Lancashire 2020 Interim Results

Posted 31/07/2020 – Insights

Lancashire Holdings Limited, the owner of Lancashire Syndicates Limited (managing agent of syndicate 2010), has announced its half year 2020 annualised results.

Alex Maloney, Chief Executive Officer, said:
“The global COVID-19 pandemic has presented a difficult set of threats to our health, our societies and our economies which remain both fluid and uncertain.

Once again, I would like to thank all of our people at Lancashire for showing their continued creativity and commitment, which has been so central to demonstrating a robust operational flexibility and resilience, since successfully moving to a home working environment in March 2020. This nimble “can do” culture within our business has given Lancashire the resources to continue to meet the needs of our clients and their brokers against this unprecedented backdrop. Our underlying business has performed very well during this period and we have been able to respond rapidly to take advantage of the improving (re)insurance market, generating a 15% increase in gross premiums written in the first half of the year.

In the face of the challenges generated by the COVID-19 pandemic to both sides of the balance sheet, there has been a retrenchment in (re)insurance market risk capital and capacity. In the year to 30 June 2020, we have witnessed double-digit percentage rate increases in many of our lines of business and accelerated rating dislocation in the catastrophe exposed reinsurance lines, resulting in rises in the range of 20%-30% for 1 June renewals in Florida. I believe that the economic fundamentals now dictate that this pricing trend is likely to strengthen throughout 2020 and into 2021 across a number of our business lines, and that current market conditions present an attractive opportunity for growth consistent with our strategy of deploying capital in line with the insurance market cycle. We were pleased to have executed a successful equity capital raise as announced on 10 June 2020. We took this step to allow us to deploy capital to take advantage of the growth opportunities presented by the improving pricing environment. I would like to thank our existing and new shareholders for their strong support for the capital raise.

The effects of COVID-19 as a loss event to the insurance and reinsurance markets remain both ongoing and uncertain. For Lancashire, the current estimated impact of the COVID-19 loss event has been assessed consistent with our usual internal processes for deriving ultimate loss estimates, albeit that there is higher uncertainty with this event. During the second quarter of 2020, we increased our COVID-19 loss estimate to approximately $42 million, from approximately $35 million, net of reinsurance and reinstatement premiums. As noted in the our Q1 trading statement, Lancashire does not write the following lines of business: travel insurance; trade credit; accident and health; Directors’ and Officers’ liability; medical malpractice; and long-term life. The Group also has minimal exposure to mortgage business and is exposed to a small number of event cancellation contracts.

In a rapidly changing market, we are seeing attractive opportunities to develop many of our existing lines of business and to establish new ones. Our business is well positioned to grow our underwriting portfolio and to develop opportunities to improve the risk adjusted returns for our business and our investors.”

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Alpha comment

At first glance these results were somewhat disappointing, not least because Lancashire normally comfortably outperforms its peer group during periods of benign natural catastrophe activity. Indeed, Lancashire’s share price fell approximately 5% on the news. Beneath these headline figures, however, a more promising outlook is evident. But for COVID-19, Lancashire would have posted a profitable combined ratio of 89% for H1 2020, close to the 87% reported for H1 2019. Added to this, hardening rates in all divisions produced price rises of +11% for the group as a whole, with marine (+13%) and aviation (+21%) increasing the most. Although these interim results do not show the performance of syndicate 2010 in isolation, we note that the marine division, of which 2010 has a very modest share, was responsible for the lion’s share of an unfavourable prior years’ loss development. Though the property division (a mainstay of the syndicate) suffered adverse development for liabilities relating to the New Zealand earthquakes of 2010, this appears to be a one-off. In conclusion, we see reasons for Lancashire to re-establish itself as a peer group outperformer as the COVID-19 situation normalises.

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