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Lancashire's cautious approach is paying off

More reinsurance helps to limit catastrophe losses
July 28, 2016

Lancashire Holdings ' (LRE) sensible decision to bump up its reinsurance purchasing helped protect the group against an uptick in natural catastrophe and speciality market claims in the first half of this year.

IC TIP: Hold at 606p

This increased its spending on reinsurance premiums by 9 per cent to $152m (£115m), but this was more than offset by a jump from $20.1m to $61.9m in the amount released from previous reserves. Reinsurance reduced net liabilities by around $20m when compared with the reinsurance programme purchased in 2015. Even so, the combined ratio (of claims as a percentage of premium income) rose from 75.1 per cent to a still very profitable 76.2 per cent.

Management retained its cautious approach on investing reserves, but still managed to generate an increase in investment income (see table). Property gross premiums written rose by 17.2 per cent, helped by client renewals and appetite for managing political risk, while energy-related premiums were up by 13.1 per cent. However, marine gross premiums were down 18.4 per cent, due to continued overcapacity, and while aviation premiums were down 2.8 per cent in the first half and 13.4 per cent in the second quarter, the latter is not a major renewal period in the aviation sector.

Analysts at Numis Securities are forecasting adjusted EPS of 57.2p a share for the year to December 2016 (from 69.2p in 2015).

LANCASHIRE HOLDINGS (LRE)
ORD PRICE:606pMARKET VALUE:£1.21bn
TOUCH:605-606.5p12-MONTH HIGH:709pLOW: 467p
DIVIDEND YIELD:1.9%PE RATIO:11
NET ASSET VALUE:646¢COMBINED RATIO:76.2%

Half-year to 30 JunGross premiums ($m)Pre-tax profit ($m)Investment income ($m)Dividend per share (¢*)
201542488.614.65
201643156.616.05
% change+2-36+10-

Ex-div: 4 Aug

Payment: 31 Aug

£1=$1.322 *Excludes special dividends of 95¢ in 2015 and 170¢ in 2014