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Executives

Richard Brindle – Chief Executive Officer

Alex Maloney – Chief Underwriting Officer and Chairman-Group Underwriting and Underwriting Risk Committee

Peter D. Scales – Chief Executive Officer-Cathedral Capital Holdings Limited

Darren Redhead – Chief Executive Officer-Kinesis Inc.

Elaine Whelan – Chief Financial Officer and Chairman-Group Investment Committee

Analysts

Thomas M. Dorner – Citigroup Global Markets Ltd.

Ben Cohen – Canaccord Genuity Ltd.

Angela Gu – UBS Ltd

Nick H. Johnson – Numis Securities Ltd.

Chris D. Hitchings – Keefe, Bruyette & Woods

Olivia Brindle – Deutsche Bank AG

Lancashire Holdings Ltd (OTCPK:LCSHF) Q4 2013 Earnings Conference Call February 13, 2014 8:00 AM ET

Operator

Good morning, good afternoon, and good evening ladies and gentlemen and welcome to today’s Lancashire Quarter Four Results Conference Call. Throughout the call, all participants will be in listen-only mode and afterwards, there will be a question-and-answer session. And just to remind you, this conference call is being recorded.

And now I am pleased to present Richard Brindle. Please begin.

Richard Brindle

Thank you. Just to introduce everybody else who is going to be on the call. I am Rich Brindle, Chief Executive of Lancashire Group. I’ll now hand over after my remarks Alex Maloney who is Group CUO. I’m also joined by Pete Scales, CEO of Cathedral Capital, Darren Redhead, CEO of Kinesis, our Third-Party Capital Management Division, Elaine Wheaton, our Group CFO and Denise O’Donoghue, Our Head of Investments and Treasury.

A year ago, we introduced the old word relevance to our magazines and events have unfolded more electively expected. Small, narrow, largely following carriers are now under pressure as never before; they lack the power to make broker setup and take notice and with non-traditional capital flowing in for the capital space and all of the carriers flexing their muscles in response. The outlook for them is bleak indeed.

Lancashire would never have fallen into this category, because we take big positions on the risks that we like and leave a large majority of the business that we like, but I firmly believe that the result of last year where we had to find ways to make ourselves more relevant and more muscular if you will in a very difficult market.

We have achieved this over the course of 2013 with the purchase of Cathedral and the strong start by Kinesis. We now both have strong venture of seasoned underwriters across the three platforms as I believe exists in the specialty London market. This thing enables not only to combine our branch to the mutual advantage of the Group, but to find ways to cross fertilize each others underwriting activities and add value to brokers and clients across our specialty world in ways we never could have done alone.

With that said, we are now done on the M&A front for the foreseeable future and we’ll concentrate now on deepening and enhancing the harmony and cohesion of the group. First and foremost, we will achieve this by sharing the same office space and we are all going to be on the same floor of the walkie-talkie, hopefully by the late summer.

In our industry, different parts of group companies often simply don’t talk to each other. An example of duplication or even inter-group competition, which this forms our legion. We will not make this mistake.

Finally, we remains highly committed to our strategy of giving money back to shareholders when we have nothing better to do with this and nothing that happened last year changes our philosophy in any respect.

I’ll now hand over to Alex.

Alex Maloney

Thank you, Richard. 2013, certainly been a year of change for Lancashire, but their fundamental approach to the core of our business, the underwriting has not changed.

And in softening market and it definitely is softening market, we think that our processes and people will help us to continue to outperform. While it might be an exaggeration to say that we relished the prospects of the soft market, we believe the strong underwriting franchises have different changes themselves in the soft market when risk selection, portfolio management, analysis and discipline all come to the floor.

As a group, we now have 40 underwriting staff with the real depth of experience across that business lines, we are working to get that well, referring opportunities and discussing milestones together in regular forums and ad hoc.

Just to advertise something on the Cathedral D&F team was able to refer a broker looking for territory cover to Somerset which is in London. As of January 1, after underwriting Kinesis and Cathedral, third-party to provide new lives for the Cathedral proxy excel clients looking for additional limits.

We are working closely to get one of our plants to build-out the Syndicate 3010 while we provide 100% of the capital. We will begin right into specialty lines in 3010 in terms of energy as this accrued to Lloyd's approval.

Down on page, I’m going to speak about Kinesis individuals, so I want to fund that, over there, its plenty going on Nick I will not say. We’re seeing very strong support from our broker clients in 2013 and continue on into the current year and I would like to thank them for that.

We’ve had a 36% increase in submissions, ready to unlock excluding the D&F line which is now runoff. This is a good indicator of support we get from our brokers and clients and further we’ve laid over quality side, that’s 80% of that business right in 2013 shows we are very valuable. We don’t just supply capacity, the real expertise as well and we have used the expertise well to drive some areas where we see good opportunities.

These are areas, fix going off the all risks, energy liabilities and the cost to build, while that have made a property care excel portfolio. We just then need to be nimble to manage the market and we think we can achieve this at the January 1. In fact, we were for the first time actually buyers of best drive offer than sellers with $100 million of limit purchase excess of an aggregate deductible.

We are focused more reinsurance cover for our energy, marine and terrorism portfolios for 2014. So our risk adjusted net portfolio is looking in really good shape. We’ve always said that straight property cap ratio is post lost product of Lancashire. So the series after the serious losses we have had would be more into down over retro portfolio and redeploying that capacity into Property Cat XOL.

And then comparing the January 1, 2014 to the prior year, Retro including Accordion, the reduction in bound premium is from $66.7 million to $10.9 million while property tax sale has increased from $31.3 million to $64.8 million.

The property tax sale for prior year as well diversified geographically and it showed some multi-year deals where we think this is a proper and highlight for claims whose stable exposures. We have also corrected some low level assay, but these for small limits.

Let me look at our liable liability cat exposure; reduction in the direct retro, one of the D&F and the purchase of $110 million of aggregate retro cover, we believe this more than offset the increasing property tax.

Our carries in port areas, one of the leading London market books with already diversified objective, geographical locations, industries and attachment points. We continue to find low risk profile opportunities all around the well and those pricing is under pressure with some reductions becoming fairly common we’re seeing a great flow of business.

The uncertain future over trip fire is also stimulating more demand from U.S. clients. This may carry over to AB [ph] through two segments where it is possible to U.S. sale and may have to purchase from the private market in Peter and full team. We won’t make it for several months, but it is clear local new premium pole as exist in 852 late in installing.

The marine market continues to suffer from over capacity and our disciplined and our full team strength in 2013 while largely due to multiyear contracts win in 2012. Other than the international groups, which is in payback for the creeping customer Accordion arena, pricing is an exciting, so with the stickiness of quality clients and this use LIBOR and mobile dues interest covers.

This political risk and especially the obligors book is a bright spot, it’s growing investment and economy recovery and have seen a steady increase in deals. We remained highly selective by less than 7% of the submissions we are seeing over the expanded the team this year and as time revolves.

And the energy thing continues to find new opportunity with $8.8 million of excess liability business in 2013. James Flude has joined Lancashire London as head of energy and marine and he is already bringing us new clients and relationships.

Again pricing is under pressure after four years of compound increases and a where it has relied last year, but with additional reinsurance limit purchase, we are happy to on a risk adjusted basis, the full party continues to be in good shape.

A lot of attention has been given to the positive arena as new capital continues to arrive, but it’s worth remembering that literal and life device derived much of their profits from things like terrorism, fiscal risk, aviation and energy and these markets continue to be the preserve of the specialists.

Similarly, a lot of potential has applied to facilities, but we are already here in one of the major packages pulling now, again is a market leader in most of our business, this really isn’t a threat to us. So all-in-all, we are in a good position for the market, the price is up. We’ll continue to target the cross selling and leveraging our product relationships that Cathedral and Kinesis brings to us and we will continue to work on the portfolio optimization in the optional of the three platforms given.

Now I’ll hand over to Pete Scales.

Peter D. Scales

Thanks Richard, good afternoon. On the Cathedral Group, the timely completion of the acquisition of Cathedral while Lancashire mainly contributed from Cathedral, the results printed here is pretty immaterial. Overall we thought it would be useful to give you a brief outline of last year performance of the Cathedral Group absent the transaction.

A brief summary of the full production were taken so far to integrate the businesses and a brief run through of how we see the market place and aligns the business much we tried. Cathedral Group’s combined ratio was 77 plus, this includes relations from the run off, that I would guess reflects aggressively the 900 in 2012 and 2013.

In Lloyds columns we closed 2011 accounts on both profitably and what was a horribly a frequency of loss. 2012 account is one among the best we’ve historically had with a vast majority of exposure now at risk and 2013 although running at a slightly higher rate in 2012, mush of this staged to be in very good shape, but still with substantial impose exposure.

Since the deal was announced, we’ve been working hard with our new colleagues to streamline the capital side of the Cathedral Group, while maintaining hopes on what was a tricky season, developing solid plans for future. The bulk of Cathedral’s firm support is under our activities, and after all to go with Lancashire group and was put in place a growth share agreement to political from the Cathedral group of member.

A number I have seen in Cathedral staff announces on the joint executive committee, and are represented online which is under our risk committee. Equally we now have Lancashire representatives on the Cathedral underwriting bullet and pay committee such as the risk management committee.

Our center of inclusion is the bulk that has very much in common, not least of which is both on its underwriting. While this is obvious, we’re both underwriting driven businesses bolstered by quality spotting that allows them to strive.

In terms of the operation of our trading model, while that’s fundamentally different, both models were equally valid and have a lower volume from both client and broker. Therefore the plan is maintain both plans and both trading models in order to offer different type of installations for that process that we know was successful.

The added value is between as we’re already seeing the relationships that existed in one business paid by financial broker, enable us to bring in new business trading leverage into the other which were not assignable and they are all default. This is the work in progress on something we’re confident that would build on going forward, not just with Lancashire, but also with Kinesis. We are also trying to use Cathedral Syndicate 3010, our wholly-owned Syndicate as a build up platform to encompass both existing lines, probably starts with energy, where we can capture more Lloyd’s style of business in the long-term, bring more market leading underwriting facility that are attractive to the Cathedral corner shift model over the life of the opportunistic power of the wider Lancashire Group.

This is very attractive to underwrite because it gives them immediate cloud and more of how effectively it’s exploiting opportunity of market dislocation over and above that trade cycle we’re trying to use.

The market place in probably as challenged for the last 25 years. In December it was hard to see the bottom of where new and existing participants were willing to go and hope to renew the license business. Completion of new entry and the challenge into non-core areas and displace it in distance markets, and the maintain satisfying for potentially unattractive show ramp.

Really is the prices actually stabilized in the second half of December and what promise to be rather for Lancashire here in conclusion in pretty orderly fashion. Over that two main property lines the baseline for pricing and in terms of historical basis. Our historical basis were not in bad place and we still offer significant margin.

This number is caught on a net basis, where small amount of plant gross income lost during the renewal process has been more of a made up by cost savings and more extensively cover with the group protecting the reinsurance market.

The real story is that telco line is slightly down on plant, but net income is up with better protections and flat to lower gross average exposure. In case this is control of you business and as much as you have control in any market place, which can only be done in the long-term by having market leading underwriters in each class coupled with a service and consistently that you will find operator.

So broad numbers reached largely were Asset 1 assuming the first half reinsurance and direct renewals follow broadly the same pattern. Overall our property [indiscernible], so gross income decline by about 7% over last year, which is in line with our business plan assumptions for 2014. Reinsurance cost over were under planned.

Costs were down around 20% reflecting a lower cover. The result is although we have planned for filling out top line, net retained income is higher than we planned last year. Exposures are broadly flat and slightly down both in terms of insured aggregates and or more or less basis. Our U.S. property reinsurance account which is entirely made up of regional companies was due to the reworks that we’ve seen in most competition and we weren’t disappointed.

That said, our planned relationship source through and with that no more turnover than it’s usual. In terms of clients one I have lost is very much typical renewal season. Scientists and the business will remain the same and underscored by our relationships.

International property treaty account saw single digit reductions in price of most areas, this is offset by some degree by increases and loss effects in areas such as Germany, Scandinavia, with less inheritable impact.

With regard to our direct property account, December is a reasonably business period for renewal of that authority business or bind us. These were single digit rate increases in the U.S. proportion of that stable rates on the International system, particularly small increase in that particular income over the same time last year.

The other main profit market were written income is up a little over the same time last year. These shipments were delivered anything at this stage because this is a vast bulk of the account, we used to like in the year when mixed that things become more competitive at the rear end.

We will spend 12% less on our D&F reinsurance which now attaches much lower and gives us great build even. January is not a major renewal date, fairly engaging reinsurance, but what we did renew is as much as expected over the mid single digit generally. I mean it’s bout contingency announced but for a smallest and laid up a non-appearance business in the rock and pop industry.

Our account had a pretty [indiscernible] as long as the rest of the market, as a result this is one of the few areas where you can say license deductibles mainly raised over the last couple of months. We are also seeing larger amounts of coverage during the tools increase value.

On the cargo account which is written on the syndicate is growing during the last yea and we will grow slightly more in 2014 which reflects the increase in the movements of goods across the low as it comes again recovery. Rates are around 20% and market condition basically continue to be oversubscribed..

Dating and administrate markets is noting we haven’t seen before certainly more than once we feel this. Our businesses past had experienced to our go to pricing model, and each slide which we try high quality track records or market cycles. The market will continue to be more competitive until losses over time which is a huge, not only capsule, the point of entry after the market place.

Until then better businesses will continue to make go to returns and they are like to be the one standing next time the market changes and wait for the close. In summary it’s a tireless market and the best underwriting ratio was most effective capital that we will win, pretty much as usual.

Thank you. So I will now past I over to Darren.

Darren Redhead

Thank you very much Peter. Over the past two years, Lancashire has been accessing collateral vehicles for various products, energy and retrocessional is using various different structure. We refer this could stop to create a much more flexible standalone capital management vehicle which is on special purpose insurer and reinsurer.

Under the Kinesis banner, we have created a vehicle that remains loyal to the Lancashire brand creating something different from the prior. We are quite that the vehicle that is different in three ways. Firstly, why investors have access to the market on a [indiscernible]. We have two fixed capital raises a year and if sums are not deployed by our terms to the investors. Not less to sit on account, almost being forced to us. Also we have the ability to raise funds very quickly under a special drill should the need to rise.

Secondly the business written rather than follow – right in property catastrophe only, we have leverage Lancashire’s expertise in specialty lines, terrorism and energy, for example packaging them with property cat borrows [ph] to create an individual product. Also we have generated new business not be seeking away our existing business. Lastly, we are endeavored to get investors a balanced portfolio, so not to expose all that capitals on one event.

During 2013, a lot of hard work was done in, in investigating the landscape on a supply/demand point of view. Something I think that has not been in our Finnish industry especially in this type of market. Usually in these findings we develop a concept for products of both to the essential clients and investors.

Last year, we saw the potential limit for between $300 million to $500 million. Today, we have deployed just over $252 million. We look to be on target for the middle of our range, with our midyear capital raise again these are specialty focused. We feel we could have raised more capital on them and the present time that held back to maintaining our returns.

Collateral reinsurance is here to stay, and as a major consignment of reinsurance market, in deed, it seems to change our industry in our additional capital that we deployed in future of the main events. It cannot be ignored, nor should it be it should be embraced as an opportunity. Lancashire now has a vehicle that is by market pricing, developing its own business and has the ability to raise funds quickly to provide sizable to solutions for our clients. Lastly, I’d like to thank all of those at Lancashire for their tremendous support and help over the past year in driving Kinesis.

I will hand over the mic to Elaine.

Elaine Whelan

Thanks, John, hi everyone. Our results are in our website as usual. We’ve added a couple of extra PDFs with Cathedral numbers to our financial supplement this time though. Some of those were historic numbers to have you with your projections and some if those showed the impact of the income we picked up Cathedral's acquisitions completely. Our yearend financing statements also includes work forces in relations to acquisition and the resulting intangibles of the like. Going forward, we do particularly with the new segment and we have our own page in our segment breakout.

So there has been a lot missing parts this quarter but just since our acquisition occurred in largely net off against each together. As it stated in our release, our return for the quarter was 3.30% with that 3.2% of that from Lancashire standalone and about 0.5% for Cathedral standalone. Capital that returned for the year of 18.9% within that return about 6.4% the Lancashire equity issuance and foreign exchange hedging activities in the recent acquisition of Cathedral.

Our underlying performance for the quarter was reasonable. We didn’t have an immediate tight event, but we did have some developments and some prior year energy losses. Overall, our Lancashire development for the quarter was marginally addressed but we did see some of that is coming from Cathedral from their annual review of their reserves. And that amounted to $9.1 million at a net $8.2 million released under there in the quarter for the group.

Just note that small amount of Lancashire adverse development related to the Thai flood losses and that’s mostly offset by foreign exchange just to see the Thai flood losses at lot of reinsurance program. Adjusting for that Lancashire’s adverse development to the quarter was faceable. Similarly as we adjusted the adverse developments of the year for an impact of high flood loss development our 2011 accident year development would be slightly faceable.

On the premium side, the Lancashire premiums are broadly inline with the same quarter last year, with the increase for the group, compared to last year coming mostly from adding two months of Cathedral's business, Cathedral added $24.5 million to our top line but they remind, the fourth quarter is not a major renewal period for them and this only reflects two months worth of premiums.

Lancashire also continued to build its property political as top invested. As I mentioned, last quarter these are longer kind of deals that these both hang out, although they do provide the benefit as far our income stream and earning out over the coming years.

[indiscernible] has also got the good environment renewals as you all know we don’t provide premium guidance. With that said, if you take look at the quarter statements for 2013 for Cathedral that the auditor supplement you can get a decent idea for the Cathedral business next year. Pricing may be odd, but it is a very stable book in business model. For the Lancashire we expect continuously fund our property cat and political throughout the rest as, but a retro that was adjusted to come back.

We earlier grew $10.9 million of retro gross premiums at 1 renewals compared to $67.6 million at 1, 2013. Just a reminder that, $47.9 million of our 2013 retro gross premiums was from Accordion qualifying contract that were a 100% civic to see an open impact on our level of out risk premium in 2014.

Otherwise, our expecting pricing pressure of energy, marine and aviation that should be fairly stable as we renewed with good clients and hopefully I don’t attribute bits and pieces too. As far as the vested program goes to the Accordion, Lancashire and Cathedral are looking at similar dollars spent at 2013 for a better program. On investments, we again managed to produce a small positive return on our fourth quarter and that brought us to positive return for the year.

Our bank loan and emerging market debt portfolios did well on a fixed income portfolio benefited with a significant straight line in the quarter, despite the life and treasury used. We’re continuing to work on the emerging market debt portfolio and given the volatility indeed the fields are moving.

We are also adding more buyback to the program and with a strong into an excellent mode. We are looking at other products too to diversify our portfolio and help manage our interest rate risk. Kinesis has obviously had a successful start and over the coming year we will add underwriting fees at about $5 million on the capital cost to-date in 2014. Future capital costs will generate further underwriting fees.

On the capital cost to-date, under that we have profit collection appreciation of $5 million are claims and under loss activity. The areas of commission of that profit commission though between the first quarter of 2015. But remember, we also have the benefit from our 10% investment at Kinesis and equity pickup of them. Also Accordion and Saltire and they’re essentially in run off and we expect profit commissions over the $9.6 million from them in the first quarter of 2014.

G&A was obviously high this quarter with the cost of legal and advisory services in relations to the Cathedral acquisition, there was another run off attaining impact too I mean, our aviation expenses are bit more than normal this quarter.

Lastly and probably the best interested in the most is capital. We are topping about last quarter’s special dividends was other special dividend 2010, plus our regular final dividend of %0.10. In dollar terms, all end up with $64 million that’s returning just under 90% a comprehensive income for the year and just over 90% a comprehensive income for the session.

We continue to work and entertain with Cathedral, amount of the P&L as a combined group where we have a computational already which is about the five of returning of a better capital known. We do want to make sure that we have sufficient capital to grow and develop over the coming year. And as we said, to more refining and further refining our processes over the rest of this year.

So with all that aside, and in the absence of a market changing event, there has been no change and our expectation that we will need to drive at $1.6 billion in tangible capital to our current outlook and growth expectations for 2014 and beyond. As we continue with the market [indiscernible] as we expect us to return most if not all of our earnings at the end of 2014 or in early 2015.

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

Question-and-Answer Session

Operator

(Operator Instructions) And the first question is from the line of Tom Dorner from the Citi group. Please go ahead your line is now open.

Thomas M. Dorner – Citigroup Global Markets Ltd.

Hi guys. Sorry, two questions from me please. I just wanted to confirm I mean, that you said that you expect your capital requirements to be somewhere in the region of $1.6 billion of tangible capital, but looking forward, are there any factors that might reduce that, I wonder if you can comment on rating agencies and now that you have integrated Cathedral as the potential of it that might come down and so?

And then the second question I had was on the, sort of the strong combined ratio from Cathedral is 77% that Peter mentioned, can you give us a sense how much of that was reserve releases? You mentioned $9 million in Q4, I think but for the year as a whole and should we still be looking at kind of mid-80s combined ratio for that business? Thank you.

Elaine Whelan

Sure on. And $1.6 tangible that’s what we think that we need for 2014 and positively early on in the year it depends on what happens during the year to what we think at the end of the year. And we spent a lot of time working with Cathedral and working through our PMLs got a pretty good comfortable level there and just what we’ve got on there, and same with rating agencies that we got a good understanding of their expectations as well. And I think if pricing continues to come off or they’re going to get short then they might want to spend a capital dilute a little bit more, but at the moment we still think that there was enough good business as they are firstly able to able to write that 1.6.

So if nothing changes, then I think that appears to be a stable level for us and knocking at 1.5 to 1.6 range. And I think as Lancashire standalone we’re going to end up in that, 1.4 to 1.5 range. And as far as [indiscernible] and Cathedral probably had somewhere in the region of about $20 million and of the leases over the course of the year. If you kind of one-off and all the kind of funny items if you like. And so I would use premium investments and we obviously have a lot of history of looking at Cathedral’s numbers on a year basis, I think without the reasonable stock price.

Thomas M. Dorner – Citigroup Global Markets Ltd.

Okay, thanks.

Operator

And then the next question is from the line of Ben Cohen from Canaccord. Please go ahead, your line is now open.

Ben Cohen – Canaccord Genuity Ltd.

Good afternoon. Thanks very much. They were two things that I wanted to ask. The first one was on the build office Syndicate Suite 3010 in terms of trying to write more of the Lancashire business on that. Where are you with approval from Lloyd's and what would your plan be for this year on that side and also as a subset, if you could quantify or give some guidance in terms of the capital efficiency, you would get also, that would be very helpful.

The second thing is really just a clarification in terms of how you are accounting for Cathedral. I think that was a reference to the Lloyd's here of accounts in terms of 2012 and 2013 being very good and in terms of what you reported for 2013 for the full year. That is basically an accident, your view of 2013 is this, so we are already getting that, it’s not that these good years later than 2011 are going to come out later, maybe you could just clarify where that stands with the comments about 2011 and having closed off that year? Thank you.

Richard Brindle

On that one Ben, as Alex said, it’s fair to talk about [Indiscernible] then we’ve discussed and talked about Cathedral and Lloyd's. So we have a nice thing done to Lloyd's officially, the folks there saw obviously everything, I would say it's obviously Lloyd's approval, but we are going to look to try and merge energy and terrorism within Syndicate 3010. That's our plan. We should be into Lloyd's in the next month or so and then obviously that will and I’d like to see a slightly different type of business than we see outside of Lloyd’s.

We’re going to underwrite that business at same time we bridge it anyway. We are not getting changes down, but you can’t deny the Lloyd’s is a good brand and there is a lot brokers that replaced business in Lloyd’s and it just gives us – it’s the beauty of being with Cathedral, because it just gives us another platform, another option to write business and our place is already capital efficient.

Peter D. Scales

So, in terms of the capital, Syndicate 3010 at the moment is more inline, but trying to get lost in the what’s in the capital charge as Lloyd’s sits on the stable corporate member, so clearly the Group’s share of the 58% the largest Syndicate, the 100% 3010 as a blended number is about 59% as 3010 builds up. There is some credit within the Lloyd’s black proxy type model and thus it is more diverse, I will expect that that to be a mixture of locally at 3010 some credit for diversity in more writing into the book, but again there will be some notional Lloyd’s for small while as they need books for Lloyd’s.

So once that's mainly in the watch, the answers become a bit definitive at the moment and I’ll be surprised giving the scale immediately, it would affect massively in this Lloyd’s capital requirements that we have in place, it’s a short version, we will keep you updated once we are into Lloyd’s, the ground that we are offering now and it’s approved and up and running. That will be something which he may mention in the future calls and we know exactly what he is hoping about.

Elaine Whelan

And I will take your second question Ben. And we converted the Lloyd’s [Indiscernible] accounting for and for reporting purposes, we’ve obviously given a brief in our supplement that you go through lots of their pages by what we have picked up in Cathedral on accident year basis and very much [Indiscernible] years is a pretty short step very much surprised you see the numbers, and they have been processed is pretty similar to ours the loss ratios and it’s the largest from Cat, it’s just having the best estimate and to the extent that they developed favorably and that's obviously good news and something that goes the other way.

Ben Cohen – Canaccord Genuity Ltd.

Okay, so it’s really more an accounting how they count into Lloyd’s with all of the many changes you would expect.

Elaine Whelan

Yes, I mean we can look at on both these.

Ben Cohen – Canaccord Genuity Ltd.

Okay. Thanks.

Operator

And the next question is from the line Angela with UBS. Please go ahead. Your line is open.

Angela Gu – UBS Ltd.

Hi, everyone. It’s Angela Gu from UBS. I have two questions please. The first on reinsurance protection, I think you talked about how you’re reinsurance purchase behavior has changed because retro is now more attractive as a buyer. So I was just wondering if you can clarify of your attachment point, as this is the stock plus aggregate or do you by protection pay event. That would be very helpful.

The second one is for Elaine, I just wanted to ask whether you’re still maintaining your attrition or loss ratio guidance for Lancashire core at 22%, and would you give us some guidance of Cathedral’s attrition loss ratio. Please. Thank you.

Alex Maloney

Okay, Angela, it’s Alex here. Okay I mean, just to give you a flavor with the way we are kind of thing of that at the market and obviously everyone can give [indiscernible] gone down but equally that means our reinsurance costs are going down as well. We’ve taken the opportunity to buy more reinsurance. So we are actually spending more money as rates go down much bolder cover.

On the numbering Cat count, we have protected that in the past, we think that [Indiscernible] as we saw on a consent base but we’ve now decided to watch a retro which is on aggregate basis. We’ve got $100 million aggregate retention only with $100 million of cover in excess of that. So that we think provide some really good protection. We also purchase more reinsurance on our energy book and marine book and servicing book as well and every program that we’ve purchased this year has reduced in price by varying degrees. And if you look at the retro, we think compared to what we priced the retro this year but what we would have had paid for it 12 months ago it’s entirely different obviously in our favor.

So, that’s not to say on the reinsurance question for the year. We constantly looking at everything, we constantly look at opportunities by its best side Lancashire had the most reinsurance protection that we ever had in our history.

Angela Gu – UBS Ltd

And just to clarify, so you say it's $100 million on excess, if you a loss of $200, you basically will pay us 500 and the 700 would be covered?

Alex Maloney

Yes, that’s correct, but it is an aggregate.

Angela Gu – UBS Ltd

Thank you.

Alex Maloney

Each one will be deductible.

Angela Gu – UBS Ltd

Yes, thanks.

Elaine Whelan

And then, on your second question Angela I think, after we saw the reserves that have been, and we have been indicating our additional ratio, it’s probably gone from the 25% top of the 22%, 23% and I think we’ll see additional Cathedral in for Lancashire that probably brings us back half of it. So back half of that 25% level and I think given where we are in terms of pricing and the renewals that we see that in the initial – up a little bit higher and I think going to start bit higher.

Angela Gu – UBS Ltd

So you have 25% attritional loss ratio for the Group or for the core Lancashire business?

Elaine Whelan

That’s across the Group.

Angela Gu – UBS Ltd

Across the group. Okay, thank you.

Operator

And the next question is from the line of Nick Johnson from Numis Securities. Please go ahead. The line is open.

Nick H. Johnson – Numis Securities Ltd.

Hi, there. Two questions already answered, but since I’m here just want to ask about the expected scheme turn is for Kinesis, if no, is there any losses this year?

Alex Maloney

You want to take that?

Richard Brindle

Yes, I will take that. Gross fees to clean return would be around 28% to 29%.

Nick H. Johnson – Numis Securities Ltd.

Great, thanks very much.

Operator

And then the next question is from the line of Chris Hitchings from KBW. Please go ahead. Your line is open.

Chris D. Hitchings – Keefe, Bruyette & Woods

Thank you very much indeed. A couple of things. Can you give us just like a little bit more help about the other operating expenses that are actually runoffs. You’ve mentioned that there is an element of fees and commissions with [indiscernible] deal in there and you’d mentioned some timing issues on that. I’m just trying to get an idea of what their clean cost ratio going forward is? Second question, I’m looking at your reserve movements, am I presuming that the 9.1 from Cathedral is all in the 2012 accident year in the other schedule. So I’m surprised that 2011 developments has gone from plus 4.4 at nine months to minus 4.1 at year, which is old really if that’s all down to movements in the chart or whatever you see as well. Thanks.

Elaine Whelan

Sure. I think as a general rule you can probably knock $5 million of our G&A and $5 million off of the company’s G&A to get a run rate to take [indiscernible] the acquisition.

Chris D. Hitchings – Keefe, Bruyette & Woods

Say $10 million annual?

Elaine Whelan

Yes, about that. And maybe lot about this stuff in our numbers. That is driven by the tenure and exercised on an acreage composition [indiscernible] our equipment people are going to exercise those. That part is obviously going to get lumpy, which probably is going to enter that alone just standalone. I think we’d like you give you and – after it was worked out this one and on their movement, at least in development in the state across a number of years and trying to even the attribute so that the development of the energy [indiscernible] beginning to process.

Chris D. Hitchings – Keefe, Bruyette & Woods

So this is the development of which energy things?

Elaine Whelan

We are not able to talk about specific clean ones unfortunately.

Chris D. Hitchings – Keefe, Bruyette & Woods

All right. So that was $8 million adverse development in the fourth quarter – positive term in the fourth quarter. I guess when you referred to in nine-month stage I thought that was in the nine-month figures. So that was certainly the indication.

Elaine Whelan

We had some development last quarter. On the same thing we had some more development this quarter, but no reserve servicing.

Chris D. Hitchings – Keefe, Bruyette & Woods

So it was adverse development?

Elaine Whelan

Correct.

Chris D. Hitchings – Keefe, Bruyette & Woods

It was released in third quarter?

Elaine Whelan

On this specific limit I’m talking about, I think we were negative for 2011 and the end of last quarter.

Chris D. Hitchings – Keefe, Bruyette & Woods

Okay, fine. So that’s where you have those developments, but you allotted the 9.1 focusing those across the years. So was it reasonable to presume the last quarter is development of…

Elaine Whelan

In the later years, yes, for sure.

Chris D. Hitchings – Keefe, Bruyette & Woods

Thank you.

Operator

And the next question is from the line of Olivia Brindle from Deutsche Bank. Please go ahead.

Olivia Brindle – Deutsche Bank AG

Hi. I got a couple of questions. First of all, if we think ahead to the April and June-July renewals and we’ve been hearing a lot that that’s when we start to find out what’s slowing the market is perhaps on the pricing side. I’d just be interested to get your thoughts on that a little bit. It’s quite early in the year. And secondly, partly related to that is what is your expectation at this stage the top line growth across the group as a whole in light of the expectations of the midyear renewals, but also what you’ve seen in January.

And then thirdly, on the caps you released from Cathedral. I was just wondering if you could give a bit more clarity on that. You said that a lot of this has already been completed. So does that include [indiscernible] that you previously referred to or what else does that include and related to that should we expect any more big movement from that over 2014? Thank you.

Pete Scales

Let me talk about the first, then I’ll do this with Alex. We’re talking about that, our expectations for the year. I think we used to have an HMO. It’s like I can go with him. At one stage in Q4 we were fearing and anticipating a kind of meltdown and that didn’t really happen. There were various things that happened, which you’ll probably get to hereby the time, which stepped from the resolve of some of the more entrenched players such as ourselves and that was something. I think it’s fair to say. Looks likes the weighted [ph] markets against the encouraged ones, as Elaine talked about, [indiscernible] deploying, which is behind the state programs, which are cat, non-cat, but generally new problems to the market, but behind the list this one is pioneering to the cat space. I don’t think we have one lot. That said, we have feared both from a pricing point of view and from a signing point of view.

I think where the squeeze is really going to be felt is on the smaller following outfits obviously because even you could say those would be small. They’re going to get the lead, a huge amount of our business and they held on just as well as we do on signings. To squeeze more is almost slow following carrier for you. You got nothing against some individuals obviously, but it is hard to see that relevance trying to work in the current market. So it’s simple math. If you have non-traditional capital taking a slice of the pie the leadership can handle that also, holding onto what we got and possibly take a bit more. The math to this kind of unavoidable is what happens to the rest.

In terms of the – so I think we come into the year with a slightly stiffened result and stiffened output and I think also lot of [indiscernible] about how a lot of his column from a regional book in the U.S. have no development still with third party capital access there, extremely appreciative of not only the products, but the people offering that product and we would echo that in our book. Well, our book is different.

So I think, overall [indiscernible] was pricing environment as I was pretending we’re not, although regarding some sort of meltdown now behind us. I think what we will see more of is collaboration and that is something which we will be in a good position to resist to leave market, but again I think you will see the following markets under pressures off the same policy for lower price.

We all have seen that before. We’re not going to [indiscernible] but that’s starting to head again, but there are posted signs. Some of these big fellows’ services that you probably picked up in the growth lines are thing I’m aware of. I think it’s in the public domain. We’ll just have to flush out the way the energy is build. We have told that decision by party. That sends the people out that surprise a bit in the first place, but I applaud that decision as sort of these don’t help at all and obviously taking that back blindly following capacity out of the energy, would be very helpful for us.

We continue to get a greater and greater distribution and share of the energy. This is also from bookies operating from the outside on world economy. So I’ll have [indiscernible] but I think there’s plenty of reasons that remain for our book and the matter of our leadership profile.

Alex Maloney

I think that we’ve covered most of it, but what I would say it’s survival IT to diversify reductions. You have to – the talent and the underlying rates of the business. So if you just pick two big areas, the Lancashire and the contiguous query of this property cat in energy. If you look where you are in property cat right in we’re definitely – the market has moved quickly, which is through people. So you’re definitely not the late 90s quite yet.

We think we are about 30% of the [indiscernible] and we think you’d have to go at least now 30% down before we get enough close to the late 90s. So you’ve always got – keep on an eye on way, but it’s a great finance.

If you look at the energy market, the energy market is now getting reductions. Again if you look at where you are, you have no historic highs. The capacity has grown in the market, but the beauty of the energy market is we’re very successful with the capacity. So they were not sort of killing each other, the business and that also is controlled in the London market as well. Seriously I think that marine – the reason why marine is so difficult is they’ll certainly pay with the combined marine around the world and the capacity far outstrips the need.

So if you look at the biggest cruise ship in the world it’s about $1.5 billion. Probably 98% of the world’s energy is about $100 million. So you can never do anything to that market. The future of energy is pretty robust capacity. So I think in a nutshell if you look what the group does and the majority of the income we won we feel that we’re in pretty good shape. If you look at the areas where we won way up the likes [indiscernible] those rates are probably half since we started writing them, but we never had a loss. So I think that’s why we are cautiously optimistic about the market, which is early on. It’s an opportunity for us to solve. The good underwriter should differentiate themselves and we think having connection to that group just give us more options.

Olivia Brindle – Deutsche Bank AG

So then really the question is probably best for you on top line growth and then…

Elaine Whelan

Capital releases?

Olivia Brindle – Deutsche Bank AG

Capital releases, yes.

Elaine Whelan

I think if you look at our energy, aviation and marine lines of business to be broadly flat. Last year the maintenance were a bit – pricing should be back in new business. The big movement is obviously going to be in [indiscernible] where the 10.9 million of one of the way and also a lot more the course of the rest of the year. So that was most of event and the bill though our property cat line so you can see the signs from there. In terms of Cathedral, we’ve got that page and that supplement that business very stable and again you might lose something in pricing, but this should not lock up in kind of new business and some of the growth we may see with our [indiscernible]. And so most of the growth you see will be in our property cat lines and everything else is in a fairly flat position.

In terms of capital release and probably it’s a simple way to look what we have done is that we see for Cathedral with acquisitions and our comprehensive income and the dividends that we’ve bee able to retire, that’s been capital released from that, it’s not a simplistic but there’s obviously a lot of moving parts to that and but we’ve done that salary restructuring, we put in place of course this year, and over to the course as Pete mentioned, so that’s largely done, probably and spend the rest of the year just refining some of our modeling assumptions.

Olivia Brindle – Deutsche Bank AG

Okay, so on the top line, you’re basically saying flattish to may be sort of up 1%, 2% something like that perhaps and then on the capital release those for the big movements that we should expect?

Elaine Whelan

To get to the end of the year and obviously we’ll have an phasing of the market that playing, and if something else changes then you might return all of our earnings end of the year with [indiscernible] and for most of the flattish and property of risk returns..

Olivia Brindle – Deutsche Bank AG

Okay great, thank you.

Operator

And the next question is from the line of Frank Howard from Frank Howard Associates [ph]. Please go ahead, your line is open.

Unidentified Analyst

Hello, congratulations Richard and Peter Scales on what appears to be a very smooth integration of your two businesses.

Peter D. Scales

Thanks Frank.

Richard Brindle

Thank you.

Unidentified Analyst

And I would like to address first question to Richard and then I have a couple of quick questions for Elaine. Richard would you comment on what appears to me to be enormous de-risking of your business since the Lancashire’s inception. It seems particularly with this $100 million reinsurance over $100 million that is just typical of what you’ve been doing in the last few years. So, could you comment on that?

Richard Brindle

With pleasure, Frank I think I’ve said to you before one of the of services of the insurance market is the people most companies write the least business and rates the highest, and most of them rates the lowest we should be sets. So, somebody outside of our cognitive wells, just we’ll give that to open miles. And obviously we can’t be taught [indiscernible], we are not Berkshire Hathaway incoming about $1 billion one day and nothing the next.

We have co-relationships with brokers and clients which are vital to our ongoing success. But the back caveat in mind, we do try to de-risk when rates are coming down, we think that – I read these plans without singling anybody out, I read these plans of our people diving to new lines of business and opening new offices, they start me other against the backdrop of the market where, Mark has said that we have all seen how that movie ends. So, yeah we all de-risking, we’ve gone from sellers to purchases of the retro, and we’ve reasonably done that, when we taken the opportunity to buy more cover on the non elemental book that we signal the exactly the right thing we are doing at this point, right.

Unidentified Analyst

Okay, good. Thank you, Richard. And Elaine, I have a couple of questions for you. Again, the duration of the portfolio one year is extraordinarily low, and I personally think that’s a very good idea because of trying to reach for yield in such a low interest rate environment also there is a potential protection in case your rates should move up materially in the next year or in the years ahead. So, could you comment on that and I have got a couple of other quick questions.

Elaine Whelan

Sure, yeah, it’s low intentionally monitor in for a low duration we still on the [indiscernible] on this year and not kept the duration moving well. And the Cathedral portfolio remained augmented that is very similar to ours and probably it’s high flow duration as they had for the high cash balances so we are quite happy with that, and the bank once actually in terms of our interest rate risk, we’re looking to other software agencies as well, and we will look at some significant duration portfolio and – it give us a better view and does not any too much risk. And you might see that duration keep up a little bit but it’s not going to be significant.

Unidentified Analyst

Great well and a couple of other quick questions here. On the – mentioned Accordion and Saltire are in effect in run off and you’re expecting perhaps a $9 million profits commission in Q1, is that’s the case what about the rain quarters of this year.

Elaine Whelan

Accordion and Saltire write any more business and Accordion was retro, but they are not really interested in anymore, Saltire was kind of the one year product and Kinesis is obviously taking over that as a longer term vehicle, so the profit commissions are coming in not because of the deals in those vehicles are run-off. And profit commission in thesis Kinesis, this first item will see some of that will be first quarter next year just because the contracts have to run through three year final term rest of it they are depending all activities on them. So they’ll get the underwriting and some underwriting on behalf of Kinesis this year.

Unidentified Analyst

Yes, I guess my question is the profit commission expected from the run-off of Accordion and Saltire, would that rate of perhaps $9 million in the first quarter would that rate continue perhaps through the rest of the year.

Elaine Whelan

No, it’s a one-time hit, that’s the vehicles are done and that’s the profit commission we are getting…

Unidentified Analyst

Okay, that’s makes it clear. Other interesting thing I noticed it’s kind of a leveled interest with the Cathedral there was a – currently a long-term claim which are now apparently have been settled from the Michael Jackson Estate, so will that settlement be perhaps reflected in the release in the first quarter.

Richard Brindle

Basically, but broadly speaking we always had a claims reserve of the net movement especially nothing throughout it’s just basically something off the books, it financially might personal impact.

Unidentified Analyst

I just didn’t know it perhaps you know since it was kind of various claim anyway, perhaps there might be some further movement in there. Okay, well, thank you very much.

Elaine Whelan

Thanks Roy.

Richard Brindle

Thank you.

Operator

Okay then we have a follow-up question from the line of Tom Dorner from Citigroup. Your line is open again.

Thomas M. Dorner – Citigroup Global Markets Ltd.

Hi, I actually wanted to ask some more questions to the earlier one about fees within Lancashire Capital Management. Do you think you said in the past you’d expect it to add 2% to 3% ROE over time, as soon as I make sure I got the numbers right, so on the Kinesis business it’s $5 million within this year and then another $9 million next. Then a one-off sort of benefited about 10 from Accordion’s, Saltire, how do you get to the 2% to 3% over the next couple of years? Is it driven by Kinesis or do you need to introduce other products to achieve that, thanks.

Elaine Whelan

There is two elements to it, this drug licensing fee and then the profit commission is all it going to allied with that, which is why we going to said that ultimately we think it’s going to 3% on per ROE, it does take your time for that build out, [indiscernible] is profit commission and the $5 million or so is underwriting fee in terms of capital of these called to work, right now. So the $250 million of capital as that grows those numbers increasing that so we get into to the 2% to 3%. As now 2014 play and we’ll see it increase a little bit in 2015, this is little bit they are going to stabilize in fact was in 2015 onwards.

Thomas M. Dorner – Citigroup Global Markets Ltd.

Do you think you need to introduce new products to get there or you can just scale up Kinesis to do it?

Unidentified Company Representative

I’ll take that, it’s [indiscernible] here. I mean there’ll be natural growth with the Kinesis multi task product first I mentioned we will be going to specialty products mid year as well as we’ll be product driven over the next two to three years as we grow but, [indiscernible] this disproportion within the market obviously this structure with try to – we could expand dramatically in a very short period of time. So it’s not a loss activity as Elaine mentioned it will be two, three year grow out, to where we want to get to on a multi-class specialty products if there is a market dislocation. You could potentially get there a lot quicker.

Richard Brindle

What we tried to tell them, I don’t think we talked about this before with Gordon’s our advisors. They just sort of invested cloud. And it took a bit of time and Darren to handover as he mentioned in this script identifying these supply because that’s no [indiscernible] enough, and getting people really acquainted with our underwriting approach and that pay dividend one, one.

We want to expand our investor class. But the concept is, thus we have a sort of annual draw where we do the one-one book, which will be mainly the multi-class product, but we’ve certainly look at other products, there maybe property and casualty supply that. But then we can do what we call special draws through the year and we reckon that we can actually do a special draw within a week, ten days sort of period, which is very quite if you think about it.

And not because we put in a lot of hard work in educating our investors, getting a legal agreement signed and all of that stuff. And we are constantly and we look out for market dislocations and issues, but in friendly environment, we are constantly on the look out and this special draw feature should have made us to react extremely quickly for any dislocations.

Thomas M. Dorner – Citigroup Global Markets Ltd.

It’s very helpful. Thank you.

Operator

(Operator Instructions) And we have no further questions registered, I hand the conference back to you.

Richard Brindle

Okay. Just thanks everybody for dialing in, we’ll see you next quarter.

Operator

Ladies and gentlemen, this now concludes the conference. Thank you very much for attending. You may now disconnect and have a nice day.

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