The excellent results in this report have been achieved by sticking faithfully to our stated objectives: disciplined underwriting, minimised investment
risk, and managing our capital through the cycle.
In 2008 Lancashire was tested on both sides of the balance sheet, and passed with flying colours. Despite exposure to Hurricane Ike, the third most costly wind storm in U.S. history, and experiencing the worst financial crisis since the Great Depression, we have delivered a profit after tax of $97.5 million or $0.55 per common share and growth in fully converted book value per share plus dividends of 7.5 per cent.
Underwriting results
In the first quarter of 2008 we said we expected subsequent quarters to experience premium reductions. A growing number of deals placed in the market did not meet our requirements. In particular, Lancashire’s underwriters were highly selective when binding catastrophe-exposed deals. Consequently, Lancashire’s gross and net exposure to U.S. windstorm risk was materially lower heading into the 2008 hurricane season than it was in 2007.
In 2008 we produced an underwriting profit of $132.2 million by sticking to our area of expertise which is in specialty direct short-tailed lines within the property, energy, marine and aviation segments. Despite softening rates we did not
diversify into other classes of business.
Our Ike loss number is proof of the merits of being nimble through changing market conditions. Nevertheless, we will not rest on our laurels.
Investments
In 2008 we achieved a positive 3.1 per cent total return on our investment portfolio in spite of the extraordinary turmoil in the financial markets. Lancashire’s highly conservative investment approach has paid off; we have preserved liquidity and limited downside risk. This approach has clearly served us well and our investment strategy will remain very defensive for the foreseeable future.
Capital management
In line with our active capital management strategy, and following the strategic dividend and share repurchase programme announced in 2007, in April 2008 the Board authorised an additional $100.0 million share repurchase programme. Under this programme, between April and August 2008, we repurchased 9,433,168 common shares at prices significantly below book value, resulting in immediately accretive value to shareholders. When Hurricane Gustav struck in August 2008, we suspended
the repurchase programme.
In 2007 and 2008 we returned a total of $397.3 million to our shareholders via share repurchases and dividends.
We ended 2008 with a very strong balance sheet. In 2009 we intend to continue to pursue an active capital management strategy through the market cycle. A consequence of this strategy is that, in a rapidly changing market, we do not intend to commit to specific capital actions far in advance.
Cycle management
Our over-riding goal remains the same: to generate a superior risk-adjusted return over time. In 2009 it is likely that premium rates and conditions in our core products will continue to harden and we expect our goal will be best achieved through organic growth rather than strategic acquisitions. At the same time we intend to maintain our relatively lean operational base, backed by a sophisticated information technology platform and, above all, retain a strong focus on underwriting discipline and integrity.
Our risk management practices in particular are constantly under review. We intend to learn the lessons from Ike and the financial crisis. We will look at ways to earn an even better risk-adjusted return on our capital.
Moving up
We have now completed three full years of trading and, with the publication of these results, are eligible to apply for the admission of the Company to the Official List and the admission of the Company’s common shares to trading on the main market of the London Stock Exchange (“Admission”).
We consider that the continued growth of the Group would be best achieved by moving up to the Official List. The Group will be better placed on Admission to achieve improved liquidity and visibility, especially given that it is likely to qualify for inclusion in the FTSE 250 index.
The outlook
The world changed dramatically in 2008 and the insurance industry with it. There is likely to be more bad news for the world economy for some time to come and, while we will continue to be vigilant as events unfold throughout the year, there can be no assurance that we have or will identify and avoid all emerging risks and hidden dangers that could adversely impact our ability to achieve our business objectives.
It remains unclear to what extent the insurance industry has been reshaped by the erosion of capital caused by the 2008 hurricane and investment losses. In the short term there has been a significant estimated reduction in capacity and a hardening in rates across most lines of business the Group writes.
We are optimistic that 2009 will be a good year of trading for the Group.
In conclusion
Richard Brindle, his executive team and all our staff deserve credit for executing Lancashire’s business plan professionally and with discipline against a backdrop of unprecedented events.
Martin Thomas
Non-Executive Chairman