.6 1,532.6 1,662.7 liabilitiesinsurance contracts- losses and loss adjustment expenses 12 121.7 7.4 39.1- unearned premiums 12 454.1 244.0 325.7- other payables 12 6.2 - 3.6amounts payable to reinsurers 12, 17 60.8 32.0 2.4deferred acquisition costs ceded 17 7.1 5.6 2.5other payables 19.6 124.7 20.8corporation tax payable 7 2.2 - 1.0interest rate swap 14 - - 0.9accrued interest payable 0.4 0.5 0.5long-term debt 129.3 127.1 128.6total liabilities 801.4 541.3 525.1 shareholders' equityshare capital 16 97.9 97.9 97.9share premium 40.2 871.4 33.6contributed surplus 849.5 - 849.7fair value and other reserves 3, 10 4.5 (5.7) 8.7retained earnings 318.1 27.7 147.7total shareholders' equity attributable to equity shareholders 1,310.2 991.3 1,137.6total liabilities and shareholders' equity 2,111.6 1,532.6 1,662.7 condensed interim consolidated statement of changes in shareholders' equityfor the six months ended june 30, 2007 fair value share share contributed and other retained notes capital premium surplus reserves earnings total $m $m $m $m $m $mbalance as at january 1, 2007 97.9 33.6 849.7 8.7 147.7 1,137.6profit for the period - - - - 170.4 170.4change in investment unrealised gains (losses) 3, 10 - - - (4.2) - (4.2)total recognised income for the period - - - (4.2) 170.4 166.2issue of share capital 15 - 0.2 (0.2) - - -warrant issues - management and performance 6 - 4.8 - - - 4.8option issues - management 6 - 1.6 - - - 1.6balance as at june 30, 2007 97.9 40.2 849.5 4.5 318.1 1310.2 fair value retained share share contributed and other (deficit) notes capital premium surplus reserves earnings total $m $m $m $m $m $mbalance as at january 1, 2006 97.9 860.8 - - (11.6) 947.1profit for the period - - - - 39.3 39.3change in investment unrealised gains (losses) 3, 10 - - - (5.7) - (5.7)total recognised income for the period - - - (5.7) 39.3 33.6warrant issues - management and performance 6 - 9.8 - - - 9.8option issues - management 6 - 0.8 - - - 0.8balance as at june 30, 2006 97.9 871.4 - (5.7) 27.7 991.3profit for the period - - - - 120.0 120.0change in investment unrealised gains (losses) 3, 10 - - - 14.4 - 14.4total recognised income for the period - - - 14.4 120.0 134.4issue of share capital 15 - 0.3 (0.3) - - -transfer from share premium to contributed - (850.0) 850.0 - - -surpluswarrant issues - management and performance 6 - 10.7 - - - 10.7option issues - management 6 - 1.2 - - - 1.2balance as at december 31, 2006 97.9 33.6 849.7 8.7 147.7 1,137.6 condensed interim consolidated cash flow statementfor the six months ended june 30, 2007 notes six six twelve months months months 2007 2006 2006 $m $m $mcash flows from operating activitiesprofit before interest and tax 141.4 19.4 116.4interest income 3 35.3 25.0 53.6interest expense (5.6) (5.1) (10.6)tax 7 (0.7) - (0.2)depreciation 0.7 - 0.6amortisation of debt securities (0.7) - (1.2)employee benefit expense 5, 6 6.4 10.6 22.5foreign exchange (1.3) 1.1 1.9share of profit of associate 11 (2.8) - (3.2)net unrealised losses (gains) on derivative financial 3, 14 0.8 - (1.8)instrumentsnet realised (gains) losses and impairments on investments 3 (4.4) 3.4 (0.8)net fair value gains on investments at fair value through 3 (0.3) - -incomeunrealised (gains) losses on swaps 14 (0.9) - 0.9accrued interest receivable (3.0) (5.9) (5.6)reinsurance assets- unearned premium on premium ceded (44.4) (60.4) (19.1)- reinsurance recoveries (0.5) - -deferred acquisition costs (12.3) (29.2) (51.0)other receivables (6.3) (80.3) (6.0)inwards premium receivable from insureds and cedants (77.2) (162.6) (171.4)deferred tax asset (0.4) - (0.8)insurance contracts - losses and loss adjustment expenses 82.7 7.4 39.1 - unearned premiums 128.4 241.4 323.1 - other payables 2.6 - 3.6amounts payable to reinsurers 57.8 32.0 2.4deferred acquisition costs ceded 4.6 5.6 2.5other payables (1.1) 122.4 18.6corporation tax payable 1.2 - 1.0accrued interest payable (0.1) 0.1 -net cash flows from operating activities 299.9 124.9 314.5cash flows from investing activitiespurchase of property, plant and equipment (1.0) (0.3) (2.6)investment in associate 11 - (20.0) (20.0)dividends received from associate 11 4.6 - -purchase of debt securities (942.5) (1,547.2) (2,086.1)purchase of equity securities (15.1) (69.5) (76.1)proceeds on maturity and disposal of debt securities 595.4 650.1 1,185.6proceeds on disposal of equity securities 23.0 4.3 20.9net purchase of other investments 2.1 - (9.7)net cash flows used in investing activities (333.5) (982.6) (988.0) net decrease in cash and cash equivalents (33.6) (857.7) (673.5)cash and cash equivalents at beginning of period 400.1 1,072.4 1,072.4effect of exchange rate fluctuations on cash and cash equivalents 1.2 0.3 1.2cash and cash equivalents at end of period 9 367.7 215.0 400.1 accounting policiesfor the six months ended june 30, 2007 summary of significant accounting policies The basis of preparation, consolidation principles, estimation techniques andsignificant accounting policies adopted in the preparation of LancashireHoldings Limited ("LHL") and its subsidiaries' (collectively "the Group")condensed interim consolidated financial statements are those that the Groupexpects to apply for the year ending December 31, 2007. These will beconsistent with those followed in the preparation of the Group's consolidatedannual financial statements for the year ended December 31, 2006. basis of preparation The Group's condensed interim consolidated financial statements are preparedusing accounting policies consistent with International Financial ReportingStandards ("IFRS") endorsed by the European Commission and in accordance withIAS 34, Interim Financial Reporting. The condensed interim consolidatedfinancial statements do not include all the information and disclosures requiredin the annual consolidated financial statements and should be read inconjunction with the annual consolidated financial statements. For the period ending June 30, 2006 there had been significant development inthe Group's business from the previous audited consolidated financial statementsso condensed interim consolidated financial statements were not presented. Itwas management's preference at the time to share the details of thosedevelopments with shareholders and other users, and the Group's interimconsolidated financial statements were prepared in accordance with accountingprinciples generally accepted under IFRS endorsed by the European Commission. All amounts, excluding share data or where otherwise stated, are in millions ofUnited States ("U.S.") dollars. The condensed interim consolidated balance sheet of the Group is presented inorder of decreasing liquidity. risk disclosures The Group's risk management and risk appetite remains consistent with thatdisclosed in the consolidated annual financial statements for the year endedDecember 31, 2006. notes to the accountsfor the six months ended june 30, 2007 1. general information The Group is a provider of global property insurance and reinsurance products.LHL was incorporated under the laws of Bermuda on October 12, 2005. LHL islisted on the Alternative Investment Market ("AIM"), a subsidiary market of theLondon Stock Exchange. A secondary listing on the Bermuda Stock Exchange ("BSX") was approved on May 21, 2007. The registered office of LHL is ClarendonHouse, 2 Church Street, Hamilton HM 11, Bermuda. LHL has five wholly ownedsubsidiaries: Lancashire Insurance Company Limited ("LICL"), LancashireInsurance Holdings (UK) Limited ("LIHUKL"), Lancashire Insurance MarketingServices Limited ("LIMSL"), Lancashire Insurance Services Limited ("LISL") andLancashire Marketing Services (Middle East) Limited ("LMSMEL"). LIHUKL is aholding company for a wholly owned operating subsidiary, Lancashire InsuranceCompany (UK) Limited ("LICUKL"). The subsidiaries were incorporated and are licensed as follows: LICL LICUKL LIMSL LISL LMSMEL date of incorporation oct 28, 2005 mar 17, 2006 oct 7, 2005 mar 17, 2006 mar 11, 2007 licensing body BMA(1) FSA(2) FSA none DFSA(3) (1) Bermuda Monetary Authority(2) United Kingdom, Financial Services Authority(3) Dubai Financial Services Authority 2. segmental reporting Management and the Board review the Group's business primarily by its fourprincipal classes: property, energy, marine and aviation. Management hastherefore deemed these classes to be its business and primary segments for thepurposes of segmental reporting. Further sub classes of business areunderwritten within each primary segment. The Group's net assets are located primarily in Bermuda. Less than 10% (June30, 2006 - less than 1%; December 31, 2006 - less than 10%) of total net assetsare currently attributable to the UK operations. revenue and expense by business segment - six months ended june 30, 2007 gross premiums written $m $m $m $m $m property energy marine aviation totalanalysed by geographical segment:worldwide offshore 0.4 142.1 29.2 - 171.7worldwide including the U.S. 40.3 22.3 9.9 26.4 98.9U.S. and Canada 76.9 11.0 0.2 - 88.1worldwide excluding the U.S. 40.8 1.1 0.4 0.1 42.4europe 16.5 0.4 4.2 0.5 21.6rest of world 12.9 1.2 0.8 - 14.9far east 5.7 1.4 0.2 - 7.3middle east 2.3 5.4 (1.1) - 6.6total 195.8 184.9 43.8 27.0 451.5outwards reinsurance premiums (20.7) (54.7) - - (75.4)change in unearned premiums (61.2) (61.3) (12.1) 6.2 (128.4)change in unearned premiums ceded 9.6 34.8 - - 44.4net premiums earned 123.5 103.7 31.7 33.2 292.1insurance losses and loss adjustment expenses 32.4 35.4 15.6 1.4 84.8insurance losses and loss adjustment expenses recoverable - (0.5) - - (0.5)insurance acquisition expenses 14.6 18.8 6.4 5.8 45.6insurance acquisition expenses ceded (0.4) (4.0) - - (4.4)net underwriting profit 76.9 54.0 9.7 26.0 166.6net investment income 35.3net other investment income (0.8)net realised gains and impairments 4.4net fair value gains on investments at fair value through income 0.3share of profit of associate 2.8net foreign exchange gains 1.8operating expenses unrelated to underwriting (26.8)equity based compensation (6.4)finance costs (6.1)profit before tax 171.1tax (0.7)profit for the period attributable to equity shareholders 170.4loss ratio 26.2% 33.7% 49.2% 4.2% 28.9%acquisition cost ratio 11.5% 14.3% 20.2% 17.5% 14.1%expense ratio - - - - 9.2%combined ratio 37.7% 48.0% 69.4% 21.7% 52.2% assets and liabilities by business segment - as at june 30, 2007 assets $m $m $m $m $m property energy marine aviation totalattributable to business segments 123.8 173.3 39.1 52.4 388.6other assets 1,723.0total assets 2,111.6liabilitiesattributable to business segments 237.8 298.5 65.8 47.7 649.8other liabilities 151.6total liabilities 801.4total net assets 1,310.2 revenue and expense by business segment - six months ended june 30, 2006 gross premiums written $m $m $m $m $m property energy marine aviation totalanalysed by geographical segment:worldwide offshore - 97.3 14.5 - 111.8worldwide including the U.S. 40.8 19.8 1.7 13.9 76.2U.S. and Canada 54.3 25.0 0.2 - 79.5worldwide excluding the U.S. 24.8 - 0.4 - 25.2rest of world 4.7 4.3 2.0 - 11.0far east 3.4 0.2 2.5 - 6.1middle east 1.4 4.6 0.4 0.1 6.5total 129.4 151.2 21.7 14.0 316.3outwards reinsurance premiums (39.8) (31.2) - - (71.0)change in unearned premiums (91.3) (123.7) (15.5) (10.9) (241.4)change in unearned premiums ceded 32.3 28.1 - - 60.4net premiums earned 30.6 24.4 6.2 3.1 64.3insurance losses and loss adjustment expenses 2.1 3.5 1.8 - 7.4insurance losses and loss adjustment expenses recoverable - - - - -insurance acquisition expenses 3.1 2.9 1.0 0.6 7.6net underwriting profit 25.4 18.0 3.4 2.5 49.3net investment income 24.2net realised losses and impairments (3.4)net foreign exchange losses (1.1)operating expenses unrelated to underwriting (13.6)equity based compensation (10.6)finance costs (5.5)profit for the period attributable to equity shareholders 39.3 loss ratio 6.9% 14.3% 29.0% - 11.6%acquisition cost ratio 10.1% 11.9% 16.1% 19.4% 11.8%expense ratio - - - - 21.1%combined ratio 17.0% 26.2% 45.1% 19.4% 44.5% assets and liabilities by business segment - as at june 30, 2006 assets $m $m $m $m $m property energy marine aviation totalattributable to business segments 110.4 123.8 14.6 12.6 261.4other assets 1,271.2total assets 1,532.6liabilitiesattributable to business segments 100.7 160.1 17.3 10.9 289.0other liabilities 252.3total liabilities 541.3total net assets 991.3 revenue and expense by business segment - twelve months ended december 31, 2006 gross premiums written $m $m $m $m $m property energy marine aviation totalanalysed by geographical segment:worldwide offshore - 175.5 33.9 - 209.4worldwide including the U.S. 71.5 26.2 7.4 63.1 168.2U.S. and Canada 111.7 31.4 0.4 - 143.5worldwide excluding the U.S. 31.4 0.5 0.6 0.1 32.6europe 12.3 1.9 2.8 - 17.0rest of world 10.3 6.8 - 1.2 18.3far east 10.6 2.6 6.7 - 19.9middle east 6.7 9.0 1.3 0.1 17.1total 254.5 253.9 53.1 64.5 626.0outwards reinsurance premiums (39.8) (38.7) - - (78.5)change in unearned premiums (123.5) (119.4) (28.8) (51.4) (323.1)change in unearned premiums ceded 7.3 11.8 - - 19.1net premiums earned 98.5 107.6 24.3 13.1 243.5insurance losses and loss adjustment expenses 13.2 17.2 8.7 - 39.1insurance losses and loss adjustment expenses recoverable - - - - -insurance acquisition expenses 12.7 20.1 4.6 2.6 40.0insurance acquisition expenses ceded (1.5) (3.6) - - (5.1)net underwriting profit 74.1 73.9 11.0 10.5 169.5net investment income 54.2net other investment income 1.8net realised gains and impairments 0.8share of profit of associate 3.2net foreign exchange losses (1.3)operating expenses unrelated to underwriting (33.9)equity based compensation (22.5)finance costs (12.3)profit before tax 159.5tax (0.2)profit for the period attributable to equity shareholders 159.3 loss ratio 13.4% 16.0% 35.8% - 16.1%acquisition cost ratio 11.4% 15.3% 18.9% 19.8% 14.3%expense ratio - - - - 13.9%combined ratio 24.8% 31.3% 54.7% 19.8% 44.3% assets and liabilities by business segment - as at december 31, 2006 assets $m $m $m $m $m property energy marine aviation totalattributable to business segments 82.2 82.7 29.3 57.0 251.2other assets 1,411.5total assets 1,662.7liabilitiesattributable to business segments 128.8 154.6 38.2 51.7 373.3other liabilities 151.8total liabilities 525.1total net assets 1,137.6 3. investment return The total investment return for the Group is as follows: six six twelve months months months 2007 2006 2006 $m $m $minvestment income- interest on fixed income securities 27.7 10.8 33.3- net amortisation of premium (discount) 1.4 0.4 3.2- interest income on cash and cash equivalents 7.6 13.0 19.2- dividends from equity securities 0.3 - 0.8- investment management and custodian fees (1.7) - (2.3)net investment income 35.3 24.2 54.2- net realised and unrealised (losses) gains (0.8) - 1.8net other investment (losses) income (0.8) - 1.8net realised gains (losses) and impairments- fixed income securities 2.6 (3.4) (2.4)- equity securities 1.8 - 3.2net realised gains (losses) and impairments 4.4 (3.4) 0.8net fair value gains on investments at fair value through income 0.3 - -net unrealised gains (losses) recognised in shareholders' equity- fixed income securities (8.6) (8.1) 2.6- equity securities 4.4 2.4 6.1net unrealised gains (losses) recognised in shareholders' equity (4.2) (5.7) 8.7total investment return 35.0 15.1 65.5 Net realised gains (losses) and impairments on equity securities includes animpairment loss of $nil (June 30, 2006 - $nil; December 31, 2006 - $0.4 million)recognised on equity investments held by the Group. 4. net insurance acquisition expenses six months six months twelve months 2007 2006 2006 $m $m $m insurance acquisition expenses 58.0 31.2 91.0changes in deferred insurance acquisition expenses (12.3) (23.6) (51.0)insurance acquisition expenses ceded (9.1) - (7.6)changes in deferred insurance acquisition expenses ceded 4.6 - 2.5 total 41.2 7.6 34.9 5. other operating expenses six months six months twelve months 2007 2006 2006 $m $m $m operating expenses unrelated to underwriting 26.8 13.6 33.9equity based compensation 6.4 10.6 22.5 total 33.2 24.2 56.4 6. employee benefits six months six months twelve months 2007 2006 2006 $m $m $m wages and salaries 5.5 1.9 5.4pension costs 0.5 0.2 0.6other benefits 8.0 2.4 7.5equity based compensation 6.4 10.6 22.5 total 20.4 15.1 36.0 equity based compensation warrants warrants number weighted thousands average exercise price US$allocated as at december 31, 2005 14,463 $5.00allocated during the period 2,567 $5.00allocated as at june 30, 2006 17,030 $5.00allocated during the period 2,267 $5.00allocated as at december 31, 2006 19,297 $5.00allocated during the period - $5.00allocated as at june 30, 2007 19,297 $5.00exercisable at june 30, 2007 6,030 $5.00 The fair value of warrants granted for all periods reported was $2.62 per shareas there were no further issues in 2007. A share-based payment expense of $4.8million (June 30, 2006 - $9.8 million; December 31, 2006 - $20.5 million) isincluded in other operating expenses in the condensed interim consolidatedincome statement. long term incentive plan ("LTIP") Options may be granted under the LTIP at the discretion of the RemunerationCommittee. Options granted under the LTIP are limited to 5% of the fully dilutedcommon share capital in issue at the Initial Public Offering date assuming 5%management warrants are also in issue. All options issued will expire ten yearsfrom date of issue. The exercise price for options awarded prior to May 1, 2007is equal to or greater than the average market value of the shares on the twentyprevious trading days prior to grant. For subsequent awards it is set at theclosing market price on the fifth business day after the decision to award theoptions is made. The range of exercise prices for options are as follows: jun 30, 2007 jun 30, 2006 dec 31, 2006 low high low high low high £3.25 £3.55 £3.25 £3.55 £3.25 £3.55 $6.51 $7.11 $5.90 $6.44 $6.37 $6.95 25% of options vest on each of the first, second, third and fourth anniversaryof the grant date. There are no associated performance criteria. Settlement isat the discretion of the Group and may be in cash or shares. In the first six months of 2007, certain members of staff were issued options topurchase 3,869,013 common shares (June 30, 2006 - 2,249,439; December 31, 2006 -2,401,943). Options to purchase 101,670 common shares were forfeited during2006. The fair value of each option was estimated on the date of grant using theBlack-Scholes option-pricing model. Assumptions used for valuation of thesegrants were as follows: risk free interest rate of 5.0% (June 30, 2006 andDecember 31, 2006 - 5.125%); an expected life of six years; volatility of 30%being the maximum contractual rate; dividend yield of nil due to contractualdividend protection; the Group will settle in shares; no forfeitures, other thanleavers which are assumed to be 10% of total employees, and no dilutive events. weighted averageoptions number exercise price thousands US$ granted during the period and outstanding as at june 30, 2006 2,249 $6.51forfeited during the period (101) $6.51granted during the period 254 $7.10outstanding as at december 31, 2006 2,402 $6.57granted during the period 3,869 $7.00outstanding as at june 30, 2007 6,271 $6.84exercisable at june 30, 2007 537 $6.51 The weighted fair value of options granted during the period ended June 30, 2007was $2.61 per option (June 30, 2006 - $2.27; December 31, 2006 - $2.32). Ashare-based payment expense of $1.6 million (June 30, 2006 - $0.8 million;December 31, 2006 - $2.0 million) is included in other operating expenses in thecondensed interim consolidated income statement. 7. tax United Kingdom The UK subsidiaries are subject to normal UK corporation tax on all theirprofits. six months six months twelve months 2007 2006 2006 $m $m $m current tax expense 1.1 - 1.0deferred tax income statement credit (note 8) (0.4) - (0.8) total 0.7 - 0.2 The standard rate of corporation tax in the UK is 30% (2006 - 30%). The currenttax charge as a percentage of the Group's profit before tax is 0.4% (June 30,2006 - nil; December 31, 2006 - 0.1%) due to the different tax payingjurisdictions throughout the Group. 8. deferred tax jun 30, 2007 jun 30, 2006 dec 31, 2006 $m $m $m deferred tax assets 1.2 - 0.8deferred tax liabilities - - - net deferred tax asset 1.2 - 0.8 The movement on the total net deferred tax asset is as follows: jun 30, 2007 jun 30, 2006 dec 31, 2006 $m $m $m as at beginning of period 0.8 - -income statement credit 0.4 - 0.8 as at end of period 1.2 - 0.8 Deferred tax assets were comprised of the following: jun 30, 2007 jun 30, 2006 dec 31, 2006 $m $m $m share warrants and options 1.2 - 0.8 total 1.2 - 0.8 As at June 30, 2007, deferred tax liabilities were negligible (June 30, 2006 -$nil; December 31, 2006 - negligible). 9. cash and cash equivalents jun 30, 2007 jun 30, 2006 dec 31, 2006 $m $m $m cash at bank and in hand 186.0 72.6 50.0cash equivalents 181.7 142.4 350.1 total 367.7 215.0 400.1 Cash and cash equivalents totaling $11.0 million (June 30, 2006 - $10.5 million;December 31, 2006 - $10.9 million) were on deposit in various trust accounts forthe benefit of policyholders or counterparties to agreements to cover theircredit risk. Cash and cash equivalents totaling $58.7 million (June 30, 2006 - $nil; December31, 2006 - $25.1 million) were on deposit as collateral in favour of letters ofcredit issued for the benefit of policyholders or counterparties to cover theircredit risk. 10. investments as at june 30, 2007 $m $m $m $m cost or gross gross estimated amortised unrealised unrealised fair cost gain loss valuefixed income- U.S. treasuries 141.2 0.3 (0.5) 141.0- U.S. government agencies 235.6 0.1 (0.6) 235.1- asset backed securities 136.1 - (0.2) 135.9- mortgage backed securities 459.0 0.6 (3.8) 455.8- corporate bonds 229.9 - (1.2) 229.3- convertible debt securities 24.3 0.6 (1.3) 23.0 total fixed income securities 1,226.1 1.6 (7.6) 1,220.1equity securities 58.2 11.5 (1.0) 68.7total available for sale securities 1,284.3 13.1 (8.6) 1,288.8fixed income securities, at fair value through 17.2 0.6 (0.3) 17.5incomeother investments 8.3 2.3 (1.3) 9.3total 1,309.8 16.0 (10.2) 1,315.6 as at june 30, 2006 $m $m $m $m cost or gross gross estimated amortised unrealised unrealised fair cost gain loss valuefixed income- short term investments 2.0 - - 2.0- U.S. treasuries 93.2 0.1 (1.0) 92.3- U.S. government agencies 173.1 - (1.4) 171.7- asset backed securities 110.5 - (0.7) 109.8- mortgage backed securities 328.1 - (3.6) 324.9- corporate bonds 162.2 0.4 (2.2) 160.0- convertible debt securities 24.8 0.6 (0.3) 25.1 total fixed income securities 893.9 1.1 (9.2) 885.8equity securities 65.2 3.7 (1.3) 67.6total available for sale securities 959.1 4.8 (10.5) 953.4 as at december 31, 2006 $m $m $m $m cost or gross gross estimated amortised unrealised unrealised fair cost gain loss valuefixed income- short term investments 6.9 - - 6.9- U.S. treasuries 30.8 - - 30.8- U.S. government agencies 150.3 0.2 (0.1) 150.4- asset backed securities 121.0 0.2 (0.1) 121.1- mortgage backed securities 365.6 2.0 (0.5) 367.1- corporate bonds 190.2 1.1 (0.2) 191.1- convertible debt securities 28.9 - - 28.9 total fixed income securities 893.7 3.5 (0.9) 896.3equity securities 64.2 7.0 (0.9) 70.3other investments 9.7 1.9 (0.1) 11.5total available for sale securities 967.6 12.4 (1.9) 978.1 Equity securities and other investments are generally deemed non-current. Investments totalling $36.4 million (June 30, 2006 and December 31, 2006 - $nil)were on deposit as collateral in favour of letters of credit issued for thebenefit of third party policyholders or counterparties to cover their creditrisk. 11. investment in associate jun 30, 2007 jun 30, 2006 dec 31, 2006 $m $m $m as at beginning of period 23.2 - -acquisition - 20.0 20.0distributions received (4.6) - -share of profit of associate 2.8 - 3.2 as at end of period 21.4 20.0 23.2 Investments in associates are generally deemed non-current. Key financialinformation for Sirocco is as follows: jun 30, 2007 jun 30, 2006 dec 31, 2006 $m $m $m assets 133.5 116.9 124.6liabilities 31.8 19.4 14.3revenues 29.5 3.1 18.6profit 25.9 2.5 15.2 12. insurance and reinsurance contracts insurance liabilities $m $m $m $m losses and unearned other total loss premiums payables adjustment expenses as at december 31, 2005 - 2.6 - 2.6movement in period 7.4 241.4 - 248.8 as at june 30, 2006 7.4 244.0 - 251.4 movement in period 31.7 81.7 3.6 117.0 as at december 31, 2006 39.1 325.7 3.6 368.4 movement in period 82.6 128.4 2.6 213.6 as at june 30, 2007 121.7 454.1 6.2 582.0 reinsurance assets and liabilities $m $m $m $m unearned reinsurance amounts total premium on recoveries payable to premium reinsurers ceded as at december 31, 2005 - - - -movement in period 60.4 - (32.0) 28.4 as at june 30, 2006 60.4 - (32.0) 28.4 movement in period (41.3) - 29.6 (11.7) as at december 31, 2006 19.1 - (2.4) 16.7 movement in period 44.4 0.5 (58.4) (13.5) as at june 30, 2007 63.5 0.5 (60.8) 3.2 The risks associated with general insurance contracts are complex and do notreadily lend themselves to meaningful sensitivity analysis. In particular, dueto the short tail nature of the Group's business and the currently mostlyattritional losses reported, significant variations in reserving assumptionshave little impact on the ultimate number. However, the impact of an unreportedevent or a significant event could lead to a significant increase in our lossreserves. Management believes that the loss reserves established as at June 30,2007 are adequate, however a 20% increase in estimated losses would lead to a$24.3 million (June 30, 2006 - $1.4 million; December 31, 2006 - $7.8 million)increase in net loss reserves. The split of losses and loss adjustment expenses between notified outstandinglosses and losses incurred but not reported is shown below: jun 30, 2007 jun 30, 2006 dec 31, 2006 $m $m $m outstanding losses 38.3 - 1.2losses incurred but not reported 83.4 7.4 37.9 losses and loss adjustment expenses reserves 121.7 7.4 39.1 It is estimated that our reserve for unpaid claims and adjustment expenses hasan approximate duration of one year. 13. letters of credit As both LICL and LICUKL are not admitted insurers or reinsurers throughout theU.S., the terms of certain contracts require them to provide letters of creditto policyholders as collateral. On May 17, 2006, LHL and LICL entered into asyndicated collateralised three year credit facility in the amount of $350million. This was re-financed on July 16, 2007 to a syndicated collateralisedfive year credit facility in the amount of $200 million. This facility isavailable for the issue of letters of credit ("LOC's") to ceding companies. Thefacility is also available for LICL to issue LOC's to LICUKL to collateralisecertain insurance balances. It contains a $75.0 million loan sub-limitavailable for general corporate purposes. As at June 30, 2007, LICUKL had nosuch obligations (June 30, 2006 and December 31, 2006 - $nil). Letters ofcredit totalling $70.3 million (June 30, 2006 - $nil; December 31, 2006 - $25.1million) had been issued to third parties by LICL and there was no outstandingdebt under this facility. Letters of credit are required to be fullycollateralised. As at June 30, 2007 $95.5 million (June 30, 2006 - nil;December 31, 2006 -$25.1 million) of collateral had been posted to a trustaccount, the beneficiary of which are the banks who have issued letters ofcredit on our behalf. Under the terms of the facility, investments in the trustaccount are subject to various discounts. The discounts are determined perinvestment type. 14. derivative financial instruments The Group hedges a portion of its floating rate borrowings using interest rateswaps to transfer floating to fixed rate. These instruments are held at fairvalue through the consolidated income statement. During the period, $0.9million (June 30, 2006 - $nil; December 31, 2006 - $1.0 million charge) wascredited to financing costs in respect of the interest rate swap. The net fairvalue position to the Group was $0.1 million (June 30, 2006 - $nil; December 31,2006 - $0.9 million). The Group has the right to net settle this instrument. The next cash settlement due on this instrument is negligible (June 30, 2006 andDecember 31, 2006 - negligible) and is due on September 17, 2007. The Group invests a small portion of its investment portfolio in convertibledebt securities. The option to convert is an embedded derivative, which isrequired to be separated from the host contract and fair valued through thecondensed interim consolidated income statement. As at June 30, 2007 thederivative instrument was valued at $8.8 million (June 30, 2006 - $nil; December31, 2006 - $11.5 million), with net unrealised gains of $0.3 million (June 30,2006 - $nil; December 31, 2006 - $1.8 million) reflected in the condensedinterim consolidated income statement in other investment income. The Group entered into a contingent equity physically settled put option on June13, 2007. The option gives the Group the right to put up to 9,786,000 shares tothe counterparty at a guaranteed price of $5.00 per share or the availablemarket rate, if higher. The option expires on November 30, 2007. There is noobligation to exercise the option. As at June 30, 2007 the option had not beenexercised and was valued at $0.4 million with a net unrealised loss of $1.1million reflected in the condensed interim consolidated income statement.During the period $1.1 million was charged to financing costs in respect of theoption. 15. warrants and options Management warrants and options are discussed in note 6. On April 25, 2007,127,087 ordinary warrants were exercised on a cashless basis at a strike pricesof $5.00 per share, resulting in the Group issuing a further 32,640 commonshares at $0.50 per share. On December 28, 2006, 113,219 ordinary warrants wereexercised on a cashless basis at a strike price of $5.00 per share, resulting inthe Group issuing a further 29,444 common shares at $0.50 per share. 16. earnings per share The following reflects the profit and share data used in the basic and dilutedearnings per share computations: six months six months twelve months 2007 2006 2006 $m $m $m profit for the period attributable to equity shareholders 170.4 39.3 159.3 number of number of number of shares shares shares thousands thousands thousands basic weighted average number of shares 195,752 195,714 195,714potentially dilutive shares related to share-based 9,929 4,195 6,325compensationdiluted weighted average number of shares 205,681 199,909 202,039 17. related party disclosures The condensed interim consolidated financial statements include LancashireHoldings Limited and the subsidiaries listed below: name domicileLancashire Insurance Company Limited BermudaLancashire Insurance Marketing Services Limited United KingdomLancashire Holdings Financing Trust I United StatesLancashire Insurance Holdings (UK) Limited United KingdomLancashire Insurance Company (UK) Limited United KingdomLancashire Insurance Services Limited United KingdomLancashire Marketing Services (Middle East) Limited United Arab Emirates All subsidiaries are wholly owned, either directly or indirectly. key management compensation Remuneration for key management was as follows: six months six months twelve months 2007 2006 2006 $m $m $m short-term compensation 2.2 0.8 4.5share based compensation 4.6 7.5 12.1 total 6.8 8.3 16.6 transactions with directors and shareholders Significant shareholders have a representation on the Board of Directors.During the period the Group paid $0.5 million (June 30, 2006 - $0.3 million;December 31, 2006 - $0.9 million) in directors' fees and expenses, including$0.2 million (June 30, 2006 - $0.2 million; December 31, 2006 - $0.4 million) tosignificant shareholders. A further $0.1 million (June 30, 2006 - $0.2 million;2006 - $0.3 million) was paid in respect of monitoring fees for significantshareholders pursuant to Monitoring Agreements, the terms of which are asdisclosed in the AIM admission document. transactions with associate During the period the Group ceded $25.6 million (June 30, 2006 - $22.2 million;December 31, 2006 - $29.9 million) of premium to Sirocco and received $2.9million (June 30, 2006 - $4.3 million; December 31, 2006 - $5.4 million) ofcommission income. The following amounts relating to Sirocco were included inthe condensed interim consolidated balance sheet: jun 30, 2007 jun 30, 2006 dec 31, 2006 $m $m $m unearned premium on premium ceded 22.4 19.4 11.8amounts payable to reinsurers 22.5 17.9 0.8deferred acquisition costs ceded 2.3 3.8 2.2 Profit commission is payable to the Group based on the performance of Siroccoover the period January 1, 2006 to July 15, 2008. The contingent profitcommission as at June 30, 2007 was $6.2 million (June 30, 2006 - $0.5 million;December 31, 2006 - $2.6 million). 18. statutory requirements and dividend restrictions As a holding company, LHL relies on dividends from its subsidiaries to providecash flow required for debt service and dividends to shareholders. Thesubsidiaries' ability to pay dividends and make capital distributions is subjectto the legal and regulatory restrictions of the jurisdiction in which theyoperate. For the primary operating subsidiaries these are based principally onthe amount of premiums written and reserves for losses and loss expenses,subject to overall minimum solvency requirements. Statutory capital and surplusis different from shareholders' equity due to certain items that are capitalisedunder IFRS but expensed, have a different valuation basis, or are not admittedunder insurance regulations. Annual statutory capital and surplus reported to regulatory authorities by theprimary operating subsidiaries was as follows: as at december 31, 2006 $m £m LICL LICUKLstatutory capital and surplus 1,079.2 56.3minimum required statutory capital and surplus 271.1 7.4 Statutory capital and surplus during the year was as follows: as at june 30, 2007 $m £m LICL LICUKLstatutory capital and surplus 1,238.4 55.3minimum required statutory capital and surplus 175.6 13.8 as at june 30, 2006 $m £m LICL LICUKLstatutory capital and surplus 1,090.8 -minimum required statutory capital and surplus 100.0 - In addition, LICL is required to maintain a minimum liquidity ratio, wherebyrelevant assets, as defined in the Act, must exceed 75% of relevant liabilities.As at June 30, 2007, June 30, 2006 and December 31, 2006 the liquidity ratiowas met. For LICUKL, various capital calculations are performed and an individualassessment of LICUKL's capital needs (an "ICA") is presented to the FSA. TheFSA then considers the capital calculations and issues an individual capitalguidance ("ICG"), reflecting the FSA's own view as to the level of capital. TheFSA considers that a decrease in an insurance company's capital below the levelof its ICG represents a regulatory intervention point. 19. presentation Certain comparative amounts in the June 30, 2007 condensed interim consolidatedfinancial statements have been re-presented to conform with the current period'spresentation and format. These changes in presentation have no effect on thepreviously reported net profit. INDEPENDENT REVIEW REPORT TO THE SHAREHOLDERS LANCASHIRE HOLDINGS LIMITED Introduction We have reviewed the accompanying interim condensed financial statements ofLancashire Holdings Limited and its subsidiaries (the "Group") as at June 30,2007, comprising of the interim consolidated balance sheet as at June 30, 2007and the related interim consolidated statements of income, changes in equity andcash flows for the six month period then ended and explanatory notes.Management is responsible for the preparation and presentation of these interimcondensed financial statements in accordance with International FinancialReporting Standards applicable to interim financial reporting as adopted by theEuropean Union ("IAS 34"). Our responsibility is to express a conclusion onthese interim condensed financial statements based on our review. Scope of Review We conducted our review in accordance with International Standard on ReviewEngagements 2410, "Review of Interim Financial Information Performed by theIndependent Auditor of the Entity". A review of interim financial informationconsists of making inquiries, primarily of persons responsible for financial andaccounting matters, and applying analytical and other review procedures. Areview is substantially less in scope than an audit conducted in accordance withInternational Standards on Auditing and consequently does not enable us toobtain assurance that we would become aware of all significant matters thatmight be identified in an audit. Accordingly, we do not express an auditopinion. Conclusion Based on our review, nothing has come to our attention that causes us to believethat the accompanying interim condensed financial statements are not prepared,in all material respects, in accordance with IAS 34. /S/ ERNST&YOUNG LTD August 8, 2007Hamilton, Bermuda Shareholder information The additional information consisting of the shareholder information anddirectors and advisers has been prepared from the records of the Group. While itdoes not form part of the interim statement, it should be read in conjunctionwith it and with the responsibilities section of the independent review reportthereon. Financial Calendar 2008February / March Announcement of results for the year ending 31 December 2007 Shareholder enquiries, register and website Please contact us at [email protected] or, for enquiries concerning shareregistration, call our Registrar, Capita IRG (Offshore) Limited on01534-463-2363. The Group's website can be accessed at www.lancashiregroup.com Directors and Advisers Directors Registered officeMartin Thomas (Chairman) Clarendon HouseRichard Brindle (CEO) 2 Church StreetNeil McConachie Hamilton HM 11Ralf Oelssner BermudaRobert SpassWilliam SpiegelBarry Volpert Audit Committee AuditorsRobert Spass (Chairman) Ernst & YoungRalf Oelssner P.O. Box 463William Spiegel Hamilton HM HX Bermuda Remuneration Committee RegistrarWilliam Spiegel (Chairman) Capita IRG (Offshore) LimitedRalf Oelssner Liberation Square 1/3 The EsplanadeNomination Committee St. HelierRobert Spass (Chairman) JerseyRichard BrindleMartin ThomasBarry Volpert Investment CommitteeRobert Spass (Chairman)Neil McConachieBarry Volpert Underwriting CommitteeRichard BrindleRalf OelssnerMartin ThomasSimon Burton - Non DirectorBryan Bumsted - Non DirectorCharles Mathias - Non Director SecretaryGregory Lunn This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Lancashire Holdings