- Lloyds of London syndicate manager reports strong pricing and drop in claims
- Strong investment returns further boost earnings
- Big hike in dividend and second dividend for the year
- Company has now declared dividends well in excess of current share price since its IPO in 2005
“Markets may be more focused on any political storms caused in Westminster by the Budget, but catastrophe insurance specialist Lancashire Holdings’ full-year profits and bumper dividend payments show, once more, that it’s an ill wind that blows nobody any good,” says AJ Bell investment director Russ Mould. “Strong price increases, higher investment returns (thanks in part to higher bond yields) and skilled underwriting in its specialist areas of insuring (and reinsuring) across aviation, property, marine and energy all turned into healthy profits and bumper cash returns for investors in the manager of the Lloyds of London 2010 and 3010 syndicates.
“Higher claims thanks to natural disasters, higher repair costs thanks to inflation and higher costs of capital are all undeniable challenges for non-life insurers (and reinsurers) such as Lancashire. But this combination is also taking capacity out of the insurance market at a time when demand is increasing. As a result, for those players strong enough and smart enough to withstand the storm, headline insurance rates are rising, and savvy specialists such as Lancashire can show rapid premium growth as a result.
“Gross premiums written rose 17%, thanks to firm pricing and what chief executive Alex Maloney termed ‘the best market conditions we have seen for a decade.’
Source: Company accounts
“Meanwhile, natural disasters in the US, New Zealand and Turkey have not led to losses of any great substance relative to the company’s capital base or book of business. In 2023, net losses from catastrophe, weather and large losses events came to just $106 million, down from $329 million in 2022, when Hurricane Ian alone cost the company $181 million.
“This is all helping to boost the combined ratio, which is a measure of profitability for the industry. A combined ratio of less than 100% means the insurer is in profit and a figure above it means the insurer is in loss.
Source: Company accounts
“Higher interest rates and costs of capital have not just helped Lancashire by draining away supply from the market, they have driven up bond yields and provided the FTSE 250 firm with a second tailwind in the form of higher returns on the $2.5 billion investment portfolio.
Source: Company accounts
“As a result of all of these trends profits have surged once more. After two fallow, storm-and-war tossed years, Lancashire has just made its highest profits for a decade.
Source: Company accounts, Marketscreener, analysts’ consensus forecasts
“As a result of that, the company is upping its cash returns to shareholders. An increase in the final dividend to $0.15 from $0.10 in 2022, an interim dividend of $0.05 and two special dividends of $0.50 apiece take the total payment for 2023 to $1.15, or around 96p, enough for a 15% yield for anyone who bags all four payments, based on the current share price.
“This makes for a return to form for Lancashire, which had last paid a special dividend in 2018.
Source: Company accounts
“Yet the share price does not want to know. Perhaps this is because the dividend is yet to return to the all-time highs of more than a decade ago. Perhaps it is because investors simply don’t believe the company can keep on generating the profits it is making, and dividends it is paying, at a time of ever-growing concern over war in Eastern Europe and the Middle East, increased geopolitical tensions between the West and China (with Taiwan’s fate front and centre there) and climate change still one of the biggest topics on the planet.
“Yet Lancashire proved its skill during the very tough period of 2017-2022 when interest rates were zero, investment returns minimal and catastrophe losses elevated. Again, the firm negotiated all of those and has begun to reap the benefits as demand rises at a time of crimped capacity, thanks to those very same fallow years. Analysts do see further increases in profits, thanks to the growth in gross premiums written seen in the past two to three years and the development of Lancashire Insurance US is laying down a path for further business expansion.
“Nor should it be forgotten that Lancashire was incorporated nineteen years ago when it seemed as if the catastrophe insurance market was on its knees, in the wake of Hurricanes Katrina, Rita and Wilma, and its decision to raise $1 billion in capital and start to underwrite business paid off handsomely. The company has since declared more than 900p per share in dividends, including the $0.15 final and second $0.50 special announced alongside the full-year results for 2023, a figure that easily exceeds the current share price, so its long-term record bears close inspection.”
