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Jun 10, 2020

Lancashire raises £277m extra capital to take advantage of market opportunity

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Yesterday afternoon, Lancashire Holdings announced (available here) that it was going to raise an extra £287m/$365m in order to "take advantage of rate rises that the Company is currently seeing across the majority of its business lines. Lancashire expects these growth opportunities to be strongly aligned to Lancashire’s core areas of underwriting expertise and relationships."

Today (10th) Lancashire confirmed that it had raised £277m at a 3.6% discount to the closing share price on the 9th. During today's trading Lancashire shares rose 8.5% and were the biggest gainers in the FTSE 350 index

In the earlier announcement, Lancashire commented: "Most significantly, the recent COVID-19 pandemic has generated (re)insurance market losses both in terms of the claims environment and the negative impact on the investment markets. In the face of these challenges there has been a retrenchment in (re)insurance market risk capital and capacity. This in turn has led recently to continued rate increases in many of the Group’s core insurance segments and accelerated rating dislocation in the catastrophe exposed reinsurance lines. For example, the Company has seen, to date, rate rises of 20%-30% for 1 June renewals in the Florida property catastrophe portfolio. Lancashire expects the momentum of rising rates to continue in this and other classes of business across its portfolio during the rest of this year and throughout 2021."

Looking forward to the future, Lancashire said "Whilst Lancashire remains strongly capitalised and has sufficient capital headroom to take some advantage of the current rate momentum, the rapid increase in rates and dislocation in reinsurance and retrocession markets that are currently being witnessed imply a return to a traditional “hard” market over the next six to 12 months. The Placing and resultant increase in capital will allow Lancashire to take full advantage of this market opportunity, if it develops in the way Lancashire considers likely."

In particular, Lancashire mentioned rates in US property catastrophe: "The net proceeds of the Placing will therefore be deployed to enable Lancashire to take advantage of market opportunities in a number of areas, including natural catastrophe business where expected rate increases are likely to be more pronounced in the US, and new lines of business which Lancashire believes will now generate strong returns."

Encouragingly, Lancashire said of its Covid-19 estimate: "The COVID-19 pandemic is still an ongoing situation, making it exceptionally difficult to predict what the ultimate impact for the Group will be. As previously announced, Lancashire’s provisional loss estimate for COVID-19 is $35 million, net of reinsurance and reinstatement provision, based on claims notified and expected to be notified. Lancashire has not seen any trends in claims activity since 30 April 2020 that would indicate any material change to this estimate at this time. As noted in the Company’s recent 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. Lancashire has minimal exposure to mortgage business and is exposed to a small number of event cancellation contracts."

Reflective of the recovery in the stock market, Lancashire commented: "Since 31 March 2020, the unrealised investment losses in Lancashire’s investment portfolio have reversed and its total net investment return for the 2020 year to 29 May 2020 was 0.5%."

JP Morgan analyst Edward Morris wrote in a note to investors: "We see Lancashire as best positioned of the London Market players currently, given that it appears to have less/no exposure to COVID-19 and casualty lines that have been the source of high claims for peers, yet may still be positioned to take advantage of a hardening market," "We therefore see this raise as a stronger-than-expected indication of forward looking growth, and reiterate our OW rating."

The analysts presentation (available here as a pdf download) has on page 7 a chart of cumulative rate changes since 2015.