Forecasts & Results

Lancashire report lower than expected forecast losses from the war in Ukraine

Posted 28/04/2022 – Quick takes

Lancashire plc has this morning released a trading statement to cover the first quarter ending 31st March 2022. In the statement, the group announced an increase in Gross Written Premiums (GWP) of 34.7% year-on-year to US$477.9m, with a group Renewal Price Index (RPI) of 106%. Net loss estimates from the Ukraine war are currently expected to be in the range of US$20-30m. The group’s regulatory Enhanced Capital Ratio (ECR) ratio was c255% as at 31st December 2021. The group reported an investment loss of (2.3)% in the quarter. The growth in GWP was largest in the property and casualty reinsurance segment, driven by new business in the new casualty reinsurance classes of business (RPI 108%). The growth in the property and casualty insurance segment was primarily due to the continued build out of the property direct and facultative book of business, as well as new business in property political risk and property construction classes. Growth in the marine class was driven by a combination of new business, the renewal of a large multi-year contract and the marine class RPI (106%). The increase in the energy segment was primarily driven by new business in the energy liabilities class, where the group has added new underwriting teams and expanded its offering.

Alex Maloney, Group CEO, commented: “ … we continue to monitor events across Ukraine and Russia with respect to potential exposure to losses in our political violence, aviation war and marine insurance classes, as well as our aviation and specialty reinsurance classes. We estimate that our ultimate net losses incurred within Ukraine are in the range of $20m to $30m. This continues to be a complex and evolving situation and we will give an update at the announcement of our half year results in July. While we continue to analyse our potential exposure scenarios in Russia, we consider that any potential losses would be within our risk tolerances … Against this backdrop, underlying trading conditions remain favourable and Lancashire has continued to deliver strong premium growth in the first quarter … we remain confident that our strong balance sheet, robust capital position and talented underwriting teams, will give us further opportunities for profitable growth during 2022.”

Alpha comment

The strong share price reaction to this trading statement (+c7% on the morning of the statement) undoubtedly reflects relief at the relative size of estimated losses from Ukraine and the improved capital position of the group. The investment return during the quarter is disappointing, but not at all surprising given the recent rise in yields across global bond markets. We have one note of caution, however, in that the Ukraine losses do not at this stage account for any potential losses due to leased aircraft being registered in Russia (or other Russian exposure via risk classes such as Energy which might be impacted by sanctions). Resolving this situation will undoubtedly be a long and litigious process and will only begin after the cessation of the conflict – which is likely to be drawn out by continuing attempts by western nations to rearm Ukraine. That said, the improved capital ratio will enable the group to absorb losses. Lloyd’s is currently gathering initial loss estimates for the market arising from the war in Ukraine and these will cover multiple geographies and risk classes. That data is expected to be available to the Performance Management Directorate in early May.

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