Lancashire undented by catastrophes

Bermudan-based insurer Lancashire announced some apparently painful looking catastrophe losses at the end of January - a $42.1m (£26.7m) increase in the expected loss, to $117m, from last year's Japanese earthquake and a $24m-$28m hit from Thai floods. But investors shouldn't fret too much about that as, comparatively speaking, Lancashire's losses are amongst the lowest in the sector.

Take the group's third-quarter figures in November, for instance. Management reported a highly profitable combined ratio (of claims to premiums) of just 60.7 per cent - at a time when rival underwriters are making big underwriting losses, with ratios in excess of 100 per cent. Moreover, losses can be good for the sector in the long-term as it leaves insurers hiking premium rates in order to rebuild their reserves. Lancashire is certainly seeing evidence of that. "We have seen premium rates holding, or improving, across most of our core lines," said chief executive Richard Brindle at the third-quarter stage. "We believe that premium rates on property reinsurance lines will continue to improve."

What's more, and while the return from Lancashire's investment book of cash and bonds did slide significantly in the year to end-September, it still reached 1.2 per cent. That's not so bad in today's ultra-low interest rate environment and better than the returns on offer at some of its peers - Amlin's return, for example, was just 0.4 per cent.

Peel Hunt says…

Buy. The shares trade on a 15 per cent premium to forecast 2012 net tangible assets (NTA) of 623p. Lancashire's revised losses resulted in no change to our forecasts and we highlight the group's significant outperformance in terms of 2011 catastrophe losses - accounting for 12.6 per cent of net tangible assets (NTA) compared with a sector average close to 25 per cent. Lancashire is our key pick in the sector - it's positioned most favourably to benefit from catastrophe rates and has repeatedly demonstrated that it will adjust its exposure to take advantage of localised opportunities. Our fair value estimate is 963p and we expect EPS of 106.8¢ (67p) for end-2011 and NTA of 529.1p.

Numis Securities says…

Add. Lancashire's catastrophe loss performance for 2011 remains the best in the sector and that outperformance justifies the premium share price to NTA multiple of 1.4 times - compared with around 1.2 times for the larger UK peers. We also expect healthy forecast NTA growth of 21 per cent for 2012 to drive ongoing share price performance this year. However, the increased loss estimates mean a $42m cut to 2011's pre-tax profit estimate, to $195m, which reduces 2011's NTA estimate by 13p to 484p. We also trim our target price to 815p.