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Improved Lancashire results early evidence of a hard cycle, says CEO

13th February 2020 - Author: Matt Sheehan

Lancashire Group CEO Alex Maloney has said that the improvement in the company’s 2019 results are “early evidence” of the transition to a harder stage of the re/insurance pricing cycle.

Lancashire logoThe Group’s profit (after-tax) improved more than threefold in comparison with the previous year, rising from $37.5 million to $117.9 million.

This was helped by “measured pricing improvement,” according to Maloney, as well top line premium growth and a strong contribution from the insurer’s investment portfolio.

Net written premiums improved 1.7% to $424.7 million, while net investment income was up 8.6% to $37.7 million.

Ceded reinsurance premiums increased by $61.2 million, or 27.7%, compared with 2018, due to a combination of the timing of renewals and additional cover purchased, including some quota share cover for new lines of business Lancashire has entered into.

Another positive factor in 2019 was the lower levels of catastrophe losses compared with previous years, with accident year events totalling $129.8 million last year, versus $165.4 million in 2018.

This brought the Group’s loss ratio down to 30.8%, compared with 40.0% previously, which helped Lancashire to achieve a combined ratio of 80.9% for the year.

The costliest catastrophe events for Lancashire in 2019 included Hurricane Dorian and Typhoons Faxai and Hagibis, which together caused net losses of $52.1 million, excluding the impact of inwards and outwards reinstatement premiums.

“Notwithstanding the Hagibis, Faxai and Dorian windstorm losses, which all occurred during the second half of the year, the aggregate market insured loss amounts are below what we have witnessed in recent years,” said Maloney. “In contrast, 2017 and 2018 generated exceptionally heavy insured catastrophe losses at a time of unsustainably weak margins.”

But despite the improvement in results, the Group’s management still believe that further rate increases must be achieved before the market can return to sustainability.

“Whilst Lancashire has achieved a profitable underwriting performance with a combined ratio of 80.9% for the full year, we are still of the belief that further pricing improvement is needed in many lines of business before the market returns to a more sustainable environment,” Maloney explained.

“With a year of below-average industry losses compared to prior years and a strong investment performance, we are pleased to return to strong levels of profitability, with a return on equity of 14.1% for the year, with all of the Group’s platforms contributing to that return,” added  Group Chief Financial Officer Elaine Whelan.

“Our outlook for 2020 is for a continuation of rate improvements and we are retaining most of our capital to ensure we are fully able to take advantage of any underwriting opportunities that arise.”

Maloney noted that further pricing improvements may also be necessary to outweigh the pressure that the wider re/insurance markets have come under due to a combination of reserve deterioration on casualty books and through prior year catastrophe loss reserves.

“Lancashire’s strategy of underwriting predominantly short-tail lines has insulated us from the reserving stress experienced in casualty insurance classes, and our reserving from prior year catastrophe events remains robust,” he concluded.

“But these developments illustrate that there is still a need for a continued focus on underwriting discipline. Over the last few quarters stronger investment performance has helped smooth earnings across the insurance market. Investment returns are part of our overall return for our shareholders. But our market must always insist on the right price for the underwriting risk which we take on.”

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