Lancashire into the red on catastrophe claims

It was a case of swings and roundabouts for Lancashire (LRE) during 2021. The specialty insurance and reinsurance group boosted gross premiums by 50 per cent, while dramatically expanding the scale of its of its property and casualty reinsurance book. The overall performance of Lancashire Capital Management, its third-party capital collateralised reinsurance underwriting arm, also provides cause for optimism.

Unfortunately, the year was plagued by natural catastrophes and severe weather events, pushing the insurer into a statutory loss. Around $306m (£225m) of weather-related and one-off events drove the combined ratio (the sum of claims-related losses and expenses divided by earned premium) to 107 per cent. Covid-19-related losses remained stable during 2021, although net investment income was down by a fifth on the prior year.

Conditions in the underwriting market were broadly favourable, and Lancashire’s chief executive, Alex Maloney, said that the increased premium “will continue to earn through in 2022 and is expected to provide earnings resilience in future years”. Property and casualty reinsurance premiums doubled through the year, while the property and casualty insurance, aviation, and energy segments saw double-digit increases.

When the weather is set fair it’s easy to forget that insurers are there for a reason. Events such as Hurricane Ida and a particularly severe tornado season in the US Midwest made 2021 one of the costliest years on record. Maloney revealed that “industry-wide estimates place insured losses from natural catastrophes between $105bn and $130bn, making it one of the costliest years on record”.

The nature of the business means that insurers can’t draw a line under a given year, as the ratio of losses to premiums earned will always shape premium rates in future years. This year’s setbacks have left Lancashire trading at a 6 per cent discount to net assets, which is a viable entry point given that even last year’s hefty losses were within risk tolerances. Buy.

Last IC View: Buy, 762p, 10 Feb 2021