- Firm had an ‘excellent’ 2023
- Cost ratio slightly above forecasts
- Buyback canceled as expected
Investors in general insurer Lancashire Holdings (LRE) are probably scratching their heads this morning as to why their shares are down when the firm has just announced bumper results and a special payout.
The shares opened flat at 672p but by mid-morning had fallen as far as 42p or 6% to 629p.
OPERATING PERFORMANCE WAS STRONG
The firm, which despite its name is actually based in Hamilton, Bermuda, reported an ‘excellent operating performance’ for the year to December.
Gross written premiums were up 17% from $1.65 billion to $1.93 billion, and insurance revenue increased by 24% from $1.23 billion to $1.52 billion driven by a combination of new business and higher insurance rates across the business.
On top of this, the business it wrote last year was more profitable than the previous year thanks to ‘the best market conditions we have seen in a decade’ according to chief executive Alex Maloney.
Its investment return was also markedly better, swinging from a loss of roughly $77 million in 2022 to a profit of $160 million last year, all of which helped push pre-tax profit to $321 million.
This increased earnings per share from -$0.06 to $1.32 and book value per share by almost a quarter, from $5.48 to $6.17.
SO WHY ARE THE SHARES DOWN?
If there was one fly in the ointment in terms of the results it would be the combined ratio, which measures costs by dividing claim-related losses and expenses by the earned premium and which was marginally higher than expected at 82.6% versus consensus of just under 80% for the year.
In addition, the firm guided towards a 2024 combined ratio around 85% against market expectations of 80%, although given Lancashire includes 'other operating expenses' in its calculation, unlike some other insurers, which left room for uncertainty.
Analysts also noted that Lancashire’s portfolio is subject to fairly high levels of volatility and a couple of percentage points is not material in the grand scheme of things.
In addition, the company canceled its $50 million share buyback, which most analysts had expected, and instead announced a 50% increase in its ordinary dividend to reflect its more diversified model together with a one-off $0.50 per share special dividend to reflect its ‘excellent financial performance’ last year.
‘Lancashire is always led by the underwriting opportunity’, said Maloney. ‘We believe there are significant opportunities going into 2024 and we are well capitalised to be able to fund these through existing resources and internal earnings growth.’
