Lancashire looks set for a strong year

Market forecasts that reinsurance companies would start to see significant profit growth as the rate cycle hardens were largely borne out by half-year results for Lancashire Holdings (LRE), which the showed the Bermuda-based reinsurance company writing more business, more profitably than this time last year. An undiscounted combined ratio of 79.2 per cent indicated a healthy underwriting profit, further reinforced by a falling net insurance ratio of 62 per cent – indicating that losses fell in relation to premiums earned. The company expects that strong rate conditions will continue for the rest of the year.

The performance was built on the back of Lancashire’s casualty and speciality reinsurance lines. The average rate percentage increase (RPI) for the business segment was 123 per cent. Property insurance also experienced triple-digit increases in chargeable rates and these came in at a RPI of 111 per cent for the half. It has been a relatively quiet half, overall, for claims for both Lancashire and the rest of the industry, although that may change as the year progresses.

The company paid out just $49.5mn (£39.9mn) on catastrophe losses and large loss events, down from $53.1mn in the prior year. It is likely that this will signal further reserve releases as the year progresses. The impact of interest rates was felt by Lancashire’s investment portfolio, where interest received more than doubled to £38mn. Lancashire is also eyeing expansion and plans to open a US operation that will begin underwriting in early 2024.

Broker Panmure Gordon forecasts a price/earnings ratio of eight for this year, falling to 6.8 for 2024. That looks good value given that the industry has least another year of hardening rates to come. Buy.

Last IC View: Hold, 618p, 10 Feb 2023