Roadshow Presentation V090308

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Roadshow Power Point Presentation for Lehman Brothers $750m Private Placement for new Bermuda Reinsurer, Lennox Re

Transcript of Roadshow Presentation V090308

  • 1. $750 Million Private Equity Offering September 2008 c
  • 2. Agenda
    • Market Overview
    • VA Writer Risk
    • Lennox Re What We Do
    • Financial Overview
    • Appendices
  • 3. Offering Summary Offering Size Security Use of Proceeds Issuer Placement Agent
    • Lennox Holdings Limited (Lennox Holdings, Lennox or the Company)
    • $750 million
    • Common shares
    • To capitalize the Bermuda domiciled reinsurance subsidiary, Lennox Reinsurance Limited (Lennox Re)
    • Lehman Brothers
  • 4. Presentation Team
  • 5. Investment Highlights Early Entrant to Market Strong Financial Position and Expected A.M. Best A- Rating Experienced Management Team Already in Place Sophisticated Risk Manager Compelling Case for Unique, Tailored Reinsurance Solutions Significant and Growing Variable Annuity Market Opportunity Focused Variable Annuity Reinsurer Unique investment opportunity
  • 6. Market Overview
  • 7. VA Market Growth
    • Tremendous growth of the VA market over the last twenty years, both in the U.S. and Japan as well as other parts of the world
    • Product development, as well as significant improvements in risk management, will continue to drive VA sales growth and life insurers market share gains
      • Development of guarantees has appealed to customer / end users value opportunity
    • Increase of U.S. VA assets to $1.5 trillion in December 2007, an all time high (1)
      • VA sales growth in Japan has outpaced that of the U.S. in recent years
      • Sales in Japan have grown at a CAGR of 18% over the last five years and current assets stand at over $125 billion having grown at a CAGR of nearly 90% since 2003 (2)
    U.S. VA sales have ramped up considerably since 1995 1995 2007 Annualized CAGR: 11% Total U.S. Sales of VAs 1995 2007 (1) Market Commentary
    • Source: LIMRA.
    • Source: Hoken Mainichi Shimbun. Detailed sales figures can be found in appendix.
    $ in billions
  • 8. Top VA Writers
    • Top 25 U.S. VA writers have over 90% of U.S. market share
    • Top 25 VA Writers have over $1.4 trillion in assets
    Lennox has relationships with the majority of the executive leadership of the top VA Writers Top U.S. VA Writers (1) 1. Source: VARDS, March 2008. 2. Source: Hoken Mainichi Shimbun. Top Japanese VA Writers (2)
  • 9. Targeted Marketing
    • Initially targeting U.S. opportunities to be expanded later to Japan and other markets
    • Target clients include:
    • Large VA Writers (assets greater than $40 billion)
      • Opportunities exist for Lennox Re to provide larger writers accounting volatility reduction and capital benefits through tailored reinsurance solutions
      • Many of the larger writers have internal trading and hedging functions to hedge capital markets risk but look to reinsurance as an alternative risk transfer solution
    • Mid-Sized and Small Writers
      • Most of the midsized and small writers do not have the resources for internal trading and hedging functions
      • Opportunities exist for Lennox Re to not only reinsure their business, but to also aid in designing, pricing and assessing the risk of new products
    • Former VA Reinsurers
      • Lennox can provide reinsurance solutions to former VA reinsurers that have stopped providing such service and are looking to effectively reduce or eliminate risks associated with a legacy block of business
    Marketing Strategy
  • 10. VA Writer Risk
  • 11. VA Rider Universe Lennox Re is the only pure play insurer providing sophisticated, tailored reinsurance solutions for guarantee riders embedded in VAs
    • Source: LIMRA. Based on fourth quarter 2007 data. Represents percent electing the rider when that rider is offered.
    • Source: NAVA.
    • Source: LIMRA.
    Guarantee Riders Take Up Rates for Living Benefit Riders (1) 2007 U.S. VA Sales: $184 billion (3)
    • Guaranteed Minimum Death Benefit
      • Provides a guaranteed minimum death benefit to the beneficiary at the time of the contractholders death
    • Guaranteed Minimum Withdrawal Benefit
      • Allows the contractholder to take periodic withdrawals of a prescribed base amount until the full amount is withdrawn or over the life of the contractholder
    • Guaranteed Minimum Income Benefit
      • Provides the contractholder the right to annuitize a guaranteed value, at a prescribed annuitization rate, after a contractually stated waiting period (typically seven or more years)
    • Guaranteed Minimum Accumulation Benefit
      • Provides a floor on the amount by which a premium will accumulate over a specified period of time
    • Substantially all VA contracts include a guaranteed minimum death benefit (2)
    • A guaranteed living benefit is elected nearly 80% of the time it is offered
  • 12. Guaranteed Riders Create Unique Risks Financial Statement Volatility Operational Risk Reinsurance is an effective and efficient way for VA writers to manage the risks created by guarantee riders
    • See Summary of GAAP Accounting Treatment and Standards in the appendix on page 36.
    Economic Risk
    • Economic risk is the risk that the contractholders fund balance is insufficient to fund the guarantee rider benefits
    • Economic risk has two components: capital markets risk and actuarial risk
      • Capital markets risk arises when the equity markets decline causing the VA writer to pay a claim
      • Actuarial risks relate to contractholder behavior, and include lapse, mortality, rider utilization and fund reallocation
    • VA guarantees introduce significant GAAP and statutory income statement and balance sheet volatility (1)
      • Different accounting valuation approaches apply to the various riders
    • The NAIC has implemented a new capital framework and is in the process of redesigning reserve requirements for VAs
      • Under these rules, writers may be forced to set aside additional capital depending on the degree of risk embedded in their products and the level of sophistication of hedging strategies employed
    • Managing the risks associated with a block of VA contracts with guarantee riders is operationally intensive and not always a core part of VA writers operations
      • Limited qualified talent to mange these risks
      • Difficulty and cost of implementing an internal hedging program
      • Requires technology, market expertise, oversight and expense
  • 13. What are VA Writers Currently Doing About The Risk? Pricing Hedging of Rider Risk Hedging Technology and Instruments Guarantee Riders Results Then (2002 and Prior) Now While VA writers have recognized the risks associated with guarantee riders, many are struggling to find adequate solutions
    • Focused on simple death benefits
    • Riders are an extra feature
    • Added complex living benefits
    • Riders are essential
    • Priced by writers and reinsurers as an insurance contract using actuarial assumptions
    • Real world pricing framework
    • Priced as a derivative contract using capital markets assumptions
    • Risk neutral pricing framework
    • Hedging not widely practiced
    • Reinsurance available
    • Some hedging is predominant
    • Little reinsura