Press releases
2007
Q3 2007 Results
29 Oct 2007
Fully converted book value grows 7.9% in Q3, 22.0% year to date
Gross written premiums grow 33.1% in Q3, 40.2% year to date
Combined ratio 44.0% in Q3, 49.2% year to date
$100 million share repurchase authorisation
Hamilton, Bermuda, 29 October 2007
Lancashire Holdings Limited (“Lancashire” or “the Company”) today announces its results for the third quarter of 2007 and the nine month period ended 30 September 2007, and the establishment of a $100 million share repurchase program.
So far this year Lancashire has successfully navigated a higher than normal frequency of medium-sized worldwide natural catastrophes, while also generating strong underwriting results in the majority of the portfolio which is not exposed to natural catastrophes. Together, this has produced an excellent return for Lancashire shareholders.
Financial highlights for the third quarter of 2007:
- Fully converted book value per share grew 7.9% over the quarter;
- Gross written premiums of $147.3 million, an increase of 33.1% from the third quarter of 2006. Net written premiums increased 36.5%;
- Loss ratio of 23.1% and a combined ratio of 44.0%;
- Total annualised investment return of 7.7% for the third quarter, including net investment income, realised gains and losses, and unrealised gains and losses;
- Net income after tax of $105.2 million, or $0.51 diluted earnings per share.
Financial highlights for the nine months to 30 September 2007:
- Fully converted book value per share grew 22.0% year to date 2007, bringing the rolling 12 month growth in fully converted book value per share to 29.5%;
- Gross written premiums of $598.8 million, an increase of 40.2% from the first nine months of 2006. Net written premiums increased 48.4%;
- Loss ratio of 26.8% and a combined ratio of 49.2%;
- Total annualised investment return of 6.0% for the nine months to 30 September 2007, including net investment income, realised gains and losses, and unrealised gains and losses;
- Net income after tax of $275.6 million for the nine months to 30 September, 2007, or $1.34 diluted earnings per share.
The Company also announces that on 29 October 2007 its Board of Directors approved a share repurchase program (the "Repurchase Program") which authorises the Company to repurchase its own shares by way of market purchases, tender offers, accelerated purchase programs or privately negotiated transactions, up to an aggregate purchase price of $100 million.
Richard Brindle, Group Chief Executive Officer, commented:
“Lancashire had an excellent quarter, our best yet. Fully converted book value per share grew 7.9% in the quarter, bringing the year to date growth to 22.0%. At the start of the year, we believed we could deliver a return on equity of 20 to 25%; we are now increasing estimated 2007 return on equity to between 26 and 29%. Net income in the third quarter of 2007 increased exactly 100% from the same quarter in 2006, and net income for 2007 to date increased exactly 200% from the same period last year.
“In 2007 to date, despite two land-falling category five Atlantic hurricanes, insured losses in the United States from natural catastrophes have been lower than average. In the rest of the world however, this year has seen a higher than normal frequency of catastrophe losses. We have not incurred major losses from these events, which has helped produce a 2007 loss ratio of 26.8% to date. A large driver is our strategy to focus on a diversified insurance portfolio, rather than a narrow focus on natural catastrophe business. We are pleased to report that all segments of our business have generated strong underwriting profits in 2007.
“Rates are softening, a little faster than anticipated. Market cycles are inevitable but unpredictable. Rather than second-guess the timing of events, or lack of events, our strategy is to stay nimble so we can react to a market which is constantly changing. From an operational standpoint we do this by keeping our infrastructure tight and our underwriting centralised. We will react quickly when new opportunities arise, and move equally quickly when they diminish. From a capacity standpoint, we do this by adopting flexible capital strategies, recognising that outside factors can quickly and materially alter capital needs. By remaining a nimble company and paying close attention to all aspects of cycle management, we believe we can generate an attractive return for shareholders over extended periods of time.
“In a softening market, industry returns gradually fall until capacity reaches an appropriate level. We have been clear in our strategy. If underwriting opportunities decrease, Lancashire will reduce its capacity to an appropriate level. Our Board of Directors has today authorised a $100 million share repurchase program. We will make a further assessment on capital requirements nearer the end of the year. Should rate softening continue, we expect our 2008 portfolio will require less capital than we currently have. In addition to the $100 million share repurchase program, we would also anticipate returning at least 50% of the profits realised in 2007 back to shareholders via a single substantial dividend. We anticipate share repurchases and significant dividends to become recurring weapons in Lancashire’s arsenal of techniques for managing capital effectively in a softening market. We term this latter aspect of capital management ‘strategic dividends’. Strategic dividends are in keeping with our philosophy of nimbleness, affording us flexibility in tailoring our capital needs while at the same time generating an attractive yield to investors. We will continually explore all methods of capital management as appropriate.”
Underwriting results
Gross written premiums increased 33.1% in the third quarter of 2007 compared to the same period in 2006. In 2007 to date, gross written premiums increased 40.2% compared to the first nine months of 2006. The main drivers of the growth in 2007 premium written compared to 2006 have been due to strategic changes within Lancashire, primarily the opening of the UK operating platform, which began underwriting in late 2006, which itself led to a substantial increase in the broker submission count in our second trading year. These structural benefits more than offset rate reductions, leading to year-on-year premium growth. Moving into the fourth quarter of 2007 and into 2008, while rates and terms in many classes remain good, it is predicted that continued rate softening will ultimately result in premium written declining compared to prior periods.
Relatively little reinsurance is purchased in the third quarter. For the year to date, the amount of premium ceded was slightly higher than 2006, although as a ratio of gross written premium, ceded premium was lower at 13.7% in 2007 compared to 18.5% in 2006. Net written premiums increased 36.5% in the third quarter of 2007 compared to the third quarter of 2006, and increased 48.4% year to date over the same period in 2006. Sirocco Re, the energy business sidecar sponsored by Lancashire in 2006, is not being renewed for 2008.
Net earned premiums as a proportion of net written premiums were 114.2% in the third quarter of 2007, and 87.6% in the nine months to 30 September 2007.
The loss ratios of 23.1% and 26.8% for the three and nine months to 30 September 2007, respectively, reflect a very good underwriting performance in all segments.
Investments
Net investment income was $20.9 million for the third quarter, an increase of 52.6% over the third quarter of 2006. Net investment income was $56.2 million in the nine months to 30 September 2007, an increase of 48.3% over the same period in 2006. The increase in investment income is primarily due to high net operating cashflow, resulting in higher net invested assets.
Total investment return, including net investment income, net realised gains and losses and net unrealised gains and losses, was $33.0 million in the quarter and $68.5 million for the year to date. Total investment return was higher than net investment income due primarily to volatile but strong fixed income markets in the third quarter, offset by a relatively weak equity market compared to earlier in the year.
Lancashire’s strategy to maintain a short duration and high credit quality investment portfolio remains unchanged. The portfolio contains no sub-prime securities. All securitised holdings are either government or agency securities or are rated AAA.
Capital
At 30 September 2007, total capital was $1.561 billion, comprising shareholders’ equity of $1.430 billion and $131 million of long-term debt. Leverage was 8.4%.
Outlook
Following strong profits for the year to date, our estimated growth in fully converted book value per share is revised upwards from the previous guidance of 20 to 25%, to a new range of 26 to 29%, assuming a normal level of losses. 2007 gross premiums written are expected to be at least 20% higher than 2006. This is unchanged from previous guidance.
Further detail of our 2007 third quarter results can be obtained from our Financial Supplement. This can be accessed via our website www.lancashiregroup.com.
Investor Presentation and Earnings Call
UPDATE
There will be an investor conference call on the results at 11:30 UK time / 07:30 EST on Tuesday 30 October 2007. This call will be hosted by Richard Brindle, Chief Executive Officer; Neil McConachie, Chief Financial Officer; and Simon Burton, Deputy Chief Executive Officer. The call can be accessed by dialing +44 (0) 207 806 1950/ +1 718 354 1385 with the passcode 1445892.
A replay facility will be available for two weeks until Tuesday 13 November. The dial in number for the replay facility is +44 (0) 20 7806 1970 / +1 718 354 1112 and the passcode is 1445892#.
A replay facility can also be accessed at www.lancashiregroup.com.
For further information, please contact:
| Lancashire Holdings | +1 441 278 8950 |
| Neil McConachie | |
| Financial Dynamics | +44 20 7269 7114 |
| Robert Bailhache | |
| Nick Henderson | |
| Kekst & Company Inc. | |
| Michael Herley | +1 212 521 4897 |
| Mark Semer | +1 212 521 4802 |
Investor enquiries and questions can also be directed to investors@lancashiregroup.com or by accessing the Company’s website www.lancashiregroup.com.
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