LRE.L - Lancashire Holdings Ltd

[fareastwarriors]

Thanks for the update twacowfca!

[maxthetrade]

Thanks for the update twacowfca!

 

My pleasure.

 

twacowfca, aour thoughts on LRE.L (and other topics) are always appreciated!

 

I recently moved some funds from MKL to LRE.L.

[fareastwarriors]

UK insurer Lancashire forecasts tough 2018 as loss hits shares

https://uk.reuters.com/article/uk-britain-economy-retail/british-shoppers-new-year-diets-squeeze-january-retail-sales-idUKKCN1G00TI

[Williams406]

Looks like they haven't posted the re-play of the conference call yet. Did anyone catch the call live and was anything especially notable covered?

[fareastwarriors]

Looks like they haven't posted the re-play of the conference call yet. Did anyone catch the call live and was anything especially notable covered?

 

Lancashire Holdings' (LCSHF) CEO Alex Maloney on Q4 2017 Results - Earnings Call Transcript

https://seekingalpha.com/article/4147267-lancashire-holdings-lcshf-ceo-alex-maloney-q4-2017-results-earnings-call-transcript

 

 

I did not get a chance to look at it yet.

[Williams406]

I saw the SA transcript but it doesn't allow me to scroll past page 2--I don't have a SA account.

[fareastwarriors]

I saw the SA transcript but it doesn't allow me to scroll past page 2--I don't have a SA account.

 

Oh okay.

 

Here you go:

 

Operator

Good day, ladies and gentlemen, and welcome to the Lancashire Holdings Fourth Quarter 2017 Earnings Call. For your information, today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Alex Maloney, Group Chief Executive Officer. Please go ahead, sir.

 

Alexander T. Maloney

Group Chief Executive Officer and Executive Director

Okay, thank you. Good afternoon, everyone. Thanks for dialing in to our fourth quarter conference call.

After an active third quarter, the fourth quarter didn't offer any respite. We witnessed more events this

time in California, which added a further burden to an already challenging year for the industry and

the Lancashire Group. We've made a small loss for the quarter and generated a negative return for our

shareholders during 2017, which is disappointing.

This year's events have been difficult for the industry and the Lancashire Group to absorb due to the high

level of frequency we have witnessed and the aggregate estimates of insured losses, which are now in

excess of $100 billion. 2017 will now join 2005 and 2011 as one of the costliest years in recent history for

insured losses.

 

As a group, we have demonstrated that our risk management, underwriting picks and efficient reinsurance

purchasing have minimized the erosion of capital for our shareholders to a level which is well within our

stated tolerances for such events. We must remember that cat losses have a history of deteriorating, and

I can't see why this series of events would be any different. It's way too early to put a final cost on each

event. Previous events have crept considerably and taken many years before the true cost to the industry

is known. So the Lancashire Group will continue to learn -- to try to learn from the mistakes of the past

and take a cautious view on yet unproven declarations of improvements in the loss positions.

I firmly believe that we have turned the corner in the rating cycle and are witnessing positive rate

movements in virtually all classes of business that the group underwrites. I wouldn't describe the current

market as a hard market as there appears to be enough capacity to service most risks, meaning that

pricing can only be pushed so far. But we are traveling in the right direction. But the sentiment is clear, we

are seeing a more disciplined underwriting environment than we have seen for a number of years, which

we expect to continue throughout 2018 as the true cost of 2017 materializes.

We are seeing more underwriting opportunities borne out of years of rate reductions, where underwriters

are starting to address unsustainable rating levels with varying degrees of success. It's a patchy market,

but if you have the right underwriting talent, you can navigate these waters and carve out opportunities.

It's not a broad hard market where the rising tide lifts all boats, and if it was, we would have raised

additional capital to service the opportunity. But we have sufficient capital to underwrite the immediate

opportunity, and we'll always assess our needs on a regular basis.

It's the first time we've been able to grow the size of Kinesis in a number of years. Again, like the overall

scene for the marketplace, not as much as we would like to due to the competitive pressures, but Kinesis

has grown by 30% at the 1st of January underwriting cycle.

So in summary, we're in great shape. We have 3 underwriting platforms, which between them have

underwriters positioned in a class of business where we are currently seeing the largest positive rate

movements. We are carrying no more net risk levels for 2017 -- then 2017, and has sufficient capital to

execute our business plan. And we have access to capital if the opportunity kicks on from here.

I now pass over to Paul.

 

Paul Gregory

Group Chief Underwriting Officer

Thanks, Alex. It's been a number of years since we've been able to talk about positive rating environment.

But as Alex has already explained, we start 2018 doing exactly that. Whilst the [ atmosphere ] is more

positive than it's been for a while, we must also remember the events which brought the market to this

point and the impact it had upon the group's underwriting performance.

As we would expect, having a high weighting into catastrophe risk, the group's underwriting result was

negatively impacted by the loss events of 2017. For the first time in our 12-year history, we produced

a combined ratio in excess of 100%. Whilst this is obviously disappointing, it's not unexpected given

the type, quantum and frequency of events, and also when put in the context of the original Lancashire

business plan of making an underwriting profit every 4 years in 5.

Following these losses, the negative rating trends we've been experiencing in the market over the past few

years has stopped. And more encouragingly, in a number of our significant premium-generating classes,

the rating is now increasing. Approximately 75% of our 2017 portfolio of managed premiums is now

achieving rate increases of some magnitude. As a group, our exposure to lines such as property cat, retro,

D&F, energy and cargo, positions us well to take advantage of an improved rating environment and also

any new business opportunities that may present themselves.

The group has an established footprint in the catastrophe-exposed reinsurance lines via our Bermuda,

Lloyd's and third-party capital platforms. By varying degrees, rates across all these reinsurance lines

improved at 1/1. Via Lloyd's, we also have access to the D&F market, which is certainly a market where

we see a better rating environment and some small pockets of real dislocation, a number of the lossimpacted

areas we have retracted from in recent years, so we now have some natural headroom in which

to grow back.

We have a long-established history in the upstream energy market with access via our London company

and Lloyd's platforms. With rates increasing and oil price stabilizing at sustainable levels, we are incredibly

well-positioned to benefit from any increase in market premium flows. Our cargo portfolio in Lloyd's is also

seeing positive rate movement and can grow should the market conditions continue to be favorable.

Our other classes such as aviation, terrorism, political risk and marine, are now all relatively stable as

the rating environment is flattening. It's also worth noting that all our major direct insurance lines made

healthy underwriting profits in 2017 despite the depressed rating environment.

In addition to our existing classes, we've recently added further underwriting talent to the group. We

entered the downstream energy market at 1/1 following our hire of a downstream energy underwriter in

November and pleasingly has made an encouraging start in this new line. We'll be joined by a new power

underwriter later in 2018 to create a new power portfolio within Syndicate 3010. Fortunately, these are

also 2 classes of business that are now seeing rates move in the right direction.

These new classes are in areas you would expect to see Lancashire, classes that are short tail, niche,

sometimes volatile that require genuine underwriting expertise in which to generate superior cross-cycle

underwriting returns. If there are attractive opportunities to hire new underwriting talent in other specialty

classes in the future, then we'll do so.

We were able to renew all of our core reinsurance protections at 1/1 with our long-term reinsurance

partners. As it stands today, we have the capital base to support the underwriting opportunities we

currently foresee, but we retain the flexibility to act quickly should market conditions shift again.

Whilst we're positive about market conditions, we're also realistic. As I've already mentioned, rating is

improving in a number of our core portfolios. However, as always, we'll be looking to match risk and return

appropriately. So in current market conditions, we would not be looking to add significant amounts of

additional net risk, unless it's in areas where we're being appropriately rewarded.

We've always said the market will not substantially improve until there is a demand/supply imbalance. And

whilst the conditions are undoubtedly better, the shift in demand and supply is not yet material enough to

put us into a proper hard market, simply a better market. As we look forward to 2018, our underwriting

philosophy remains unchanged. We'll aim to match risk and return appropriately for the first time in a long

time. We have large portions of our underwriting portfolio exposed to positive rating movement. And we'll

strive to access whatever opportunities manifest in order to deliver the appropriate underwriting return to

the market we're in.

I'll now pass over to Elaine.

 

Elaine Whelan

Group CFO, Executive Director & CEO of Lancashire Insurance Company

Thanks, Paul. Hi, everyone. As Alex said, following the third quarter's hurricanes and earthquakes, we

closed out 2017 with the California wildfires. The wildfires in isolation would not have had a particularly

significant impact on the group. Since it's one of the costliest natural catastrophe years on record, they

added to the mounting tally.

We've recorded a net loss after recoveries of $34.5 million across the northern and southern wildfires. Our

ROE for the quarter was negative 0.9%, bringing us to negative 5.9% for the year. Our combined ratio

was 119.5% for the quarter and 124.9% for the year. Although we've made a loss for the year, we remain

pleased with the way our group performed across the succession of events. Our capital and reinsurance

strategies paid off. And while we have a small capital impairment for the year, our balance sheet remains

strong.

As Paul has said, pricing is improving across a large portion of our portfolio, albeit not as much as we'd

like to see. We're well-positioned with provision capital to take advantage of those increases and any other

opportunities that come our way.

On results, our gross premiums written have decreased this quarter. That's primarily due to some prior

year accrued loss of business in the worldwide offshore book, where we saw construction projects and

the like canceled. We therefore, adjusted the premiums in line with the remaining exposure on those

contracts. While they adjust pro-rata premiums every quarter, it sounds like a bit more this quarter

given the fourth quarter is typically our lowest premium volume. As these are prior year contracts,

the adjustment has a fairly immediate impact on gross earned premiums also. The effect of those

adjustments, plus some additional reinsurance purchase, has also impacted net premiums earned and our

acquisition cost ratio for the quarter.

For 2018, I would see no reason to change the previous guidance we've given of an acquisition cost ratio

around 26% to 27%. As you know, we don't provide premium guidance, however, we do expect to see

the benefit of the price increases we've mentioned plus any new business opportunities on our top line

in 2018. Bear in mind, we will also have an impact on the timing of multiyear and non-annual deals, plus

those non-linear license business, like a political risk group.

In 2017, the net reduction on gross premiums written from those types of contracts has been $65 million,

and I would expect roughly a similar impact in 2018.

On losses. While the individual wildfires are not significant, we've broken out the impact of the combined

events in our press release. The net loss of $34.5 million contributed 36.7% to our loss ratio for the

quarter. On the third quarter's event, it is purely still very early days, but we did adjust our reserves

slightly based on updated information received.

We reduced our net loss reserves in the hurricanes and Mexican quakes from $153.8 million to $147.3

million. So much the last quarter, we had a few other losses that I've characterized as largely pure

attrition, but not significant enough individually to be carried. Our attrition for the quarter and the year

does look like it's running a bit higher than normal, but that's not indicative of a trend and there's no

change in further view, our normal attrition in the mid-30s.

We had some deterioration on individual claims on prior accident years, but we again had general IBNR

releases due to the lack of any reports coming through, and overall net favorable development on prior

accident years of $7.4 million for the quarter. As a reminder, Q4 2016 had strong releases from Cathedral

on the quarter as the 2014 year began.

 

[Sullivcd]

They are in a good position to take advantage of a market they view to be hardening.  Opportunities are there but not to the capital raising level, which they feel they could easily do. Expect a decent 2018 but nothing spectacular, 2019 has a lot of promise. That was what I took away at least.  BVPS at $5.49 so trading around 1.5x, not super cheap imho.

[fareastwarriors]

Investments returned, 0.4% for the quarter, driven by strong returns from our risk asset. Given the

modest increase in yields in the quarter, our fixed maturity portfolio generated flat returns. I don't

envisage any significant changes in asset allocation or investment strategy for 2018. We'll continue to

hedge our interest rate risk through the expected rate hikes.

Other income is impacted by the timing of profit commissions from Kinesis, which we received earlier this

year than last, and the underlying year of account performance at Cathedral. This season, Cathedral's

2015 year of account were lower than the 2014 year of account, reflecting the relative levels of premium

and performance of those years.

With the loss events of 2017, we do expect cat collateral releases and no PCs on the 1/1/17 cycle.

Our G&A ratio has increased this quarter, primarily as a function of net premiums earned. In dollar terms,

it has decreased relative to Q4 2016 as the additional catastrophe event in the fourth quarter impacted

variable computation further. Our stock compensation costs were also further impacted by performance

with a small credit recorded for the quarter.

Lastly, on capital, as stated in our press release, there's no change to our dividend policy, and we're

declaring a final ordinary dividend of $0.10 per share or about $20 million. We previously stated that we

were targeting around $1.3 billion to $1.35 billion of capital to support the group's expected rate, and that

hasn't really changed following the loss events in 2017. As ever, we'll monitor underwriting opportunities

and adjust our capital accordingly.

With that, I'll now hand over to the operator for questions.

 

 

Operator

[Operator Instructions] And we will take our first question from Jonny Urwin of UBS.

Jonathan Peter Phillip Urwin

UBS Investment Bank, Research Division

Just 2. So firstly, how should we be thinking about the growth opportunity for you guys through 2018?

On the one hand, you mentioned pricing is going up across 3 quarters if you book or so, which is good,

and you see yourself as well-positioned, which is good. But on the other hand, you're still talking about

a challenging year. So I guess, how positive are you, guys? And then just thinking a bit more about your

comments. So it sounds like you're going to get some margin improvement on a good chunk of the book.

But are you also going to increase new business as well to the extent that you got line of sight into that?

And then lastly, can you update us on how you're seeing the attritional develop through 2017? Are there

any areas that were perhaps better or worse than you expected? I know, Elaine, you said there was no

trend in the Q4 deterioration. But just to get a feel for where you're running versus expectations, that will

be helpful, and then how you would see that change with 2018 price increases?

Alexander T. Maloney

Group Chief Executive Officer and Executive Director

Okay, Jonny, I'll take one, and then I'll hand over to Elaine. So I mean, clearly, we've got a big percentage

of that portfolio. We're well-positioned for the product lines that are seeing the biggest rate increases.

So clearly, we've got growth there on our existing book. I mean, new businesses are always a little bit

more hard to calculate by definition. But obviously, we are starting to see opportunities where product

lines or even business within product lines is finally being reunderwritten, and that could be an opportunity

for us. But what I would say is, and I think it's just consistent with what other sensible people have said,

is demand seems relatively flat. It doesn't -- well, it's a huge demand at the moment. And maybe with

growth in the U.S. and the oil price stability, we're going to see more of that come through towards the

end of the year and into '19. But I think anyone who thinks there's huge amounts of new business around

is probably kidding themselves a bit. So there's definitely opportunities. We will clearly take advantage of

those opportunities. It's quite hard to gauge. But equally, as Paul said in his script, people have reloaded

capacity at the same -- as it was in '17, really. So I wouldn't want to put a number on it, but as usual,

we'll maximize when it comes through the door if it makes sense.

Elaine Whelan

Group CFO, Executive Director & CEO of Lancashire Insurance Company

On the attrition side of things, yes, you're right, there's going to be a trend there. We did see a little

bit more in terms of smaller loss at Cathedral. Nothing really significant there that's individually worth

commenting about really. On the line of sight, we picked up a few business PCs in the energy portfolio

and some stuff around pricing down as well, but nothing I would see as indicative of any kind of change

in terms of the makeup of the business, how we are underwriting it. And still pretty comfortable with

the mid-30s range that we've been kind of guiding to over the last little while, if anything, and price

improvements in 2018 will improve that.

Jonathan Peter Phillip Urwin

UBS Investment Bank, Research Division

Cool. And just to follow up on the growth. I mean, can you give us a steer on the 2018, just given as

always, there'll be some multi-year effects?

Elaine Whelan

Group CFO, Executive Director & CEO of Lancashire Insurance Company

 

Yes, I think net earned, it depends how much extra new business we'd like to put on. But if we managed a

good chunk there, then I wouldn't expect it to be farther than what we got for 2017. Generally, about half

of our net earned comes from the current year's underwriting portfolio, and then the rest is made up from

prior year stuff coming through. So all those multi-years that we had in previous years will still give us

some benefit to our earnings there. And any new business that we write this year, there will be a lot of net

earned premium into next year, so we'll get the benefit of that coming through there at a better pricing.

Operator

We will take our next question from Kamran Hossain of RBC.

Kamran Hossain

RBC Capital Markets, LLC, Research Division

Two questions. The first one is just coming back to, I guess, January renewals. Could you give us an idea

of what you achieved at 1/1? And any thoughts on whether this should improve as the year goes on? And

secondly, in terms of the business plan, I guess you said that you expect to deploy all your capital this

year. What does that kind of seem on for an ROE? I know you're probably not going to give a number, but

kind of, I guess, direction year-on-year would be helpful.

Alexander T. Maloney

Group Chief Executive Officer and Executive Director

So you're correct, we're not going to give you a number.

Kamran Hossain

RBC Capital Markets, LLC, Research Division

I'll try later.

Alexander T. Maloney

Group Chief Executive Officer and Executive Director

So just to give you a sort of background. I mean clearly, after the events, the first thing we would try --

we probably had about 6 business plans on the go at once at one point, and we come up with various

different scenarios. Some of that was based on, should we raise capital? What is the opportunity? But

where we actually got to in the end, I think we called it right. So we talked about capital in September. We

talked about capital again in probably mid-November. But where we got to in the end was we didn't need

additional capital to support our business plan, and that was the right call because that's where we're at.

So I think, as I said in my script, if something happens in the year and there's opportunities, we probably

haven't got tons of excess capital, I would love to be in that situation where we had to go to market and

raise capital, and I'm very confident we could do that. But we've got enough for the current opportunity.

And actually, remember, for us, it's cat that drives your capital needs. So if the -- we're still quite heavily

specialty line focused. So if we see better improvements in those lines, that doesn't show up as much

capital, so we should be fine this year.

Elaine Whelan

Group CFO, Executive Director & CEO of Lancashire Insurance Company

One other thing I'd just add to capital side of things is that we talked last year quite a lot about the excess

bumper that we were carrying. And so we still got plenty of hedge, and some of that was loss absorption,

if you like, but there's still plenty of hedge left there for us to use.

Alexander T. Maloney

Group Chief Executive Officer and Executive Director

And then, Kamran, one other thing I said was we bought exactly the same reinsurance for '18 as we did in

'17, so we haven't dropped any cover. The position to do that is the same.

 

 

Paul Gregory

Group Chief Underwriting Officer

 

And Kamran, in terms of what we saw at 1/1, I'll just go through the kind of RPIs we saw on the major

lines of business. So if you look at the reinsurance lines out of Bermuda, which is things like Cat XL, cat

on D&F, retro, et cetera, the blended RPI was about a 10-point rate increase across that portfolio. I would

caveat that with there was some loss-impacted business renewed at 1/1. If you look at our Cat XL work,

it was about plus 7, which is pretty consistent with the commentary you're seeing in the market. And

in Cathedral, that reinsurance book was around plus 8, so again, pretty consistent. Energy, we've been

seeing just below plus 5 at 1/1. And things like D&F was around plus 6 at 1/1, albeit, I would again caveat

that D&F book at 1/1 is only about 25% of the portfolio, most of which is binder, which is a much steadier

book of business, and there's a lot of backward-dated risks to renew through Q2. So they're the kind of

major lines of business that are seeing the rises, obviously, a big part of our portfolio. All the other lines,

terror, aviation, marine, et cetera, are all broadly flat.

Operator

We will take our next question from Nick Johnson of Numis.

Nicholas Harcourt Johnson

Numis Securities Limited, Research Division

Just on the new hires you mentioned, so downstream energy and power. Can you talk a little bit about

the origins of that? Is that what you've seen the opportunity to hire some really good people? Or is it in

response to market opportunity? And perhaps you could just add whether there are any other areas that

you may also be looking -- you may also hire into.

Paul Gregory

Group Chief Underwriting Officer

Sure. I'd like to say it was foresight on our part when we saw the market rates about to improve in both

those lines, but it wasn't. We just identified some individuals that could come and fit within the group

well that we had a lot of respect for. They're obviously areas, as I mentioned in my script, they are niche,

short-tail specialists kind of things that we do, areas of our portfolio really we should have a presence

in. So we were just fortunate we were able to identify some what we think to be really good individuals

that would fit in the team well. So it was more about the individuals and their availability. And then we've

just benefited from the fact that it looks like those lines are now experiencing positive rate movements.

In terms of other lines, we -- as always, we're always looking at other lines of business we can be in,

and we'll continue to do that. There's nothing imminent on the horizon, but as always, we're having

conversations with various people and something -- sometimes they come to fruition and sometimes they

don't.

Nicholas Harcourt Johnson

Numis Securities Limited, Research Division

Okay. And on the downstream energy and power, is it possible to perhaps quantify the sort of premium

income numbers that might be achievable in '18, possibly '19, for those 2 segments?

Paul Gregory

Group Chief Underwriting Officer

Yes. I mean, we're not ready to give guidance on that just yet given -- well, power won't really -- the

power guy won't turn up until mid-'18. So '18, there's not going to be really any impact. It all depends

where the market ends up going. At the moment, they're not going to turn into significant classes of

business, but they're going to be nice additional premiums. Obviously, we have the ability of those

markets with change dramatically for the better and we can ramp up quite quickly.

Operator

[Operator Instructions] Our next question comes from Andreas van Embden of Peel Hunt.

Andreas Evert Cornelis de Groot van Embden

Peel Hunt LLP, Research Division

 

Just a few questions from my side. First of all, your outwards reinsurance program, you mentioned you're

going to invest -- buy the same amount of reinsurance in 2018 as in 2017. But could you maybe comment

on the mix? I know that in your press release, you've put more cover for your energy book and additional

limit within Lloyd's. Are you trying to protect more of your big risks into 2018? And it also ties in with

your PMLs, I just noticed that your PMLs came slightly down in January. It seems you've lowered your risk

profile, so I assume you're putting capital work in 2018, but for the same risk or lower risk? Could you

maybe comment on that? And then finally, on classes, could you comment on what's the level of assets

under management at year-end 2017? And whether the 30% increase at 1-Jan, was it just a start of

further sort of increases in assets under management in 2018? Do you have some sort of target AUM for

Kinesis by the end of the year?

Alexander T. Maloney

Group Chief Executive Officer and Executive Director

Okay, Andreas, so I'll start now. So just excluding PMLs and modeling, and won't actually comment

on that at the moment, we had exactly the same reinsurance program for the group, whether that's

at Cathedral or a Lancashire as we did in 2017, and I suppose one that's a clear indication of our view

of the opportunity for '18 and a clear view of the availability of reinsurance for '18 as well. So we are

disappointed that rates didn't go higher at the 1st of January. But clearly, the opportunity -- the sort of

benefit of that is available to reinsurance. So our retentions are actually the same. We're not retaining

any more risk at the bottom, and we're buying the same cover. As we head onto '18, we do know, going

through some of the transcripts in the conference calls, that some people have retained more risk for '18.

And we don't think the market is moved enough to do that, otherwise, we would have done that ourselves.

I think on the PMLs, that was just probably modeling change noise. I wouldn't take too much notice of

that. And clearly, the PMLs can move around any way on the portfolio. The Q4 reinsurance one, I don't

know what is that.

Elaine Whelan

Group CFO, Executive Director & CEO of Lancashire Insurance Company

Yes. So this is stuff that's in the treasury that is backwards looking, so that's stuff that we did in Q4. So

a little bit in Lloyd's, mostly through core share, and the rest is on the energy side. That's a replacement

[ part from you guys ] and did some cover in place for them.

Darren Redhead

Chief Executive Officer of Kinesis Capital Management

Andreas, it's Darren from Kinesis. As Alex mentioned, we grew the limit sold from 1/1 to 1/1 worth 30%.

We still have more money to utilize if we want. At the moment, we haven't -- we might give some of that

back to investors, but we will be looking at opportunities during the year. One of the things I would say

that's going to be mentioned as a general thing, yes, rates are up but not as much as we anticipated. So

that's -- we would like to grow more than 30%, but to date, we haven't.

Andreas Evert Cornelis de Groot van Embden

Peel Hunt LLP, Research Division

And what is the AUM right now at Kinesis?

Darren Redhead

Chief Executive Officer of Kinesis Capital Management

Yes, at the moment, the limit sold, it's 30% more than last year, so you can work that out. But we haven't

finalized at what limit we'd sold for the year, so we're not going to comment on that.

Operator

We will take our next question from Faizan Lakhani of Bernstein.

Faizan Lakhani

 

I just have one question, and it's regarding the reserve releases. So you benefited from lower cat claims

from the hurricanes from about $9 million in quantum. And then stripping that out, it seems like the

reserve releases were actually $1.5 million strengthening. Is that a change in reserve philosophy? Or have

you changed your reserve losses?

Elaine Whelan

Group CFO, Executive Director & CEO of Lancashire Insurance Company

There's no change in our reserving methodology. The change in the reserves for the hurricanes is kind of

current accident year stuff. If you look at the prior year development, it's not going to impact that, it's in

the prior quarter developments. And quarter-on-quarter, I mentioned there's just a little bit more of an

uptick in attrition. We saw some stuff come through in 2016 year on both line Lancashire and Cathedral

sides. And if you look at Q4 last year, we did have some big releases from Cathedral, and that was some

specific claims being released after closeout of 2014 and just the lack of report coming through. I think

we've said in the past not to pay too much attention to what happens within an individual quarter as it can

be lumpy. Some quarters, we get more reported; some quarters we get less.

Operator

We will take our next question from Edward Morris of JPMorgan.

Edward Morris

JP Morgan Chase & Co, Research Division

Two questions. First one is actually just coming back on reserves. One of your peers is explaining that

when they end the year with less surplus in the short-tail classes, then they typically expect lower reserve

releases for the next couple of years. Can you just explain whether that might be the case for Lancashire?

Or should we expect a similar situation to any other year, perhaps for 2018? And the second question is on

tax. Can you just confirm, no expected change to your tax rates as a result of the tax reform?

Elaine Whelan

Group CFO, Executive Director & CEO of Lancashire Insurance Company

So again, we haven't used our reserving methodology. We don't give any guidance on where we

expect reserve releases to go purely because of the nature of our book. It's pretty hard to predict. But

sometimes, we get some nice releases, sometimes we get lower releases. So we don't speculate our

surplus and what value for future profit. So you can work your numbers out in the same basis that you

have been previously. And in terms of tax, there's obviously a lot of stuff changing in the tax world, but we

don't expect to have any significant impact to it. And we'll probably get a little bit less group relief going

forward, but nothing too significant. We've got pretty small tax from there anyways, whether it's a charge

or a credit.

Operator

We would take our next question from Thomas Fossard of HSBC.

Thomas Fossard

HSBC, Research Division

Two questions on my side. On the range front and retrocession program, so obviously, you mentioned

that everything was almost left unchanged compared to 2017. Can you still quantify how much more you

have to pay in order to get that cover in place for the year? And second point, I think that, Alex, in your

introductory remarks, you explained that you were expecting some loss reporting on the HIM to go higher

or potentially to have some deterioration. Have you got any early sign of this since the start of the year?

Or overall, what is your feedback around the loss reporting, especially in Q3 and Q4? Have you, is there

any worries you've got around that?

Alexander T. Maloney

Group Chief Executive Officer and Executive Director

 

 

Sure, okay. So I think what I was trying to explain on the HIM losses were -- we haven't had significant

cat losses for a number of years in this industry. And when you look at prior cat events, if you look at the

life of a cat claim, we've got cat claims on our books that were moving for 5 years. So I think there has

been some commentary and there's been some movements in HIM losses that, just from my personal

point of view, seem a bit strange that at such a short period of time off those events, some people are

reducing those HIM losses already. And I would like to be -- or we are, as a group, more conservative. We

have lived through these losses before. There's still not a huge amount of information coming through the

system. We have seen some Irma deterioration from a number of clients recently. There's still not a lot of

Maria information coming through. So look, reserve is, is notoriously difficult for these classes of business.

If you're publicly traded, you have to go to the market with virtually no information. So I don't want to be

sitting on one of these calls with a HIM loss going out. That could happen. It could happen to anyone. But

clearly, we're trying to be as conservative as we can to stop that happening. So I suppose our reserves

haven't moved much. We don't play games with our reserves. We're a little bit surprised that some of the

HIM losses are coming down so quick. And if you look at any of the original PCS numbers on every single

cat claim, no cat claim has ever got better. So there is varying different degrees of how close the sort of

PCS guys or within those agencies get to where they think the funnel is going to be. But probably, these

series of events are a little bit more complicated as well just because you had so many. So I just think it's

early days. I'm usually the one complaining about nothing happens quick enough in insurance. And I think

this time I'm saying, let's wait and see where these claims get to, and we'll have a much better view of

that in the next 12 months.

Paul Gregory

Group Chief Underwriting Officer

In terms of the outwards at 1/1, Thomas, it really did vary per program. I mean, we have a number of

non-cat, non-loss effective programs. And you were seeing anything between flat to plus 5 on those kind

of contracts. If there were cat renewals, then obviously, you were seeing a bit more of that. And if there

were loss-impacted layers, then again, you would see a bit more on that. So it really was varied depending

upon the program, but all in line with our expectation and broadly in line with what you're seeing around

market commentary for certain lines of business.

Alexander T. Maloney

Group Chief Executive Officer and Executive Director

And then clearly, if you look at HIM with rates and how much of that HIM was premium we spend on

reinsurance, we're net positive even after the reinsurance increases apply this year.

Operator

[Operator Instructions] We have a follow-on question from Jonny Urwin of UBS.

Jonathan Peter Phillip Urwin

UBS Investment Bank, Research Division

A really quick one, just on the investment return outlook. Can you just give us the Stig, given we've got

slightly higher yields?

Elaine Whelan

Group CFO, Executive Director & CEO of Lancashire Insurance Company

Yes, sure. I mean, we're still pretty short duration, and our yields have been up over the course of the

year as rates have gone up. And we expect it to increase a little bit again. We'll obviously have some

mark-to-market impacts to that. But I think we could fix the current yields. This is something we can

maintain throughout 2018, if not increase a little bit with all the rate hikes.

Operator

We will take our next question from Nick Johnson of Numis.

Nicholas Harcourt Johnson

 

Numis Securities Limited, Research Division

I'm just struggling a little bit to square the comment that the markets turned the corner with the other

comment you made that it's going to be another challenging year for the industry. I think you sort of said

something that perhaps you could explain, but perhaps if you could just clarify on that a little bit, please?

Alexander T. Maloney

Group Chief Executive Officer and Executive Director

So I suppose, Nick, we've turned the corner because we're not getting reductions anymore. So that is a

completely true statement, and a number of classes of business are in positive territory. But everyone

just needs to be a bit realistic about where we're at in the rating cycle. And yes, rates are up, and that's

brilliant, and I'm really happy about that. But if you look at where you're coming from, it hasn't really

moved at all massively has it? So I think everyone wants a hard market, everyone wants rates to go up,

no more so than Jonny Creagh-Coen. But the fact of the matter are it's great to be in positive territory.

But we're just not -- rates need to go up to a more sustainable level over a period of time. Now clearly,

everything can outweigh this year with enough capital and the returns that we need to give to our

shareholders. And all the time, there's plenty of capital that we can match a low return, maybe that's

okay. But I suppose it's just a realistic comment of, yes rates are up, but you just got to appreciate where

we're coming from. So I still think '18 will be a challenging year, and most classes are still difficult to make

money. So I think we're just being incredibly honest about our view of '18, and we're not sort of getting

ahead of ourselves.

Operator

We appear to have no further questions in the queue.

Alexander T. Maloney

Group Chief Executive Officer and Executive Director

Okay. Thank you for dialing in, and we'll talk to you next quarter.

Operator

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and

gentlemen. You may now disconnect.

 

 

 

 

 

[Williams406]

Sullivcd--thanks for your summary. fareastwarriors--thanks for posting the transcript.

[Sullivcd]

Does anyone know why the share price has been off recently?

[WhoIsWarren]

Does anyone know why the share price has been off recently?

 

As far as I'm aware there is no news specific to Lancashire.  More sellers than buyers.

 

Industry pricing continues to disappoint, which is quite a hit given the losses incurred last year.  Who knows exactly what's going on there, but cheap money accepting mispriced risk could explain part of it.

 

The one bright spot is that since the 2017 losses, many traditional insurers have been exiting loss-making lines of business, indicating point of max pain has probably been reached.  Lancashire hasn't had much portfolio trimming to do as it never over-expanded and indeed it is able to pick up the odd good underwriter and round out its offering.  There's no doubt that the group needs to have a wider portfolio offering in time, but now's not the time to aggressively do this.  I really admire the Group for its patience.  Hats off to the board and CEO Alex Maloney for resisting the siren call of growth.  The path they've chosen certainly doesn't win the hearts and minds of "story" investors

[Cigarbutt]

Does anyone know why the share price has been off recently?

 

As far as I'm aware there is no news specific to Lancashire.  More sellers than buyers.

 

Industry pricing continues to disappoint, which is quite a hit given the losses incurred last year.  Who knows exactly what's going on there, but cheap money accepting mispriced risk could explain part of it.

 

The one bright spot is that since the 2017 losses, many traditional insurers have been exiting loss-making lines of business, indicating point of max pain has probably been reached.  Lancashire hasn't had much portfolio trimming to do as it never over-expanded and indeed it is able to pick up the odd good underwriter and round out its offering.  There's no doubt that the group needs to have a wider portfolio offering in time, but now's not the time to aggressively do this.  I really admire the Group for its patience.  Hats off to the board and CEO Alex Maloney for resisting the siren call of growth.  The path they've chosen certainly doesn't win the hearts and minds of "story" investors

 

Lancashire is a company I respect a lot too. Lagging market performance is understandable given the general short term orientation mindset. If you look at their pattern of exposure (direct exposure and level of reinsurance purchased) concurrent to the last January renewal period, they are still protecting from the downside. Even if 2017 had material insured events, it was not a true stress test.

 

As far as the underlying cycle, in my humble opinion, this cycle has been incredibly unusual. It must be awfully hard to maintain discipline and to walk away from most “opportunities” when competitors use malleable assumptions and statistical extrapolation of the recent past in order to evaluate the price of downside risk, a price that is “discovered” after the fact and which has, historically, often differed materially from the original estimate.

 

Of course now, they look too conservative and irrelevant. That perception too may change.

 

Something I find interesting is that there may be reasons for the incredible softness (suppressed interest rates, abundance of cheap capital etc) but a firm does not need to identify and define those factors, it simply needs to show discipline and walk away when the price does not make sense. Simple but not easy.

 

Never bought a stock on the London Exchange but Lancashire may eventually be one.

 

[Sunrider]

Any of the experts here have a view on their loss pre-announcement? Seems to be quite a hit $30 +30-45m. In the years that I had a position in this stock, I don’t recall them ever feeling compelled to pre-announce large losses (didn’t have any). I’ve not dug in but this seems to run counter to their ‘underwriting first’ / unique skill narrative.

 

Any views welcome!

 

[Dynamic]

I'd also appreciate views on this.

 

Perhaps it's simply a sign of honest bumpy earnings rather than dishonest smooth earnings, the sort of thing I appreciated when Berkshire Hathaway was so exposed to catastrophe losses. The company still expects to be profitable over the first 9 months of 2018 on aggregate, so it looks like the type of random clumping of loss experience we should expect from time to time.

 

I've watched it loosely for some time but never bought any LRE.L - usually finding GARP opportunities I preferred to invest in - but I would suffer no tax issues with their sometimes substantial special dividends of their excess profit and generally admire a company that acknowledges it has no good uses for excess capital and distributes it to shareholders rather than chasing inadequately priced risks in a quest for market share.

 

Rupert Hargreaves, writing for Motley Fool UK on 8th October, seems keen to buy on weakness, expecting a decent forward yield, and hopes the projected losses are mildly overestimated. He has been bullish on Lancashire for quote some time and points out that star fund manager, Neil Woodford, is also a fan.

 

I would imagine that full year profits will be fairly modest and there will either be no special dividend or one that is smaller than in many recent years. I imagine they'd hope to resume a healthy special dividend next year barring large losses.

[Cigarbutt]

Humble contribution.

Surprised too by the announcement as this is not part of a widespread movement in the reinsurance industry vs Q3 catastrophe results.

LRE has pre-announced catastrophe results before and has been conservative, in correlation to their profile (underwriting culture, reserve development etc).

This could be the beginning of a new trend but I think this is likely to be "random clumping" and the trigger for the announcement may have been the result of an idiosyncratic exposure in the marine segment and I wonder if the recent Lürssen shipyard fire is the explanation for the unusual marine loss.

https://www.reinsurancene.ws/pcs-designates-lurssen-shipyard-fire-as-market-braces-for-major-loss/

[WhoIsWarren]

Cigarbutt - yes, the marine loss largely relates to the one you mention.  I understand this shipyard has been a long standing client and has never had a loss, so I think it's right to think of this as 'random clumping'.

 

Tough times for the company, but there are reasons to be somewhat optimistic.  There is very definitely a withdrawal of capacity from the specialty markets, partly driven by a Lloyd's stated objective to be more selective with business plan approvals for 2019.  The results haven't been finalised yet but it seems like they're serious -- pressured by the rating agencies and the UK financial regulator.  Even in the absence of actions by Lloyd's, specialty insurers are getting real about the pricing environment and are pulling out of poorly performing lines.  You see announcements every week on this front, have done for a lot of this year.  Not from Lancs though, as they always write for profit not for top line.

 

In addition to improved specialty insurance pricing, Lancashire has added a couple of new teams in the last few months, as discussed at the last quarterly results / earnings call.  It's worth pointing out that management has been VERY disciplined regarding bringing in new teams over the last few years -- making sure they can get the numbers to work, not just getting top line growth.  For that they deserve huge credit.  Now with the rest of the industry culling staff, top quality underwriters are more willing to move for more realistic salaries.  It's reasonable to assume some will fancy the idea of working at an "underwriting first" shop like Lancashire.  Don't expect dramatic moves, but 2-3-4 teams in 2019 would be nice.

 

Factoring in some improved pricing and the 2 previously announced new teams, revenues and profits will increase by a reasonable rate in 2019, without factoring in any heroics. There could be other positives, for example the offshore energy market which has endured a rough 3-4 years.

 

 

 

[Dynamic]

Thanks Cigarbutt and WhoIsWarren.

 

That narrative sounds very reasonable, WhoIsWarren, and it does seem to fit the story that Lancashire remains focused on disciplined, conservative and profitable underwriting and is forthright in recognising and revealing losses when they occur.

 

A price around 540p sounds a lot more attractive than earlier prices in the 600s and 700s I've been watching. I may give it some serious consideration.

[WhoIsWarren]

No problem.

 

That was the positive narrative - there's a negative one too! :(  :o

Between 2017/18 Lancashire won't have made any money. I'm hoping it's because we're near the bottom of the cycle, but it's worrying that pricing not rebound more after last year's losses.  The speed at which capital can be added to the market is different from the past -- in theory days rather than months/quarters.  Perhaps poor horse (poor racecourse better analogy)??

 

However at current share price I am very confident that the private market value is quite a bit higher, not withstanding the fact that PMVs have come down over the last year or two.

 

[Cigarbutt]

^There have been dividends along the way but share price is at the same level it was in 2010.

 

The Lloyd's insurance market is being redefined and the industry looks incredibly commoditized in a world awash with capital.

Lloyd's was formed in 1688, a revolution period than ended up as a gloriously smooth transition but it must have been a tough time to be in the insurance market.

I think Lloyd's will remain relevant and cost focus should be a permanent feature but the bet that LRE.L is making is that, somehow, sanity will come back to the pricing side.

 

At this point, this is anybody's guess:

https://www.fitchratings.com/site/pr/10047166

The link also adds some perspective on the relatively unexpected pre-announcement.

 

Would be tempted to buy here for the long run but wonder if it may not be darkest just before dawn as potential triggers for a true hard market may lessen LRE's capacity to enjoy the upside. The underlying cycle seems to be broken and need to go back in history to study previous cycles. Hopefully, won't need to go back to the time when marine underwriters used to record the sinking of ships with quill pens (oops, some apparently are still doing that in the Lloyd's world).

[WhoIsWarren]

Cigarbutt - looking the share price alone is not fair the dividends since 2010 have been substantial! The dividend adjusted share price at the start of 2010 was £1.70 (i.e. a 3-bagger all in). 

 

Now if you'd said since 2013.....  :(

 

Hopefully, won't need to go back to the time when marine underwriters used to record the sinking of ships with quill pens (oops, some apparently are still doing that in the Lloyd's world).

 

Actually, if I'm not mistaken Lloyd's records - with a quill pen - all merchant ships (above a certain size I presume) that go down.  This isn't done by the underwriters, but rather one of the "waiters".  Lloyd's is a very traditional place, really cool to go on a tour if you're ever in London.

 

I'm sure you know it but Lloyd's is only one of Lancashire's four platforms.  But the point you're making is valid - a lot of insurance is a commodity.  To "beat the market" you either have to write niches that are more protected / have some barriers to entry, or else stay very disciplined.  Lancashire tries to do a combination of the two.  The second of these is much like what a good (value?) investor in the capital markets does. In fact there are similarities with the current investing and insurance markets don't you think?  Low interest rates and falling perceptions of risk have encouraged investors into both.

[Cigarbutt]

Actually, if I'm not mistaken Lloyd's records - with a quill pen - all merchant ships (above a certain size I presume) that go down.  This isn't done by the underwriters, but rather one of the "waiters".  Lloyd's is a very traditional place, really cool to go on a tour if you're ever in London.

 

I'm sure you know it but Lloyd's is only one of Lancashire's four platforms.  But the point you're making is valid - a lot of insurance is a commodity.  To "beat the market" you either have to write niches that are more protected / have some barriers to entry, or else stay very disciplined.  Lancashire tries to do a combination of the two.  The second of these is much like what a good (value?) investor in the capital markets does. In fact there are similarities with the current investing and insurance markets don't you think?  Low interest rates and falling perceptions of risk have encouraged investors into both.

 

Thank you for the perspective WhoIsWarren.

That's actually quite a fascinating topic (risk perception).

 

I'm looking for a new book that may not exist yet: From coffee house to blockchain.

https://www.linkedin.com/pulse/chainthat-17th-century-london-market-coffee-house-rick-huckstep

 

The trend has certainly been to put emphasis on the complexity of models and on the quantity of data, which makes person-to-person haggling outdated. A risk though is that the wall of data complexity may put a veil in the growing distance between the basic underwriter and the actual pricer. I'm only a guy typing on screen but really wonder if the underwriting responsibility with its embedded fundamental analytical power is not being partially discarded by alternative forms of intelligence. The basic underwriter (actuarial side) is, by definition, partly playing blind and final pricing results form a whole lot of inputs and incentives that are far from transparent and rational. At times, it's what you don't know that can kill you and wonder if this is not such a time when down-to-earth historical long-term perspective should at least be considered, in terms of downside risk.

 

For the insurance underwriting part, here's a link, for which I cannot locate the origin, that was probably written with a typewriter but which may be more relevant than ever.

 

https://www.casact.org/pubs/forum/88fforum/88ff241.pdf

Let the good times roll.

[fareastwarriors]

Awfully quiet here. What's going on with Lancashire ?

[Cigarbutt]

Awfully quiet here. What's going on with Lancashire ?

I would say slow and steady wins the race.

Their Q3 trading statement is in line with expectations for catastrophes and they are (and will be able to) benefiting from the hard market.

A nice feature for LRE (like a few others) is that, contrary to many others who 'react' to the realization that reserves are inadequate by raising prices, they seem to wait for the market to meet their internally determined price points, which appears to be a defining factor for discipline and ability to really grow when hardening occurs. Their interim first six-month-2019 report is more complete and the reserve development table on page 26 is interesting.

I would say they deserve a premium to book value and the question is, at this point, by how much?

[BroKon]

They were about as bullish as they have been in years, on their Q3 call, in terms of their outlook for a potential hard market. It clearly won't be a classic in terms of P&L this year, and they haven't yet quantified Hagibis losses (although they did have a decent investment return - at least compared to their historically conservative allocation). They also won't be paying out a special dividend as they want to put their capital to work in the Jan renewals, which is indicative of how bullish they are turning.

 

As Cigarbutt points out they have remained very disciplined throughout the soft market, but its hard to seem them trade over 1.8x tangible book until we can see whether the Jan renewals, in for example Japanese Wind, can reprice properly, or if the excess capacity continues to dampen rate increases.