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Roadshow Power Point Presentation for Lehman Brothers $750m Private Placement for new Bermuda Reinsurer, Lennox Re
Citation preview
$750 Million Private Equity $750 Million Private Equity OfferingOffering
September 2008September 2008
$750 Million Private Equity $750 Million Private Equity OfferingOffering
September 2008September 2008
c
2
AgendaAgenda
I. Market Overview
II. VA Writer Risk
III. Lennox Re – What We Do
IV. Financial Overview
V. Appendices
3
Offering SummaryOffering Summary
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
Offering Size
Security
Use of Proceeds
Issuer
Placement Agent
4
Presentation TeamPresentation Team
Years inIndustry
John Coughlin Executive Chairman 27 years Founder, J. Lennox & Company, Inc.
Mark Zesbaugh Chief Executive Officer 20 years Chief Executive Officer of Allianz, North America
Lee Launer Chief Investment Officer 29 years Chief Investment Officer, MetLife, Chairman of RGA
John Brill Chief Financial Officer 34 years Chief Financial Officer, SCOR Life Reinsurance
Eric Henderson Chief Pricing Officer 10 years Product Development and Corporate Risk Management, Allianz of North America
Gary Kalmanovich Chief Quantitative Officer 13 years Head of Variable Annuity Hedging, CIGNA Reinsurance
Mike Spurbeck Chief Risk Officer 15 years Vice President of Risk Management, Aviva U.S.A.
Paul Zajac Chief Technology Officer 15 years Chief Information Officer, MetLife Investments
Name Position Most Recent Position
5
Investment HighlightsInvestment Highlights
Early Entrant to Market
Strong FinancialPosition 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
Market OverviewMarket Overview
7
VA Market GrowthVA 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 user’s 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
1. Source: LIMRA.2. Source: Hoken Mainichi Shimbun. Detailed sales figures can be found in appendix.
$ in billions
88
Lennox has relationships with the majority of the executive leadership of the top VA Writers
Top VA Writers Top VA Writers
Top U.S. VA Writers (1)
1. Source: VARDS, March 2008.2. Source: Hoken Mainichi Shimbun.
Top Japanese VA Writers (2)
Top 25 U.S. VA writers have over 90% of U.S. market share
Top 25 VA Writers have over $1.4 trillion in assets
($ in millions) 2007 VA U.S. VA 2007 NewRank Issuer Assets Market Share U.S. VA Sales
1 TIAA-CREF $377,726 25.4 % $14,116
2 Hartford 119,032 8.0 13,254
3 MetLife 106,360 7.2 15,265
4 AXA Financial 88,265 5.9 15,502
5 AIG 82,008 5.5 9,478
6 Prudential 78,468 5.3 11,528
7 Lincoln 77,701 5.2 12,814
8 ING 70,916 4.8 10,766
9 Pacific Life 53,802 3.6 10,676
10 Ameriprise 53,252 3.6 10,678
11 John Hancock 52,986 3.6 10,805
12 Nationwide 46,483 3.1 5,367
13 Aegon 43,871 3.0 3,862
14 Jackson National Life 32,757 2.2 9,113
15 Allianz North America 23,119 1.6 3,317
16 New York Life 18,615 1.2 2,382
17 Sun Life 17,589 1.2 2,806
18 Fidelity 17,330 1.2 2,412
19 Thrivent 14,768 1.0 1,485
20 Genworth 13,282 0.9 2,580
21 Northwestern Mutual 11,081 0.8 1,090
22 MassMutual 10,424 0.7 1,274
23 Protective 8,716 0.6 464
24 Ohio National 6,792 0.5 2,177
25 Commonwealth 6,272 0.4 NA
($ in millions) 2006 VA JapaneseRank Issuer Assets Market Share
1 Hartford $28,342 26.3 %
2 Mitsui Sumitomo MetLife 15,063 14.0
3 ING 14,629 13.6
5 Tokio Marine & Nichido Life 11,987 11.1
4 Sumitomo Life 10,559 9.8
6 Manulife 7,374 6.8
7 Mitsui Life 4,919 4.6
8 Alico Japan 4,883 4.5
9 T&D Financial 4,141 3.8
10 Daiichi 2,304 2.1
99
Targeted MarketingTargeted Marketing
Marketing StrategyInitially 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
VA Writer RiskVA Writer Risk
11
VA Rider UniverseVA Rider Universe
Lennox Re is the only pure play insurer providing sophisticated, tailored reinsurance solutions for guarantee riders embedded in VAs
1. Source: LIMRA. Based on fourth quarter 2007 data. Represents percent electing the rider when that rider is offered.2. Source: NAVA.3. Source: LIMRA.
Guarantee Riders
Guaranteed Minimum Death Benefit – Provides a guaranteed minimum death benefit
to the beneficiary at the time of the contractholder’s 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
Take Up Rates for Living Benefit Riders (1)
2007 U.S. VA Sales: $184 billion (3)
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 RisksGuaranteed Riders Create Unique Risks
Economic risk is the risk that the contractholder’s 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
Financial Statement Volatility
Operational Risk
Reinsurance is an effective and efficient way for VA writers to manage the risks created by guarantee riders
1. See “Summary of GAAP Accounting Treatment and Standards” in the appendix on page 36.
Economic Risk
1313
What are VA Writers Currently Doing About The Risk?What are VA Writers Currently Doing About The Risk?
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 reinsurance available
Home grown programs
Basic understanding of derivative markets and limited application
Commercial software programs available
Greater understanding of derivative markets and increasing application
Large claims in 2001-2002 due to mispricing and lack of hedging
Amidst recent increase in equity market volatility, magnitude of claims appear contained to date
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
1414
Variable Annuity FeesVariable Annuity Fees
Primary VA Writer Fee (1) Value Proposition of Customized, Tailored Reinsurance Solutions
Retain significant economics
VA writers fee structure allows for reinsurance premiums
Reinsurance Premium (3)
Description Fees
Reinsurance Premium 70 bps
Net Fees to Primary VA Writer
Description Fees
Net Fees to Primary Writer 181 bps
Description Fees
Mortaility and Expense Fee 118 bpsAdministrative Fee 20 bpsGMWB Rider Fee 63 bpsTotal Direct Writer Primary Fees 201 bps
Additional VA Writer Fees FeesAsset Management Fees (2) 50 bps
Total Fees 251 bps
1. Based upon the average of the top five selling variable annuity products from 2007 4Q VARDS variable sales and corresponding prospectus data from the Ernst and Young Retirement Income Knowledge Bank.
2. VA Writers typically participate in some portion of the underlying asset management fees either through subadvised arrangements or revenuing sharing agreements (50 bps is used for illustration purposes). Additionally, based upon the E & Y Income Knowledge Bank, actual assets management fees on these top selling products range from 53bps 229bps on average.
3. Reinsurance premium charged by reinsurer (e.g., Lennox Re).
Lennox Re – What We DoLennox Re – What We Do
1616
What Risks Are We Assuming? What Risks Are We Assuming?
Reinsurance fully transfers the risk associated with VA guarantees
Note: Management estimates.
On an un-hedged basis, capital markets risk represents the largest component of total risk
Effective hedging significantly reduces the overall exposure to capital markets risk
Reinsurance of VA guarantees is the only solution to fully transfer capital markets risk, basis risk, actuarial risk and operational risk
Direct writers can limit the capital markets exposure through the development and execution of sophisticated hedging programs
However, while capital markets risk is mitigated, basis risk still exists and actuarial risk is retained
Risk Management Risk Associated with Guarantee Riders
17
Product PricingProduct Pricing
17
Lennox Re will price business using a cost plus margin approach
Rider benefits will be priced on a risk neutral and market consistent basis
Actuarial risk will be mitigated through tailored product design
Return on risk capital is driven by the residual actuarial and basis risk
Lennox Re will tailor a reinsurance solution to meet the needs of each VA writer
All product pricing will follow well defined pricing guidelines
Reinsurance Charge by SourceKey Highlights
18
Direct WritersDirect Writers
LennoxLennox
Traditional ReinsurersTraditional Reinsurers
Investment BanksInvestment Banks
Goal is effective and competitive coverage in any market environment
Lennox Will Pair with Writers to Develop Flexible SolutionsLennox Will Pair with Writers to Develop Flexible Solutions
1919
HedgingHedging
Capital markets risk hedged using actively managed four Greeks hedging program
Lennox will hedge market dynamics to its “pure play” philosophy
– Remove common investment risk exposures from company’s risk profile
– Fully hedge delta and rho
– Strategically hedge vega and gamma within VaR limits
Hedging instruments employed will include:
– Index puts and calls
– Index futures and variance swaps
– Interest rate futures and swaps
19
Lennox will hedge to a greater extent than the industry average
Economic RisksKey Highlights
Capital Market Risks– Equity level (Delta)– Interest rate level (Rho)– Equity gap (Gamma)– Interest rate volatility (Rate Vega)– Equity volatility (Equity Vega)– Basis (Mutual fund vs. Hedge) – Interest rate and equity correlation– Cross index correlations– Other higher order and cross exposures
Actuarial Risks– Mortality / Longevity– Fund rebalance– Lapse– Utilization– Partial Withdrawal
2020
HedgingHedging
20
Lennox will mitigate capital markets risks utilizing a daily hedging process
Rigorous Hedging ProcessKey HighlightsDaily Schedule
Overnight andPrior to During Trading Post Market
Procedures Market Open Hours Close
Liability attribution analysis
Asset attribution analysis
P&L attribution analysis
Liability risk valuation
Asset risk valuation
Risk exposure analysis
Hedging analysis
Rep
ort
ing
Daily reporting
Market update
Hedge implementation
Trade execution analysis
Post-close assessment
Clo
se a
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P
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P&
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Att
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Ris
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ysis
H
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xecu
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Extensive experience in hedging embedded guarantees
Multiple valuation models
Nightly liability and asset analytics
Real time market data
Grid computing
Operational excellence
Economies of scale Trading Efficiencies Negatively correlated risk
ModelingModeling
21
Modeling capabilities move beyond typical insurance setups and targets those of hybrid derivative trading desks
Leading Hedge (Ernst and Young)– Widely utilized platform– Flexible with C++ code that is user customizable and extendable– Will be our primary system
MG Hedge (Milliman)– Dominant market system– Not customizable– Provides validation of results on other platforms
Proprietary (Matlab and C++)– In development– Fast prototyping and analysis capabilities
Black-Scholes based models– Simple and easy to construct– Dominates the insurance industry - almost exclusively used for VA hedging– Poor model for more exotic guarantees (e.g. Maximum Anniversary Value
Guarantee)Hull-White with Heston model
– Already incorporated into Leading Hedge– Allows for more complete modeling of future market skew and volatility dynamics
Other models – in development– LIBOR Market Model– Local Volatility Equity Index model
Validation through asset pricing– Variety of market assets, including held assets, to be regularly priced over the same
scenarios we will use for the liability valuation
Platforms
Monte Carlo Scenario Models
Liability priced with state-of-the-art market-consistent models
22
Lennox will hedge liquid capital markets risks, with validation, to model
Liability and asset sensitivities from the same model– The sensitivities to be generated from the same base and perturbed scenarios for
the liability and the assets
First and second order index sensitivities (e.g., delta and gamma)
Multiple interest curve sensitivities (e.g., key rates)
First order sensitivities to all model parameters– Hull-White: α and σ
– Heston: ρ, θ, κ, ξ, and σ0
Continuously compare sensitivities of the liability and hedge assets– Rebalance when necessary– Protect against extra rebalancing by holding better duration and convexity matched
instruments
Theta calculation on liability and assets– Cashflows, discount and expected growth, gamma and model state changes
Attributable gains and losses– Changes in market levels and market parameters between expected and actual
Model verification– Changes in asset price predicted by the change in model parameters and respective
sensitivities against actual price change
Periodically assess if other and higher order sensitivities are significant
Check sensitivities of liability and assets to other models– Grid of strike vs. duration of “key” exposures over local volatility surface– Sensitivities to LMM parameters
Analyze attribution, meticulously searching for biases
Attribution
Hedge Model Sensitivities
Validation
Hedge ImplementationHedge Implementation
23
Investment PortfolioInvestment Portfolio
Lennox Re’s primary investment objective is to preserve capital
Investment in high quality fixed income
securities:
– Average credit quality of AA
– No current plans for below investment grade
corporates or equities
– Approximate duration of three years
– Contracted with Asset Allocation and
Management Company, L.L.C. as third party
investment manager
Investment Criteria
ABS NAIC 15%
CMBS11%
Investment Grade
Corporates NAIC 2
10%
Cash and Equivalent
4% US Government
Bonds25%
RMBS NAIC 1
15%
Investment Grade
Corporates NAIC 1
25%
Projected Investment Portfolio
2424
Enterprise Risk ManagementEnterprise Risk Management
Effective governance structure to be established
– Independent oversight
– Escalation procedures for limit breaches
– Effective decision making and communication
Economic capital will be calculated and risk budgets will be allocated to risk taking activities
– Capitalization level consistent with an “A” rated company
– Enhances the ability to make the best risk return decisions
Appropriate limits will be set so that Lennox is not exposed to excessive risk
– Daily value at risk (“VaR”) limits
– Investment limits
– Limits on unhedged positions
All product pricing will be signed off by full management team
24
Lennox will monitor and manage enterprise risks within an agreed upon risk appetite
Risk Management Framework Reporting Lines Solidify Independent Oversight
Chief Risk Officer
Chief Executive Officer
Board of Directors
Risk Committee
No direct P&L responsibility
Direct reporting lines to CEO and Board
Chair of Risk Committee
25
Lennox is Prepared to Write Business TodayLennox is Prepared to Write Business Today
Team Previous Experience Years Experience
John CoughlinExecutive Chairman
Founder, J. Lennox & Company, Inc.Managing Director, BSI ConsultingAetna Life
27 years
Mark ZesbaughChief Executive Officer
Chief Executive Officer, Allianz of North AmericaChief Financial Officer, Allianz of North America / Life USA
20 years
Lee LaunerChief Investment Officer
Chief Investment Officer, MetLifeChairman, Reinsurance Group of America (RGA)
29 years
John BrillChief Financial Officer
Chief Financial Officer, SCOR Life Reinsurance, Chief Financial Officer, PartnerRe Life Reinsurance and Winterthur Life Reinsurance
34 years
Eric HendersonChief Pricing Officer
Product Development and Corporate Risk Management of Allianz of North AmericaWilliam M. Mercer consulting actuary
10 years
Gary KalmanovichChief Quantitative Officer
Senior Director, Hedge Program, CIGNA RePortfolio Manager, Allstate Investments, Variable Hedging ProductsVP, Financial Engineer, Goldman Sachs
13 years
Mike SpurbeckChief Risk Officer
VP, Risk Management, Aviva USAChief Risk Officer, Allianz of North America
15 years
Paul ZajacChief Technology Officer
Chief Information Officer, MetLife Investments VP, Fixed Income Technology, PaineWebber
15 years
Lennox already has a full team of well respected industry professionals in place
Team of 8 has over 150 years of combined experience
Financial OverviewFinancial Overview
27
Sales ProjectionsSales Projections
1. See slide 6.
As the first pure play reinsurer of the guarantees in VA riders, Lennox Re is uniquely positioned to penetrate this growing and largely untapped market opportunity
Market:
Growth rate of 10%, consistent with historical CAGR1
$1.1 trillion of GMDB and $200 billion of GMLB
Lennox:
Production is evenly split between GMDB and GMWB
– Base Case: $14 billion (account value) in sales year one, $30 billion year two, and $54 billion in years three through five
– Conservative Case: $7 billion (account value) in sales year one, $13 billion year two, and $25 billion in years three through five
– Upside Case: $24 billion (account value) in sales year one, $49 billion year two, and $70 billion in years three through five
Assumptions Projected Market Share Penetration (1)
28
Strong Financial PositionStrong Financial Position
Strong Capitalization
Expected rating of A- from AM Best with maintenance of this rating our highest priority
High quality investment portfolio
Until a track record of performance is established, additional capital to maintain a higher BCAR (~200%) will be required
– A typical A rated insurer is required to maintain a 130% BCAR.
Key Highlights
$731$786
$898
$1,084
$1,443
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
Year 1 Year 2 Year 3 Year 4 Year 5Base Case
Base Case CAGR: 19%
Projected GAAP Book Value Growth($ in millions)
29
High and Stable Earnings StreamHigh and Stable Earnings Stream
Base Case
Key Assumptions:
Base case production
200% BCAR ratio years one and two grading to 145% year five
Implied volatility of 18.38% in year one, 16.82% in year two and 15.26% in years three through five
Interest rates of 4.68% in year one, 4.97% in year two and 5.25% in years three through five
Gross margin of 10 bps in year one and 13 bps in years two through five
All options and warrants are exercised in year five
Note: Tax rate is 0.0%, and assumes Lennox is a non-PFIC operating in Bermuda.1. Year five stated book value includes proceeds from options and warrants.2. Assumes book value exit multiple of 1.80x and investor fully diluted ownership of 85%. Excludes impact of warrants.
($ in thousands) Year 1 Year 2 Year 3 Year 4 Year 5
Summary Income Statement
Premiums $81,937 $242,954 $496,271 $742,978 $979,553Hedging Gains (Losses) (92,674) (207,326) (261,880) (310,161) (407,812)Claims and Reserves 18,461 8,821 (126,230) (251,163) (326,291)
Reinsurance Technical Result $7,724 $44,449 $108,161 $181,654 $245,450Investment Income 35,257 33,102 30,826 35,208 47,547Operating Expenses 45,352 27,572 32,423 30,543 33,322
Net Income ($2,371) $49,979 $106,564 $186,319 $259,675
Summary Balance Sheet
Total Assets $712,653 $754,194 $979,347 $1,391,470 $2,034,124Total Liabilities (18,402) (31,945) 81,538 307,342 591,347
Total Shareholders Equity 731,055 786,139 897,809 1,084,128 1,442,777 (1)
Performance Ratios
ROAE 6.59 % 12.66 % 18.80 % 20.55 %ROAA 6.81 12.29 15.72 15.16
Investor Returns
IRR (2) 22.7 % 24.3 %
$3,930
$1,896
$1,270
$2,180
$3,228
$2,698
$4,516
$2,807
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
30
Base Case Valuation AnalysisBase Case Valuation Analysis
0.88
– 1
.87x
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s’
Med
ian
Cu
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/ B
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2.72
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.13x
Len
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P /
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bas
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Yea
r 5
RO
AE
(3)
(20
– 22
%)
New Investors’ 5 Year IRR (1)
18.8%
2.9%
53.1%
36.8%
29.0%
Whole Company Implied Valuation at 1.80x Year 5 Book Value: $2.6 billion
7.3x
– 1
0.8x
Co
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le
Co
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s M
edia
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008
P /
E (4
)
Overview of Valuation Methodologies
We have used various valuation methodologies to derive an appropriate indicative exit valuation for Lennox’s new investors
Co
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Med
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200
8
P
/ E
wit
h 1
5%
Co
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ol
Pre
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8.4
x –
12.4
x
48.5%
43.1%
Market data and estimates as of 7/16/08. Financial data as of 3/31/08.1. Assumes investor fully diluted ownership of 85%. Excludes impact of warrants to be allocated.2. Comparable companies include: AFL, AMP, AIZ, DFG, FFG, LNC, MET, NFS, PRU, PL, RGA and SFG. P / BV range established excluding the
highest and lowest of comparable companies.3. Regression equation is: Y = 20.33 x – 1.34.4. P / E range established excluding the highest and lowest of comparable companies.
Whole Company Valuation ($ millions)
31
Investment HighlightsInvestment Highlights
Early Entrant to Market
Strong FinancialPosition 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
AppendicesAppendices
Additional Valuation DetailAdditional Valuation Detail
1.00x
1.20x
1.40x
1.60x
1.80x
2.00x
2.20x
2.40x
7/16/05 7/16/06 7/17/07 7/16/08
Large Cap Small Cap
34
Price to Book and Regression AnalysisPrice to Book and Regression Analysis
Large Caps:1.17x
Mid / Small Caps: 1.11x
Historical Price to Book
Sources: SNL Financial and Factset. Market data as of 7/16/08. Financial data as of 3/31/08.1. Large cap includes companies with market value over $8 billion: MET, PRU, AFL, LNC and AMP.2. Small / mid cap includes companies with market value less than $8 billion: AIZ, NFS, RGA, PL, SFG, DFG and FFG.
(1) (2)
Current Regression Analysis
NFS
PL
RGAFFG LNC
AFL
DFG
METAMP
SFG
PRU
AIZ
y = 20.3410x - 1.3400
R2 = 0.8647
0.50x
1.00x
1.50x
2.00x
2.50x
3.00x
3.50x
4.00x
8% 10% 12% 14% 16% 18% 20% 22%
2008E ROAE
1Q08
P/B
V
Median Price / Book1-Year 2-Year 3-Year
Large Cap 1.56 x 1.68 x 1.55 xMid / Small Cap 1.29 1.39 1.35
35
Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08
8.0 x
9.0 x
10.0 x
11.0 x
12.0 x
13.0 x
14.0 x
15.0 x
Large Caps Small Caps(1) (2)
9.2x
8.1x
Trading Comparables and Price to Earnings AnalysisTrading Comparables and Price to Earnings Analysis
Price to Next Twelve Months Earnings
Sources: SNL Financial and Factset. Market data as of 7/16/08. Financial data as of 3/31/08. Book value excludes accumulated othercomprehensive income.1. Large cap includes companies with market value over $8 billion: MET, PRU, AFL, LNC and AMP.2. Small / mid cap includes companies with market value less than $8 billion: AIZ, NFS, RGA, PL, SFG, DFG and FFG.
Comparable Companies
($ in millions) Price/ LT 2008Share Market Book 2008E 2009E 2008E Growth PEG
Company Price Value Value EPS EPS ROAE Rate Ratio
MetLife $50.96 $36,153 1.17 x 8.2 x 7.5 x 13.4 % 11.0 % 0.75 x
Aflac 59.50 28,268 3.48 14.9 13.0 21.5 15.0 0.99
Prudential 60.09 26,406 1.16 8.0 6.8 13.7 14.3 0.56
Lincoln 43.50 11,494 1.02 7.9 7.0 12.3 11.1 0.72
Ameriprise 40.00 8,936 1.18 10.8 9.2 10.4 11.0 0.98
Assurant 65.94 7,776 1.87 10.0 9.3 17.2 11.5 0.87
Nationwide 47.10 6,490 1.30 10.6 9.1 11.7 10.0 1.06
RGA 43.46 2,705 0.88 7.6 6.5 11.1 11.0 0.69
Protective Life 34.36 2,399 1.11 8.9 7.6 11.9 9.0 0.99
StanCorp 47.32 2,316 1.55 9.8 8.8 14.9 11.0 0.89
Delphi Financial 21.52 1,037 0.96 7.1 5.7 12.7 12.0 0.59
FBL Financial 20.10 603 0.67 7.3 6.5 8.9 6.0 1.22
Mean 1.36 x 9.3 x 8.1 x 13.3 % 11.1 % 0.86 x
Median 1.17 8.6 7.6 12.5 11.0 0.88
Mean Large Caps (1) 1.60 x 10.0 x 8.7 x 14.3 % 12.5 % 0.80 x
Median Large Caps 1.17 8.2 7.5 13.4 11.1 0.75
Mean Small Caps (2) 1.19 x 8.7 x 7.6 x 12.6 % 10.1 % 0.90 x
Median Small Caps 1.11 8.9 7.6 11.9 11.0 0.89
Current Accounting Treatment and StandardsCurrent Accounting Treatment and Standards
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Summary of GAAP Accounting Treatment and Standards
Summary of GAAP Accounting Treatment and Standards
Significant financial statement volatility results from the accounting treatment elected for guarantee riders
GAAP accounting treatment of these products can fall under the following accepted standards:
Disconnected accounting valuation approaches for assets and liabilities and the impact on financial statements have become problematic for many VA insurers
There is a significant opportunity for reinsurers who can develop a reinsurance approach that addresses these financial statement volatility risks and related concerns
Mark to MarketAccounting VA VA VA Hedged VA Writer Implications ofTreatment Rider Base Rider Asset Impact Reinsurance
SOP 03-01 GMDB No No Yes Earnings volatility Reduces earnings volatility
GMIB
FAS 133 GMWB No Yes Yes Complex procedures to qualify Reduces cost and complexity
GMAB
FAS 159 GMDB Yes Yes Yes Earnings volatility Reduces cost and complexity
GMIB
GMWB
GMAB
Summary Financial ProjectionsSummary Financial Projections
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Financial Projections: Downside ProductionFinancial Projections: Downside Production
Summary Financial Projections
Note: Tax rate is 0.0%, and assumes Lennox is a non-PFIC operating in Bermuda.1. Year five stated book value includes proceeds from options and warrants.2. Assumes book value exit multiple of 1.80x and investor fully diluted ownership of 85%. Excludes impact of warrants.
($ in thousands) Year 1 Year 2 Year 3 Year 4 Year 5
Summary Income Statement
Premiums $40,968 $110,662 $227,931 $342,143 $451,689Hedging Gains (Losses) (46,337) (94,981) (119,264) (142,917) (188,082)Claims and Reserves 9,232 4,899 (59,310) (115,792) (150,573)
Reinsurance Technical Result $3,863 $20,580 $49,357 $83,434 $113,034Investment Income 35,257 34,647 34,141 36,574 42,627Operating Expenses 44,915 26,245 29,678 26,698 28,301
Net Income ($5,795) $28,982 $53,820 $93,310 $127,360
Summary Balance Sheet
Total Assets $719,142 $746,267 $858,731 $1,056,207 $1,413,654Total Liabilities (8,488) (15,451) 38,087 142,252 273,366
Total Shareholders Equity 727,630 761,718 820,644 913,954 1,140,288 (1)
Performance Ratios
ROAE 3.89 % 6.80 % 10.76 % 12.40 %ROAA 3.96 6.71 9.75 10.31
Investor Returns
IRR (2) 19.1 % 18.6 %
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Summary Financial Projections
Financial Projections: Partially HedgedFinancial Projections: Partially Hedged
Note: Tax rate is 0.0%, and assumes Lennox is a non-PFIC operating in Bermuda.1. Year five stated book value includes proceeds from options and warrants.2. Assumes book value exit multiple of 1.80x and investor fully diluted ownership of 85%. Excludes impact of warrants.
($ in thousands) Year 1 Year 2 Year 3 Year 4 Year 5
Summary Income Statement
Premiums $81,937 $242,954 $496,271 $742,978 $979,553Hedging Gains (Losses) (72,879) (156,080) (207,301) (246,188) (324,105)Claims and Reserves 18,462 8,822 (126,230) (251,163) (326,293)
Reinsurance Technical Result $27,520 $95,696 $162,740 $245,627 $329,155Investment Income 35,257 34,703 35,990 43,993 60,649Operating Expenses 45,352 27,572 32,423 30,543 33,322
Net Income $17,425 $102,827 $166,307 $259,077 $356,482
Summary Balance Sheet
Total Assets $732,448 $826,838 $1,111,734 $1,596,615 $2,336,076Total Liabilities (18,402) (31,945) 81,538 307,342 591,347
Total Shareholders Equity 750,850 858,783 1,030,196 1,289,273 1,744,729 (1)
Performance Ratios
ROAE 12.78 % 17.61 % 22.34 % 23.50 %ROAA 13.19 17.16 19.13 18.13
Investor Returns
IRR (2) 28.4 % 29.1 %
Use of ProceedsUse of Proceeds
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Use of ProceedsUse of Proceeds
Detailed Gross and Net Proceeds
1. Knight Capital was the placement agent for the seed capital and was originally engaged as placement agent for this offering. Upon completion of this offering the Company will owe Knight Capital $4.0 million as part of their settlement agreement.
2. Reflects five years of development of the financial models and business concept.3. Loans were used for formation, hiring management team, developing infrastructure and modeling capability.
($ in thousands)Description Amount
Gross Proceeds from Offering $750,000
Transaction Expenses:
Lehman Brothers fee $30,000
Estimated offering expenses 1,000
Obligations due at Closing:
Knight Capital fee (1)4,000
Payment to John Coughlin (2)1,021
Repayment of Seed Capital (3)7,788
Total Payments due at Closing $43,809
Net Proceeds from Capital Raise $706,191
Japanese VA DataJapanese VA Data
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Japanese VA Market Growth Japanese VA Market Growth
Sales in Japan have grown at a CAGR of 18% since 2003 (1)
Variable annuity assets in Japan grew to over $125 billion in 2007 and have grown by a CAGR of nearly 90% since 2003 (1)
Growth has been driven in large part by the deregulation of life insurance sales through banks
High savings rate, low interest rates and an aging population in Japan suggests high demand and large growth for VA products
Variable annuity sales growth in Japan has outpaced that of the U.S. in recent years
2003 – 2006 CAGR: 18%
Estimated Japanese Sales of Variable Annuities 2003 – 2006 (1)
Japanese Market Commentary
1. Source: Hoken Mainichi Shimbun. Estimated using annual change in assets under management.
$ in billions
GlossaryGlossary
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GlossaryGlossary
C3 Phase II: Statutory risk based capital requirement for variable annuities.
Contractholder: A person who pays premiums for an annuity, often the same person as the annuitant.
CrossGreeks: Second order sensitivity of “Greeks” to changes in market parameters.
Death benefit: A provision in certain annuity contracts that pays the beneficiary when the annuitant dies.
Delta: The amount by which an asset or liability value changes for a specified change in the underlying security.
Employee Retirement Income Security Act (“ERISA”): American federal statute that establishes minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans.
Exclusions: Provisions in an insurance or reinsurance policy excluding certain risks or otherwise limiting the scope of coverage.
Exposure: The possibility of loss. A unit of measure of the amount of risk a company assumes.
Gamma: Amount by which Delta changes for a specified change in the underlying security.
Generally Accepted Accounting Principles (‘‘U.S. GAAP’’): U.S. generally accepted accounting principles as defined by the American Institute of Certified Public Accountants or statements of the Financial Accounting Standards Board. U.S. GAAP is the method of accounting to be used by Lennox Holdings for reporting to shareholders.
Greeks: Measurement of the sensitivity of an asset or a liability value to changes in underlying market parameters. See Delta, Gamma, Rho and Vega.
Guaranteed Living Benefits: These benefits protect the annuity contractholders during their lifetimes, providing equity participation with some form of downside protection. GLBs come in various forms, including GMIBs, GMABs and GMWBs.
Guaranteed Minimum Accumulation Benefits: GMAB offers buyers a guarantee that the annuity contract value will never fall below a certain amount (e.g., the original premium). In order to access this guarantee, customers have to wait for a specified period of time (e.g., 510 years).
Guaranteed Minimum Death Benefits: A GMDB provides a guaranteed minimum death benefit to the beneficiary of a variable annuity. This floor death benefit is independent of the contract's actual cash value. A return of premium GMDB guarantee pays the beneficiary a minimum death benefit of the initial premium paid and is the most modest form of GMDB. Other guarantees provide for some additional degree of appreciation as specified in the annuity contract.
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GlossaryGlossary
Guaranteed Minimum Income Benefit: GMIB ensures that buyers will be able to receive future annuity payments based on a contract value equal to the greater of either market value or a guaranteed base. The guarantee is typically equal to the original premium adjusted for an assumed level of market performance (e.g., 5%). In order to use the guarantee, the buyer must annuitize the contract.
Guaranteed Minimum Withdrawal Benefit: GMWB allows owners to make annual withdrawals up to a stated percentage (typically 57%) of a guaranteed contract value. This guarantee may be equal to the original premium or a stepped up market value.
Policyholder Benefit Reserve: A liability established by an insurer or reinsurer to pay future expected claims.
Rho: The amount by which an asset or liability value changes for a specified change in interest rates, i.e. its sensitivity to changes in interest rates.
ROP: return of premium guaranty.
Statutory Accounting Principles (‘‘SAP’’): Recording transactions and preparing financial statements in accordance with the rules and procedures prescribed or permitted by United States state insurance regulatory authorities, which in general reflect a liquidating, rather than going concern, concept of accounting.
Surplus: As determined under SAP, surplus is admitted assets less all liabilities. Admitted assets are assets of an insurer prescribed or permitted by a state to be recognized on the statutory balance sheet.
Underwriting: The insurer’s or reinsurer’s process of reviewing applications for coverage and the decision whether to accept all or part of the exposure and determination of the applicable premiums.
VACARVM: Statutory reserving methodology for variable annuities currently under development by NAIC.
Variable Annuity: A contract with a cash value that varies based upon the performance of the underlying mutual funds. The potential decline in the value of the contract to can be mitigated by the contractholder through the use of guarantee riders.
Vega: Vega is the amount by which an asset or liability value changes for a specified change in the underlying equity volatility.
Withdrawal Privilege: A provision in many annuity contracts that allows the contractholder to withdraw a portion of account value without paying surrender charge.
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DisclaimerDisclaimer
Some of the statements in this presentation, including those using words such as “believes,” “expects,” “intends,” “estimates,” “projects,” “predicts,” “assumes,” “anticipates,” “plans,” and “seeks” and comparable terms, are forwardlooking statements. Forwardlooking statements are not statements of historical fact and reflect the Company’s views and assumptions as of the date of this presentation regarding future events and operating performance. Because the Company has no operating history, most of the statements relating to the Company and its business, including statements relating to the Company’s competitive strengths and business strategies, are forwardlooking statements. All forwardlooking statements address matters that involve risks and uncertainties. Accordingly, there are important factors that could cause the Company’s actual results to differ materially from those indicated in these statements. The Company believes that these factors include but are not limited to those described under the section titled “Risk Factors” in the private placement memorandum.
Any forwardlooking statements the recipient reads in this presentation reflect the Company’s current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to, among other things, the Company’s operations, results of operations, growth strategy and liquidity. The Company undertakes no obligation to publicly update or review any forwardlooking statement, whether as a result of new information, future events or otherwise.
Market data and forecasts used in this presentation have been obtained from independent industry sources as well as from research reports prepared for other purposes. The Company has not independently verified the data obtained from these sources and the Company cannot assure the recipient of the accuracy or completeness of the data. Forecasts and other forwardlooking information obtained from these sources are subject to the same qualifications and uncertainties applicable to the other forwardlooking statements in this Memorandum.
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DisclaimerDisclaimer
In connection with any placement of securities by Lennox Holdings Limited as described herein, a private placement memorandum relating to an investment in the securities, which will include information on various risk factors, will be delivered to potential investors. Information contained herein is only an overview and does not purport to be a complete description of the transactions described herein or any potential offering of securities by Lennox Holdings Limited. If an offering of securities is proposed, this investor presentation should be read in conjunction with the private placement memorandum. You should rely only on a private placement memorandum in making an investment decision with respect to the securities and should not rely hereon.
The securities, if any are offered, will not be registered under the Securities Act of 1933, as amended (the “Securities Act”), or any state or foreign securities laws. The issuer has not been and will not be registered under the Investment Company Act of 1940 (the “Investment Company Act”). The securities, if any are offered, may not be offered or sold except pursuant to transactions not subject to the registration requirements of the Securities Act and any state or foreign securities laws. The securities, if any are offered, may be offered or sold only to “accredited investors” as defined in Rule 501(a)(1), (2), (3) or (8) of Regulation D under the Securities Act, who are also “qualified purchasers” as defined in the Investment Company Act.