‘Owt for Nowt’ at Lancashire

Lancashire (LRE) benefited in the first half from a record low number of natural catastrophes during the early part of the year as winter storms passed benignly across the company’s immediate horizon. However, Lancashire’s problems are largely man-made, as insurers grapple with how much the aircraft currently held hostage in Russia are going to cost the industry once lessors start writing the assets off. Unfortunately, this is the main question weighing on the company’s shares.

That's despite Lancashire’s relative low exposure to aviation – it is the company’s fifth biggest business line with gross premiums of $58mn (£47.5mn) written in these results. To put that into context, Lancashire’s largest underwriting business is property and casualty reinsurance, which grew by more than 45 per cent in the half to $548mn of gross premiums as insurers wrestled with a surge of business sparked by the end of the pandemic.

The aviation issue is vexing but still hard to quantify for Lancashire. Claims from lessors are likely through the courts for years until it is determined what is covered by the written policies – the terms of airlines’ own insurance cover is another complicating factor. While Lancashire has no exposure to the $3.5bn AerCap NV case currently rumbling through the courts, according to the trade press, there are still up to $15bn worth of planes stranded in Russia. Analysts at Berenberg reckon that management will declare a large speciality loss, typically in the $50mn-$60mn, to cover potential claims.

In valuation terms, the shares trade on a PE ratio of barely four times Berenberg’s EPS forecasts for 2022, with a discount to net tangible assets of 22 per cent. Unfortunately, until there is more certainty Lancashire is only for the very brave. Hold.

Last IC View: Buy, 545p, 11 Feb 2022