Stellar Lancashire to return capital position to 2008 levels
After bumper Q3 results, Bermuda-headquartered Lancashire is to give back capital to shareholders through a $263mn special dividend and an additional $150mn share buyback facility. Analysts calculate that these moves will return its capital position to 2008 levels.
Lancashire outperformed in the third quarter, and exceeded analysts' expectations with pre-tax profit of $109mn, reversing the $121.7mn loss of Q3 2008.
This is partly due to larger-than-expected prior year reserve releases in the quarter and higher earned premium of $155.8mn, compared to $147.9mn in Q3 2008.
The reserve release enhanced Lancashire's excellent third quarter combined ratio of 39.1 percent by 14.8 percentage points. This compares to the 178.2 percent combined ratio posted in Q3 2008, after it sustained heavy losses from hurricanes Gustav and Ike.
The (re)insurer's a bumper special dividend of $1.25 per common share (£0.76) has led to a payout of approximately $263mn, to be paid in January 2010.
The class of 2005 reinsurer is also planning a $150mn share buy-back in addition to the remaining $42mn facility. According to Nick Johnson, an analyst at Numis securities, these repayments will be approximately equal to 2008/09 earnings and take capital back down to 2008 levels. Meanwhile, analyst Eamonn Flanagan of Shore Capital described the moves as "clear demonstrations of its capital discipline".
Third quarter gross written premium was up 12 percent to $140mn, with the main driver being growth in US property catastrophe reinsurance income. There are seen to be further opportunities in this area.
Lancashire said it is encouraged by underwriting discipline in the market, with rate increases still being achieved in the majority of its classes; average rates increased by 7 percent in Q3.
Describing Lancashire's performance as "stunning… excellent underwriting with even better capital management", Flanagan added that while the group has benefited from the benign hurricane season and seen the return of capital, it is "still underwriting aggressively in catastrophe exposed lines".
The group has continued with its conservative stance on investments, although it increased its corporate bonds allocation to 16 percent. Net investment income stood at $14.5mn, compared to $15.5mn at the same point in 2008.
Return on equity was 7.4 percent in the third quarter and 18.1 percent for the nine months to 30 September 2009.
Group CEO Richard Brindle added that Lancashire has made "excellent progress" in further building out its property catastrophe book with exposures in the US. He added: "There are plenty of new opportunities in both this and the international arena. This is helping us to achieve our stated goal of becoming a significant market participant in property catastrophe generally."
"We have been encouraged by the underwriting discipline demonstrated by the market compared to previous cycles, particularly in the reinsurance sector. This is borne out by the fact that we are still achieving positive renewal price increases in the majority of our classes. We also continue to work with clients and brokers on their Gulf of Mexico insurance needs to find innovative solutions to the issues that affected both markets and clients this year."
And president and CFO Neil McConachie continued: "Following an extended period of consistent growth in book value, Lancashire has generated capital well in excess of our targeted level. If the price is right, we are aiming to increase our share repurchase activity over the coming months."
Shares in Lancashire - which are currently trading at an approximate 5 percent premium to NAV - were up 1.64 percent at 526 pence at the time of writing (5 November).