Roadshow Presentation V090308

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

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  • Roadshow Presentation V090308

    1. 1. $750 Million Private Equity Offering September 2008 c
    2. 2. Agenda <ul><li>Market Overview </li></ul><ul><li>VA Writer Risk </li></ul><ul><li>Lennox Re – What We Do </li></ul><ul><li>Financial Overview </li></ul><ul><li>Appendices </li></ul>
    3. 3. Offering Summary Offering Size Security Use of Proceeds Issuer Placement Agent <ul><li>Lennox Holdings Limited (“Lennox Holdings”, “Lennox” or “the Company”) </li></ul><ul><li>$750 million </li></ul><ul><li>Common shares </li></ul><ul><li>To capitalize the Bermuda domiciled reinsurance subsidiary, Lennox Reinsurance Limited (“Lennox Re”) </li></ul><ul><li>Lehman Brothers </li></ul>
    4. 4. Presentation Team
    5. 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. 6. Market Overview
    7. 7. VA Market Growth <ul><li>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 </li></ul><ul><li>Product development, as well as significant improvements in risk management, will continue to drive VA sales growth and life insurers’ market share gains </li></ul><ul><ul><li>Development of guarantees has appealed to customer / end user’s value opportunity </li></ul></ul><ul><li>Increase of U.S. VA assets to $1.5 trillion in December 2007, an all time high (1) </li></ul><ul><ul><li>VA sales growth in Japan has outpaced that of the U.S. in recent years </li></ul></ul><ul><ul><li>Sales in Japan have grown at a CAGR of 18% over the last five years and current assets stand at over $125 billion having grown at a CAGR of nearly 90% since 2003 (2) </li></ul></ul>U.S. VA sales have ramped up considerably since 1995 1995 – 2007 Annualized CAGR: 11% Total U.S. Sales of VAs 1995 – 2007 (1) Market Commentary <ul><li>Source: LIMRA. </li></ul><ul><li>Source: Hoken Mainichi Shimbun. Detailed sales figures can be found in appendix. </li></ul>$ in billions
    8. 8. Top VA Writers <ul><li>Top 25 U.S. VA writers have over 90% of U.S. market share </li></ul><ul><li>Top 25 VA Writers have over $1.4 trillion in assets </li></ul>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. 9. Targeted Marketing <ul><li>Initially targeting U.S. opportunities to be expanded later to Japan and other markets </li></ul><ul><li>Target clients include: </li></ul><ul><li>Large VA Writers (assets greater than $40 billion) </li></ul><ul><ul><li>Opportunities exist for Lennox Re to provide larger writers accounting volatility reduction and capital benefits through tailored reinsurance solutions </li></ul></ul><ul><ul><li>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 </li></ul></ul><ul><li>Mid-Sized and Small Writers </li></ul><ul><ul><li>Most of the midsized and small writers do not have the resources for internal trading and hedging functions </li></ul></ul><ul><ul><li>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 </li></ul></ul><ul><li>Former VA Reinsurers </li></ul><ul><ul><li>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 </li></ul></ul>Marketing Strategy
    10. 10. VA Writer Risk
    11. 11. VA Rider Universe Lennox Re is the only pure play insurer providing sophisticated, tailored reinsurance solutions for guarantee riders embedded in VAs <ul><li>Source: LIMRA. Based on fourth quarter 2007 data. Represents percent electing the rider when that rider is offered. </li></ul><ul><li>Source: NAVA. </li></ul><ul><li>Source: LIMRA. </li></ul>Guarantee Riders Take Up Rates for Living Benefit Riders (1) 2007 U.S. VA Sales: $184 billion (3) <ul><li>Guaranteed Minimum Death Benefit </li></ul><ul><ul><li>Provides a guaranteed minimum death benefit to the beneficiary at the time of the contractholder’s death </li></ul></ul><ul><li>Guaranteed Minimum Withdrawal Benefit </li></ul><ul><ul><li>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 </li></ul></ul><ul><li>Guaranteed Minimum Income Benefit </li></ul><ul><ul><li>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) </li></ul></ul><ul><li>Guaranteed Minimum Accumulation Benefit </li></ul><ul><ul><li>Provides a floor on the amount by which a premium will accumulate over a specified period of time </li></ul></ul><ul><li>Substantially all VA contracts include a guaranteed minimum death benefit (2) </li></ul><ul><li>A guaranteed living benefit is elected nearly 80% of the time it is offered </li></ul>
    12. 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 <ul><li>See “Summary of GAAP Accounting Treatment and Standards” in the appendix on page 36. </li></ul>Economic Risk <ul><li>Economic risk is the risk that the contractholder’s fund balance is insufficient to fund the guarantee rider benefits </li></ul><ul><li>Economic risk has two components: capital markets risk and actuarial risk </li></ul><ul><ul><li>Capital markets risk arises when the equity markets decline causing the VA writer to pay a claim </li></ul></ul><ul><ul><li>Actuarial risks relate to contractholder behavior, and include lapse, mortality, rider utilization and fund reallocation </li></ul></ul><ul><li>VA guarantees introduce significant GAAP and statutory income statement and balance sheet volatility (1) </li></ul><ul><ul><li>Different accounting valuation approaches apply to the various riders </li></ul></ul><ul><li>The NAIC has implemented a new capital framework and is in the process of redesigning reserve requirements for VAs </li></ul><ul><ul><li>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 </li></ul></ul><ul><li>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 </li></ul><ul><ul><li>Limited qualified talent to mange these risks </li></ul></ul><ul><ul><li>Difficulty and cost of implementing an internal hedging program </li></ul></ul><ul><ul><li>Requires technology, market expertise, oversight and expense </li></ul></ul>
    13. 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 <ul><li>Focused on simple death benefits </li></ul><ul><li>Riders are an extra feature </li></ul><ul><li>Added complex living benefits </li></ul><ul><li>Riders are essential </li></ul><ul><li>Priced by writers and reinsurers as an insurance contract using actuarial assumptions </li></ul><ul><li>“ Real world” pricing framework </li></ul><ul><li>Priced as a derivative contract using capital markets assumptions </li></ul><ul><li>“ Risk neutral” pricing framework </li></ul><ul><li>Hedging not widely practiced </li></ul><ul><li>Reinsurance available </li></ul><ul><li>Some hedging is predominant </li></ul><ul><li>Little reinsurance available </li></ul><ul><li>Home grown programs </li></ul><ul><li>Basic understanding of derivative markets and limited application </li></ul><ul><li>Commercial software programs available </li></ul><ul><li>Greater understanding of derivative markets and increasing application </li></ul><ul><li>Large claims in 2001-2002 due to mispricing and lack of hedging </li></ul><ul><li>Amidst recent increase in equity market volatility, magnitude of claims appear contained to date </li></ul>
    14. 14. Variable Annuity Fees Primary VA Writer Fee (1) VA writers fee structure allows for reinsurance premiums <ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>Reinsurance premium charged by reinsurer (e.g., Lennox Re). </li></ul>Value Proposition of Customized, Tailored Reinsurance Solutions <ul><li>Retain significant economics </li></ul>Reinsurance Premium (3) Net Fees to Primary VA Writer
    15. 15. Lennox Re – What We Do
    16. 16. What Risks Are We Assuming? Reinsurance fully transfers the risk associated with VA guarantees Note: Management estimates. <ul><li>On an un-hedged basis, capital markets risk represents the largest component of total risk </li></ul><ul><li>Effective hedging significantly reduces the overall exposure to capital markets risk </li></ul><ul><li>Reinsurance of VA guarantees is the only solution to fully transfer capital markets risk, basis risk, actuarial risk and operational risk </li></ul><ul><li>Direct writers can limit the capital markets exposure through the development and execution of sophisticated hedging programs </li></ul><ul><ul><li>However, while capital markets risk is mitigated, basis risk still exists and actuarial risk is retained </li></ul></ul>Risk Management Risk Associated with Guarantee Riders
    17. 17. Product Pricing Lennox Re will price business using a cost plus margin approach <ul><li>Rider benefits will be priced on a risk neutral and market consistent basis </li></ul><ul><li>Actuarial risk will be mitigated through tailored product design </li></ul><ul><li>Return on risk capital is driven by the residual actuarial and basis risk </li></ul><ul><li>Lennox Re will tailor a reinsurance solution to meet the needs of each VA writer </li></ul><ul><li>All product pricing will follow well defined pricing guidelines </li></ul>Reinsurance Charge by Source Key Highlights
    18. 18. Direct Writers Lennox Traditional Reinsurers Investment Banks Lennox Will Pair with Writers to Develop Flexible Solutions Goal is effective and competitive coverage in any market environment
    19. 19. Hedging <ul><li>Capital markets risk hedged using actively managed four Greeks hedging program </li></ul><ul><li>Lennox will hedge market dynamics to its “pure play” philosophy </li></ul><ul><ul><li>Remove common investment risk exposures from company’s risk profile </li></ul></ul><ul><ul><li>Fully hedge delta and rho </li></ul></ul><ul><ul><li>Strategically hedge vega and gamma within VaR limits </li></ul></ul><ul><li>Hedging instruments employed will include: </li></ul><ul><ul><li>Index puts and calls </li></ul></ul><ul><ul><li>Index futures and variance swaps </li></ul></ul><ul><ul><li>Interest rate futures and swaps </li></ul></ul>Lennox will hedge to a greater extent than the industry average Economic Risks Key Highlights <ul><li>Capital Market Risks </li></ul><ul><ul><li>Equity level (Delta) </li></ul></ul><ul><ul><li>Interest rate level (Rho) </li></ul></ul><ul><ul><li>Equity gap (Gamma) </li></ul></ul><ul><ul><li>Interest rate volatility (Rate Vega) </li></ul></ul><ul><ul><li>Equity volatility (Equity Vega) </li></ul></ul><ul><ul><li>Basis (Mutual fund vs. Hedge) </li></ul></ul><ul><ul><li>Interest rate and equity correlation </li></ul></ul><ul><ul><li>Cross index correlations </li></ul></ul><ul><ul><li>Other higher order and cross exposures </li></ul></ul><ul><li>Actuarial Risks </li></ul><ul><ul><li>Mortality / Longevity </li></ul></ul><ul><ul><li>Fund rebalance </li></ul></ul><ul><ul><li>Lapse </li></ul></ul><ul><ul><li>Utilization </li></ul></ul><ul><ul><li>Partial Withdrawal </li></ul></ul>
    20. 20. Hedging Lennox will mitigate capital markets risks utilizing a daily hedging process Rigorous Hedging Process Key Highlights <ul><li>Extensive experience in hedging embedded guarantees </li></ul><ul><li>Multiple valuation models </li></ul><ul><li>Nightly liability and asset analytics </li></ul><ul><li>Real time market data </li></ul><ul><li>Grid computing </li></ul><ul><li>Operational excellence </li></ul><ul><li>Economies of scale </li></ul><ul><ul><li>Trading Efficiencies </li></ul></ul><ul><ul><li>Negatively correlated risk </li></ul></ul>
    21. 21. Modeling Modeling capabilities move beyond typical insurance setups and targets those of hybrid derivative trading desks Platforms Monte Carlo Scenario Models Liability priced with state-of-the-art market-consistent models <ul><li>Leading Hedge (Ernst and Young) </li></ul><ul><ul><li>Widely utilized platform </li></ul></ul><ul><ul><li>Flexible with C++ code that is user customizable and extendable </li></ul></ul><ul><ul><li>Will be our primary system </li></ul></ul><ul><li>MG Hedge (Milliman) </li></ul><ul><ul><li>Dominant market system </li></ul></ul><ul><ul><li>Not customizable </li></ul></ul><ul><ul><li>Provides validation of results on other platforms </li></ul></ul><ul><li>Proprietary (Matlab and C++) </li></ul><ul><ul><li>In development </li></ul></ul><ul><ul><li>Fast prototyping and analysis capabilities </li></ul></ul><ul><li>Black-Scholes based models </li></ul><ul><ul><li>Simple and easy to construct </li></ul></ul><ul><ul><li>Dominates the insurance industry - almost exclusively used for VA hedging </li></ul></ul><ul><ul><li>Poor model for more exotic guarantees (e.g. Maximum Anniversary Value Guarantee) </li></ul></ul><ul><li>Hull-White with Heston model </li></ul><ul><ul><li>Already incorporated into Leading Hedge </li></ul></ul><ul><ul><li>Allows for more complete modeling of future market skew and volatility dynamics </li></ul></ul><ul><li>Other models – in development </li></ul><ul><ul><li>LIBOR Market Model </li></ul></ul><ul><ul><li>Local Volatility Equity Index model </li></ul></ul><ul><li>Validation through asset pricing </li></ul><ul><ul><li>Variety of market assets, including held assets, to be regularly priced over the same scenarios we will use for the liability valuation </li></ul></ul>
    22. 22. Lennox will hedge liquid capital markets risks, with validation, to model Attribution Hedge Model Sensitivities Validation Hedge Implementation <ul><li>Liability and asset sensitivities from the same model </li></ul><ul><ul><li>The sensitivities to be generated from the same base and perturbed scenarios for the liability and the assets </li></ul></ul><ul><li>First and second order index sensitivities (e.g., delta and gamma) </li></ul><ul><li>Multiple interest curve sensitivities (e.g., key rates) </li></ul><ul><li>First order sensitivities to all model parameters </li></ul><ul><ul><li>Hull-White: α and σ </li></ul></ul><ul><ul><li>Heston: ρ, θ, κ, ξ, and σ 0 </li></ul></ul><ul><li>Continuously compare sensitivities of the liability and hedge assets </li></ul><ul><ul><li>Rebalance when necessary </li></ul></ul><ul><ul><li>Protect against extra rebalancing by holding better duration and convexity matched instruments </li></ul></ul><ul><li>Theta calculation on liability and assets </li></ul><ul><ul><li>Cashflows, discount and expected growth, gamma and model state changes </li></ul></ul><ul><li>Attributable gains and losses </li></ul><ul><ul><li>Changes in market levels and market parameters between expected and actual </li></ul></ul><ul><li>Model verification </li></ul><ul><ul><li>Changes in asset price predicted by the change in model parameters and respective sensitivities against actual price change </li></ul></ul><ul><li>Periodically assess if other and higher order sensitivities are significant </li></ul><ul><li>Check sensitivities of liability and assets to other models </li></ul><ul><ul><li>Grid of strike vs. duration of “key” exposures over local volatility surface </li></ul></ul><ul><ul><li>Sensitivities to LMM parameters </li></ul></ul><ul><li>Analyze attribution, meticulously searching for biases </li></ul>
    23. 23. Investment Portfolio Lennox Re’s primary investment objective is to preserve capital <ul><li>Investment in high quality fixed income securities: </li></ul><ul><ul><li>Average credit quality of AA </li></ul></ul><ul><ul><li>No current plans for below investment grade corporates or equities </li></ul></ul><ul><ul><li>Approximate duration of three years </li></ul></ul><ul><ul><li>Contracted with Asset Allocation and Management Company, L.L.C. as third party investment manager </li></ul></ul>Investment Criteria Projected Investment Portfolio
    24. 24. Enterprise Risk Management <ul><li>Effective governance structure to be established </li></ul><ul><ul><li>Independent oversight </li></ul></ul><ul><ul><li>Escalation procedures for limit breaches </li></ul></ul><ul><ul><li>Effective decision making and communication </li></ul></ul><ul><li>Economic capital will be calculated and risk budgets will be allocated to risk taking activities </li></ul><ul><ul><li>Capitalization level consistent with an “A” rated company </li></ul></ul><ul><ul><li>Enhances the ability to make the best risk return decisions </li></ul></ul><ul><li>Appropriate limits will be set so that Lennox is not exposed to excessive risk </li></ul><ul><ul><li>Daily value at risk (“VaR”) limits </li></ul></ul><ul><ul><li>Investment limits </li></ul></ul><ul><ul><li>Limits on unhedged positions </li></ul></ul><ul><li>All product pricing will be signed off by full management team </li></ul>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 <ul><li>No direct P&L responsibility </li></ul><ul><li>Direct reporting lines to CEO and Board </li></ul><ul><li>Chair of Risk Committee </li></ul>
    25. 25. Lennox is Prepared to Write Business Today Lennox already has a full team of well respected industry professionals in place <ul><li>Team of 8 has over 150 years of combined experience </li></ul>Team Previous Experience Years Experience John Coughlin Executive Chairman <ul><li>Founder, J. Lennox & Company, Inc. </li></ul><ul><li>Managing Director, BSI Consulting </li></ul><ul><li>Aetna Life </li></ul>27 years Mark Zesbaugh Chief Executive Officer <ul><li>Chief Executive Officer, Allianz of North America </li></ul><ul><li>Chief Financial Officer, Allianz of North America / Life USA </li></ul>20 years Lee Launer Chief Investment Officer <ul><li>Chief Investment Officer, MetLife </li></ul><ul><li>Chairman, Reinsurance Group of America (RGA) </li></ul>29 years John Brill Chief Financial Officer <ul><li>Chief Financial Officer, SCOR Life Reinsurance, </li></ul><ul><li>Chief Financial Officer, PartnerRe Life Reinsurance and Winterthur Life Reinsurance </li></ul>34 years Eric Henderson Chief Pricing Officer <ul><li>Product Development and Corporate Risk Management of Allianz of North America </li></ul><ul><li>William M. Mercer consulting actuary </li></ul>10 years Gary Kalmanovich Chief Quantitative Officer <ul><li>Senior Director, Hedge Program, CIGNA Re </li></ul><ul><li>Portfolio Manager, Allstate Investments, Variable Hedging Products </li></ul><ul><li>VP, Financial Engineer, Goldman Sachs </li></ul>13 years Mike Spurbeck Chief Risk Officer <ul><li>VP, Risk Management, Aviva USA </li></ul><ul><li>Chief Risk Officer, Allianz of North America </li></ul>15 years Paul Zajac Chief Technology Officer <ul><li>Chief Information Officer, MetLife Investments </li></ul><ul><li>VP, Fixed Income Technology, PaineWebber </li></ul>15 years
    26. 26. Financial Overview
    27. 27. Sales 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 <ul><li>Market: </li></ul><ul><li>Growth rate of 10%, consistent with historical CAGR 1 </li></ul><ul><li>$1.1 trillion of GMDB and $200 billion of GMLB </li></ul><ul><li>Lennox: </li></ul><ul><li>Production is evenly split between GMDB and GMWB </li></ul><ul><ul><li>Base Case: $14 billion (account value) in sales year one, $30 billion year two, and $54 billion in years three through five </li></ul></ul><ul><ul><li>Conservative Case: $7 billion (account value) in sales year one, $13 billion year two, and $25 billion in years three through five </li></ul></ul><ul><ul><li>Upside Case: $24 billion (account value) in sales year one, $49 billion year two, and $70 billion in years three through five </li></ul></ul>Assumptions Projected Market Share Penetration (1)
    28. 28. Strong Financial Position <ul><li>Strong Capitalization </li></ul><ul><li>Expected rating of A- from AM Best with maintenance of this rating our highest priority </li></ul><ul><li>High quality investment portfolio </li></ul><ul><li>Until a track record of performance is established, additional capital to maintain a higher BCAR (~200%) will be required </li></ul><ul><ul><li>A typical A rated insurer is required to maintain a 130% BCAR. </li></ul></ul>Key Highlights Base Case CAGR: 19% Projected GAAP Book Value Growth ($ in millions)
    29. 29. High and Stable Earnings Stream <ul><li>Key Assumptions: </li></ul><ul><li>Base case production </li></ul><ul><li>200% BCAR ratio years one and two grading to 145% year five </li></ul><ul><li>Implied volatility of 18.38% in year one, 16.82% in year two and 15.26% in years three through five </li></ul><ul><li>Interest rates of 4.68% in year one, 4.97% in year two and 5.25% in years three through five </li></ul><ul><li>Gross margin of 10 bps in year one and 13 bps in years two through five </li></ul><ul><li>All options and warrants are exercised in year five </li></ul>Base Case <ul><li>Note: Tax rate is 0.0%, and assumes Lennox is a non-PFIC operating in Bermuda. </li></ul><ul><li>Year five stated book value includes proceeds from options and warrants. </li></ul><ul><li>Assumes book value exit multiple of 1.80x and investor fully diluted ownership of 85%. Excludes impact of warrants. </li></ul>
    30. 30. Base Case Valuation Analysis 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: $2.6 billion Overview of Valuation Methodologies We have used various valuation methodologies to derive an appropriate indicative exit valuation for Lennox’s new investors 48.5% 43.1% <ul><li>Market data and estimates as of 7/16/08. Financial data as of 3/31/08. </li></ul><ul><li>1. Assumes investor fully diluted ownership of 85%. Excludes impact of warrants to be allocated. </li></ul><ul><li>2. Comparable companies include: AFL, AMP, AIZ, DFG, FFG, LNC, MET, NFS, PRU, PL, RGA and SFG. P / BV range established excluding the highest and lowest of comparable companies. </li></ul><ul><li>Regression equation is: Y = 20.33 x – 1.34. </li></ul><ul><li>P / E range established excluding the highest and lowest of comparable companies. </li></ul>Whole Company Valuation ($ millions) 0.88 – 1.87x Comparable Companies’ Median Current P / BV (2) 2.72x 3.13x Lennox Implied P / BV based on Year 5 ROAE (3) (20 – 22%) 7.3x – 10.8x Comparable Companies Median 2008 P / E (4) Comparable Companies’ Median 2008 P / E with 15% Control Premium 8.4 x – 12.4x
    31. 31. 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
    32. 32. Appendices
    33. 33. Additional Valuation Detail
    34. 34. Price to Book and Regression Analysis Large Caps: 1.17x Mid / Small Caps: 1.11x Historical Price to Book <ul><li>Sources: SNL Financial and Factset. Market data as of 7/16/08. Financial data as of 3/31/08. </li></ul><ul><li>Large cap includes companies with market value over $8 billion: MET, PRU, AFL, LNC and AMP. </li></ul><ul><li>Small / mid cap includes companies with market value less than $8 billion: AIZ, NFS, RGA, PL, SFG, DFG and FFG. </li></ul>(1) (2) Current Regression Analysis
    35. 35. Trading Comparables and Price to Earnings Analysis (1) (2) 9.2x 8.1x Price to Next Twelve Months Earnings <ul><li>Sources: SNL Financial and Factset. Market data as of 7/16/08. Financial data as of 3/31/08. Book value excludes accumulated other </li></ul><ul><li>comprehensive income. </li></ul><ul><li>Large cap includes companies with market value over $8 billion: MET, PRU, AFL, LNC and AMP. </li></ul><ul><li>Small / mid cap includes companies with market value less than $8 billion: AIZ, NFS, RGA, PL, SFG, DFG and FFG. </li></ul>Comparable Companies
    36. 36. Current Accounting Treatment and Standards
    37. 37. Summary of GAAP Accounting Treatment and Standards <ul><li>Significant financial statement volatility results from the accounting treatment elected for guarantee riders </li></ul><ul><li>GAAP accounting treatment of these products can fall under the following accepted standards: </li></ul><ul><li>Disconnected accounting valuation approaches for assets and liabilities and the impact on financial statements have become problematic for many VA insurers </li></ul><ul><li>There is a significant opportunity for reinsurers who can develop a reinsurance approach that addresses these financial statement volatility risks and related concerns </li></ul>
    38. 38. Summary Financial Projections
    39. 39. Financial Projections: Downside Production Summary Financial Projections <ul><li>Note: Tax rate is 0.0%, and assumes Lennox is a non-PFIC operating in Bermuda. </li></ul><ul><li>Year five stated book value includes proceeds from options and warrants. </li></ul><ul><li>Assumes book value exit multiple of 1.80x and investor fully diluted ownership of 85%. Excludes impact of warrants. </li></ul>
    40. 40. Financial Projections: Partially Hedged Summary Financial Projections <ul><li>Note: Tax rate is 0.0%, and assumes Lennox is a non-PFIC operating in Bermuda. </li></ul><ul><li>Year five stated book value includes proceeds from options and warrants. </li></ul><ul><li>Assumes book value exit multiple of 1.80x and investor fully diluted ownership of 85%. Excludes impact of warrants. </li></ul>
    41. 41. Use of Proceeds
    42. 42. Use of Proceeds Detailed Gross and Net Proceeds <ul><li>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. </li></ul><ul><li>Reflects five years of development of the financial models and business concept. </li></ul><ul><li>Loans were used for formation, hiring management team, developing infrastructure and modeling capability. </li></ul>
    43. 43. Japanese VA Data
    44. 44. Japanese VA Market Growth <ul><li>Sales in Japan have grown at a CAGR of 18% since 2003 (1) </li></ul><ul><li>Variable annuity assets in Japan grew to over $125 billion in 2007 and have grown by a CAGR of nearly 90% since 2003 (1) </li></ul><ul><li>Growth has been driven in large part by the deregulation of life insurance sales through banks </li></ul><ul><li>High savings rate, low interest rates and an aging population in Japan suggests high demand and large growth for VA products </li></ul>Variable annuity sales growth in Japan has outpaced that of the U.S. in recent years 2003 – 2006 CAGR: 18% Estimated Japanese Sales of Variable Annuities 2003 – 2006 (1) Japanese Market Commentary <ul><li>Source: Hoken Mainichi Shimbun. Estimated using annual change in assets under management. </li></ul>$ in billions
    45. 45. Glossary
    46. 46. Glossary <ul><li>C3 Phase II: Statutory risk based capital requirement for variable annuities. </li></ul><ul><li>Contractholder : A person who pays premiums for an annuity, often the same person as the annuitant. </li></ul><ul><li>CrossGreeks : Second order sensitivity of “Greeks” to changes in market parameters. </li></ul><ul><li>Death benefit : A provision in certain annuity contracts that pays the beneficiary when the annuitant dies. </li></ul><ul><li>Delta : The amount by which an asset or liability value changes for a specified change in the underlying security. </li></ul><ul><li>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. </li></ul><ul><li>Exclusions : Provisions in an insurance or reinsurance policy excluding certain risks or otherwise limiting the scope of coverage. </li></ul><ul><li>Exposure : The possibility of loss. A unit of measure of the amount of risk a company assumes. </li></ul><ul><li>Gamma : Amount by which Delta changes for a specified change in the underlying security. </li></ul><ul><li>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. </li></ul><ul><li>Greeks : Measurement of the sensitivity of an asset or a liability value to changes in underlying market parameters. See Delta, Gamma, Rho and Vega. </li></ul><ul><li>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. </li></ul><ul><li>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). </li></ul><ul><li>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. </li></ul>
    47. 47. Glossary <ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>Policyholder Benefit Reserve: A liability established by an insurer or reinsurer to pay future expected claims. </li></ul><ul><li>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. </li></ul><ul><li>ROP: return of premium guaranty . </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>VACARVM: Statutory reserving methodology for variable annuities currently under development by NAIC. </li></ul><ul><li>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. </li></ul><ul><li>Vega : Vega is the amount by which an asset or liability value changes for a specified change in the underlying equity volatility. </li></ul><ul><li>Withdrawal Privilege: A provision in many annuity contracts that allows the contractholder to withdraw a portion of account value without paying surrender charge. </li></ul>
    48. 48. Disclaimer <ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul>
    49. 49. Disclaimer <ul><li>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. </li></ul><ul><li>  </li></ul><ul><li>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. </li></ul>

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