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Rating Action:

Moody's rates Lancashire Insurance 'A3' for insurance financial strength

28 Oct 2010

New York, October 28, 2010 -- Moody's Investors Service has assigned a Baa2 long-term issuer rating for Lancashire Holdings Limited (LSE: "LRE", "Lancashire Holdings") and A3 insurance financial strength ratings for its operating subsidiaries, Lancashire Insurance Company Limited ("LICL") and Lancashire Insurance Company (UK) Limited ("LUK"). The ratings carry a stable outlook.

RATINGS RATIONALE

Lancashire Holdings is a Bermuda-based holding company whose shares are listed on the London Stock Exchange. Its insurance subsidiaries write specialty insurance and, to a lesser extent, reinsurance worldwide. The CEO, Richard Brindle, was a successful fixture in the London insurance market before his tenure at Lancashire.

Dividends from the principal Bermuda operating company, LICL (c.90% of the group's net assets), are the main source of support for obligations at the holding company.

The A3 insurance financial strength rating of LICL is based on inception-to-date outperformance, a clear emphasis on underwriting and good capitalization. From 2006-2009, operating return on average equity was 22.2% (ex realized and unrealized investment gains/losses and AOCI), which puts Lancashire near the top of the Class of 2005/2006 Bermuda startups (public and private) and well placed among London market peers.

"An important feature of Lancashire's strategy is its willingness and ability to reduce writings if business prospects do not meet hurdle rates," said Kevin Lee, senior credit officer at Moody's. This is made easier by the company's relatively low fixed expense structure (c.13% general and administrative expense ratio in 2009, including equity-based compensation).

However, this strategy also means management may be quick to return capital to shareholders. Since its $963 million initial public offering in 2005, the company has returned nearly as much capital as it had raised in its IPO. Because of the active approach to capital management, nimble strategy and the large loss characteristics of its target business (property re/insurance, energy assets, marine and aviation war coverage), Lancashire's capital structure could change abruptly. For these reasons, Moody's expectation is that Lancashire's (adjusted) debt-to-total capital ratio will remain lower than its larger, more diversified peers. Lancashire's (adjusted) debt-to-capital ratio was 7.0% at June 2010, including 25% equity credit for its deferrable interest junior debt.

The A3 insurance financial strength rating of the UK operating subsidiary, LUK, is based on the capital relief and protection provided by a quota share reinsurance agreement with its sister company, LICL.

The Baa2 long-term issuer rating at the holding company is based on our expectation of ample credit support and dividend capacity from the operating subsidiaries as well as good financial flexibility. Bondholders at the parent company are structurally subordinated to policyholders at the operating subsidiaries, which hold most of the group's liquid assets. This is why the Baa2 long-term issuer rating is rated lower than the A3 insurance financial strength. Moody's standard practice is to reflect a two notch difference for insurance groups that maintain the majority of assets in Bermuda -- as opposed to three notches in certain other jurisdictions -- partly because Bermuda regulations impose lighter restrictions on dividend transfers (to the holding company) compared to certain other jurisdictions.

The following factors could lead to an upgrade of the ratings: 1) (adjusted) debt-to-capital ratio below 15% cross cycle, 2) EBIT fixed charge coverage above 7x cross cycle and 3) operating ROAE above 15% cross cycle. Conversely the following factors could lead to a downgrade of the ratings: 1) (adjusted) debt-to-capital ratio above 18%, 2) EBIT fixed charge coverage below 5x in consecutive years, 3) more than 10% decline in shareholders' equity over a rolling twelve month period as a result of losses, return of capital, etc. and 4) failure to adhere to internal risk limits that restrict catastrophe modeled losses to a percentage of capital.

The following ratings have been assigned with a stable outlook:

Lancashire Holdings Limited -- long-term issuer rating at Baa2;

Lancashire Insurance Company Limited -- insurance financial strength rating at A3;

Lancashire Insurance Company (UK) Limited -- insurance financial strength rating at A3.

Lancashire, through its UK and Bermuda-based insurance subsidiaries, is a global provider of specialty insurance and reinsurance worldwide. For H1 2010, Lancashire reported gross premiums written of $460.1mn (vs. $384.7mn H1 2009), net income of $93.0mn (vs. $147.1mn H1 2009) and total shareholders' equity of $1,360.9mn as of Jun 2010 (vs. $1,378.9mn as of Dec 2009).

The principal methodology used in rating Lancashire Holdings Limited was Moody's Global Rating Methodology for Reinsurers rating methodology published in July 2008. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Kevin Lee
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Stanislas Rouyer
Senior Vice President
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.

Moody's rates Lancashire Insurance 'A3' for insurance financial strength
No Related Data.
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