Lancashire Holdings Limited Holdings Lancashire Holdings Limited Understanding risk. Seeing the opportunity. Annual Report 2019 & Accounts Annual Report & Accounts 2019 OUR PURPOSE IS TO… • Deliver bespoke risk solutions that protect our clients and support economies, businesses and communities in the face of uncertain loss events; • Manage our risk exposures and capital resources to generate returns for our investors; and • Support our people and work with our stakeholders; fostering a positive, sustainable and open business culture to the benefit of society. STRATEGIC REPORT Overview 1 Lancashire Group at a glance 8 Chairman’s statement 10 Business model Strategy GOVERNANCE 12 Chief Executive’s review 48 Chairman’s introduction 14 Our strategy 50 Board of Directors Performance 52 Principles for Sustainable Insurance 16 Financial review 55 Corporate governance report 18 Key performance indicators 59 Committee reports 20 Underwriting review 74 Directors’ Remuneration Report 24 Business review 96 Directors’ report 30 Enterprise risk management 100 Statement of Directors’ 33 Principal risks responsibilities 40 Engagement and sustainability FINANCIAL STATEMENTS ADDITIONAL INFORMATION 101 Independent auditor’s report 170 Shareholder information 107 Consolidated primary statements 171 Glossary 111 Accounting policies 176 Alternative performance measures 118 Risk disclosures 177 Contact information 143 Notes to the accounts FROM OUR BEGINNING 2012: Focusing our core portfolio In a year of flat demand and ample industry capacity, Lancashire optimised its 2009: Listing on the LSE portfolio, in order to better balance our exposure and Our listing on the main focus on more profitable market of the LSE was areas. We launched the built on four years of client-facing third-party strong performance capital reinsurance facility, and the indication of Saltire, and issued $130m of 2005: Inception pricing improvements senior debt. across our business lines. With opportunities and capital, we began to grow, $1bn and others withdrew from the market. LHL was incorporated in Bermuda on 12 October 2011: Resilience in 2005 and raised over the face of volatility $1 billion via an initial public offering on AIM With the insurance sector on 16 December 2005. reeling from record breaking, $100 billion losses, Our focus has always Lancashire’s focus on been that ‘underwriting fundamentals over comes first’ as we seek diversification paid off, with to capitalise on the superior combined ratios opportunities of compared to competitors the market. reflecting our exceptional 2008: LHL profitable in a risk management. Our year of significant market nimble approach to capital losses allowed us to take advantage of this post-loss market. In 2008 there were very We launched the Accordion substantial losses to the third-party capital (re)insurance markets, both reinsurance facility. from insured events and the impact of the financial crisis, testing Lancashire on both sides of the balance sheet. Even in such challenging circumstances we delivered a combined ratio of 86.3% and a positive total investment return of 3.1%. WE HAVE UNDERSTOOD THE CYCLE 2014: Returning capital to shareholders $346.0m returned to shareholders With low rates making investment of capital into the market unattractive, the Group delivered on its commitment to instead return excess capital to our shareholders. Over time we have a proven record of doing so, actively managing our capital to adjust to conditions. 2013: Broadening capital base Against a backdrop of 2018: Lloyd’s review capital oversupply and market softening, Lancashire An overdue review by Lloyd’s broadened its base to access of underperforming classes different kinds of capital leads to a number of (re) through the purchase of insurance businesses leaving Cathedral (now Lancashire the market, reducing the Syndicates) and the supply of risk capital and establishment of Kinesis contributing to the (now LCM). improvement in rates. 2017: Loss events stress test Lancashire 2017 saw three major hurricanes, Harvey, Irma and Maria, two earthquakes in Mexico, and wildfires in California. Lancashire’s careful balancing of risk and return managed its exposures, where others with higher exposure were forced to leave the market. WE CAPTURE OUR OPPORTUNITIES Overview Total shareholder return 34.3% 2018: -12.7% Total investment return 4.9% 2018: 0.8% Combined ratio Dividend yield 80.9% % 2018: 92.2% 1.5 2018: 4.5% Profit after tax $117.9m 2018: $37.5m Return on equity 14.1% 2018: 2.4% For APMs refer to page 176 www.lancashiregroup.com 1 TO DELIVER BESPOKE RISK SOLUTIONS Protecting against uncertainty Lancashire Holdings Limited 2 Annual Report & Accounts 2019 Five business segments Overview Our focus is on short-tail, specialty (re)insurance risks within five general segments: Property, Energy, Marine, Aviation and Lancashire Syndicates. 2019 gross premium written by segment: Property Lancashire covers property catastrophe $223.8m excess of loss, terrorism, property political risk, property risk excess of loss, property $297.5m retrocession and other property. Energy Total: $706.7m Lancashire covers worldwide offshore energy, Gulf of Mexico offshore energy, onshore energy, energy liabilities, construction energy and other energy. Marine Lancashire covers marine hull and total loss, marine builders’ risk, marine excess of loss, marine P&I clubs, marine hull war $53.2m $94.9m and other marine. $37.3m Aviation Lancashire covers AV52, aviation deductible and other aviation. Lancashire Syndicates Syndicates 2010 and 3010 cover property reinsurance, property direct and facultative, aviation deductible, other aviation and satellite, marine cargo, energy and terrorism. www.lancashiregroup.com 3 MANAGING OUR CAPITAL Focusing on managing risk and generating investor returns Lancashire Holdings Limited 4 Annual Report & Accounts 2019 Our investment case Overview To generate meaningful returns for our investors across the insurance cycle. Producing a solid performance Proven record of capital management across the insurance cycle Lancashire has a proven record of returning 500 300 400 250 excess capital to shareholders over time. 300 200 (%) ($m) 200 150 100 100 0 50 10 11 12 13 14 15 16 17 18 19 Share repurchases Special dividends Ordinary dividends Percentage of IPO capital returned Delivering across the cycle Total shareholder return Since our inception, we have a history (£) of delivering shareholder returns across 500 the cycle. 400 300 200 100 1918171615141312111009 Lancashire Holdings FTSE 250 Index Experienced underwriters Combined ratio producing higher returns Group management and our underwriters have 125 decades of experience in rated companies, 100 Lloyd’s and collateralised markets. 75 50 25 Combined ratio (%) Combined 0 10 11 12 13 14 15 16 17 18 19 Lancashire Lancashire – 10-year average1 Sector2 average Sector average – 10-year average1 1. Ten-year average based on 2010-2019 reporting periods. Sector ratios are weighted by net premiums earned. 2. Sector includes Arch, Argo, Axis, Beazley, Everest, Greenlight, Hanover, Hiscox, Renaissance Re and Third Point Re. The 2019 results for Argo, Greenlight, Hiscox and Third Point Re are not available at the time of the report. Source: Company reports www.lancashiregroup.com 5 ENGAGING WITH STAKEHOLDERS There for those who rely on us Lancashire Holdings Limited 6 Annual Report & Accounts 2019 Our core stakeholders Overview The Group values its relations with, and works to support, its stakeholders to ensure the success of the business. We engage constructively with our people, our stakeholders and in society. Since its foundation in 2005, the Group has focused on fostering relations with a broad range of stakeholders. Society and the Our people environment Our employees are the lifeblood of the organisation Our Through the and the Group therefore strives to attract and retain policyholders Lancashire Foundation, we excellent individuals who share our drive and appetite We place the to outperform. utilise the talent highest value on and energy of our See page 42 for further details. the relationships staff in helping we have built others, positively Our policyholders over the years impacting society with our existing and creating a Policyholders are central to our business, so policyholders and more sustainable understanding and serving their commercial work hard at environment. requirements is at the forefront of everything we creating a lasting do. Through our range of underwriting platforms, we impression with strive to offer clear, fairly priced and useful products. new ones. See page 43 for further details. Our shareholders As a premium-listed company on the Our shareholders LSE, LHL understands the importance Lancashire values of its obligations to shareholders. We the views of all of work hard to foster good investor relations Lancashire its shareholders and pride ourselves on having an active Our people and maintains open and transparent programme of engagement with our We believe the communication diverse shareholder community. talents of our channels with them. See page 44 for further details. people and our distinctive culture continue to set us Society and the environment apart from our Our insurance products deliver social benefits in competitors. helping businesses and communities manage and mitigate the risks they face. Lancashire is strongly committed to giving back to the communities within which it operates and also further afield. The business seeks to help those who are