AJ Bell press comment – 3 November 2022
- Losses in Hurricane Ian no worse than expected for Lloyds’ of London syndicate manager
- Pricing continues to firm with 7% uplift in prices on business renewals
- Higher Government bond yields mean stronger investment returns for FTSE 250 firm
- Lancashire has paid out total dividends worth just over 820p a share since its listing in 2008
“Investors could be forgiven for thinking that non-life insurers would be down in the dumps, after a difficult 2021 followed by Russia’s invasion of Ukraine and the damage caused by Hurricane Ian in America in 2022, but an upbeat trading statement means shares in Lancashire are trading near their 12-month highs,” says AJ Bell Investment Director Russ Mould. “The manager of Lloyd’s of London syndicates 2010 and 3010 is registering losses relating to the catastrophe insurance policies that it underwrites but they are proving to be no worse than expectations. Better still, prices for new business are rising and the FTSE 250 firm should also benefit from rising yields on Government bonds, with $2.1 billion in investments on its balance sheet, much of it in short-dated paper.
Source: Refinitiv
“Lancashire’s first-half results revealed that losses relating to Russia and Ukraine had, thus far, come to just $22 million, while the third-quarter update reveals a hit of somewhere between $160 million and $190 million. Neither figure exceeds management or market expectations.
“Lancashire’s underwriters therefore seem to be managing their exposures very effectively – in the first half, the combined ratio was just 78%, and in this business a combined ratio of less than 100% is good news, as that means underwriting losses and expenses are less than premiums written. However, major events can take their toll on other catastrophe insurers who are less careful and major losses (and substantial payments to meet claims) can reduce their ability to underwrite new business or even knock them out of the business altogether.
“This may be why Lancashire is reporting an average 7% uplift in prices on business renewals, and a 34% uplift in total gross premiums written for the year to date.
“Another deceptively fair wind may also be on the verge of giving the specialist insurer a lift.
“Non-life insurers hold substantial bond portfolios as they look to match potential payment liabilities with reliable income from coupons. Higher bond yields boost returns on investment. Although the need to mark those Government bond holdings to market value on a quarterly basis means Lancashire shows a negative investment return in the third quarter, those losses are unrealised and higher yields and coupons should bring benefits further down the road.
“The combination of skilled underwriting, higher investment returns, and firm pricing could boost profits in 2023 and beyond and enable the company to add to its amazing long-term dividend record.
Source: Company accounts
“An unchanged first-half dividend of $0.05 (4.1p) topped up the pot and Lancashire has paid out total dividends worth just over 820p a share since its listing in 2008, including a series of special payments, the last of which came in 2018.
“That sum exceeds the current share price by some distance, to hint at the potential for long-term investors, and the stock trades at only a modest premium to the last stated net asset value per share figure of $5.67, or 502p at $1.13 to the pound.”
