Forecasts & Results
Lancashire plc FY22 results
Posted 10/02/2023 – Quick takes
The Lancashire Group has reported its financial results for the year ending 31st December 2022.
- Group Gross Written Premiums (GWP) increased +35% to US$1.7bn (vs. FY21 US$1.3bn), an increase of almost 280% since 2017;
- Renewal Price Index (or RPI, equivalent to RARC) for FY22 of 108%;
- Reinsurance GWP +50% to US$842m (vs. FY21 US$561m), primarily driven by casualty reinsurance;
- Insurance GWP +22% to US$810m (vs. FY21 US$664m), primarily driven by property D&F;
- Group combined ratio of 97.7% (vs. FY21 107.3%);
- Net Loss ratio of 58.3% (vs. FY21 67.6%);
- Natural catastrophes were US$218.4m net, including US$163m for Hurricane Ian (which is at the lower end of the US$160-190m range provided at 3Q22);
- Total net catastrophe losses, excluding the impact of reinstatement premiums, were US$309m (vs. FY21 US$306m);
- Total provisions for large risk events in FY22 were US$90m, including Ukraine (where reserves have increased from US$22m to US$66m and now include an additional management margin for any potential indirect claims related to the conflict across a number of classes) and US$25m from an accumulation of four large losses in the upstream energy and generation business;
- The group’s outwards reinsurance spend, in dollar terms, increased vs. FY21 by US$55m (or 13.5%), but the proportion vs. GWP decreased year-on-year;
- Total net investment return for FY22 of -3.5% (vs. FY21 +0.1%), primarily driven by unrealised losses;
- The group net acquisition cost ratio in FY22 increased to 26.4% (vs. FY21 22.5%), primarily driven by a change in business mix;
- Group operating expenses in FY22 were US$129m (vs. FY21 US$120m) primarily driven by an increase in headcount.
The group reported a strong start to 2023, namely the 1st January renewals. Property Reinsurance has seen favourable market dynamics (RPIs of c111%), which are expected to continue at least until the mid-year renewals. In other lines, the pricing environment remains “supportive”, albeit rate rises are not as high. Lancashire states that its specialty book “has seen five years of rate increases” and that “this looks set to continue in 2023, while our casualty business is more stable, with rates remaining close to historical peaks”.
Prior year favourable development for FY22 was US$100.5m (FY21 US$86.5m) primarily due to general IBNR releases on the 2020 and 2021 accident years and across most lines of business due to a lack of reported claims. There was also favourable development on natural catastrophe loss events from the 2018 and 2019 accident years as well as beneficial claims settlements on risk losses in the 2017 accident year.
Alex Maloney, Group CEO, commented: “I am very pleased to report that Lancashire continued its strong growth trajectory during 2022 … Our robust underwriting performance in 2022 came against a backdrop of high industry losses and a volatile macroeconomic environment … we have continued to expand our footprint and take full advantage of the organic growth opportunities and rate increases being seen across the majority of our product lines … This growth has come from those lines where we have longer-term strength and expertise and from those we have added over the past few years as part of our actions to diversify and fortify our portfolio … we have demonstrated that the growth and diversification of recent years now allows us to absorb significant catastrophe losses, such as hurricane Ian. While this event is estimated to be the second most costly hurricane on record, we have still produced a net underwriting profit. This is a notable positive step-change for the business and testament to the clear long-term strategy we have set out.”
The group pre-tax loss for FY22 of US$(2.8)m compares to a pre-tax loss of US$(56.8)m in FY21, reflecting the improvement in the group combined ratio offset by higher acquisition & operating expenses and the (unsurprising) investment loss.
This improvement in the combined ratio reflects the diversification of the group’s book, as illustrated by Lancashire’s chart, away from property reinsurance into other forms of direct and reinsurance activities.
Unfortunately, that diversification only partially flows to supporters of s2010, via quota share arrangements over parts of the s3010 book.
The large loss on Hurricane Ian is to be expected for a group which writes a significant amount of property catastrophe business. The fact that the latest loss expectations for Hurricane Ian are at the lower end of the previous range is welcomed.
The tripling of the reserves for Ukraine is disappointing, but is probably not a huge surprise and reflects the (re)insurance exposures run by the group, including aviation. It is likely that we will therefore see the Ukraine reserve on s2010 follow a similar pattern and increase from the current level of cUS$11m to something close to US$30m. We hope that this number has now been set at a conservative level.
Overall these results are in-line with expectations and the positive rate environment (particularly for property catastrophe) is encouraging for supporters of s2010 for the 2023 YoA.