Analysts at Morgan Stanley are expecting Lancashire Holdings Limited to take advantage of the hardening market and expand its footprint, while at the same time improve profitability on the back of better pricing.
With P&C pricing anticipated to improve further in 2020 and potentially into 2021, Lancashire is well placed to take advantage of market conditions and grow in a hardening market.
In the company’s full-year 2019 results, management said that its improved results are “early evidence” of the transition to a harder part of the cycle, with CEO Alex Maloney noting an expectation of further growth in a better market.
Since then, the COVID-19 pandemic has served to pressure underwriting and investment portfolios to varying degrees, but has also exacerbated the hardening market, suggesting the availability of potentially higher underwriting returns for reinsurers moving forward.
“We expect Lancashire to finally expand its footprint in a hardening market while improving its profitability as a result of better pricing,” say analysts.
When compared with its peers, analysts state that Lancashire has no exposure to the litigation trends in U.S. casualty business, which, combined with the fact the firm does not write retail business, an area which has experienced elevated policy coverage disputes as a result of COVID-19, means it is not exposed to some of the adverse dynamics affecting others.
In its Q1 trading update, the London-listed insurer and reinsurer announced estimated COVID-19 claims of $35 million, the majority of which relates to its property book. The re/insurer’s Q1 COVID-19 hit is fairly moderate and influenced by the fact that it does not write numerous lines of business so far shown to be the most exposed to the pandemic.
“We therefore believe that the pricing trends anticipated in 2020 will become visible more rapidly on Lancashire’s P&L and valuation than those of its peers,” say Morgan Stanley analysts.
In light of the expected rate increases, the lack of exposure to some of the adverse dynamics and that ultimately, Lancashire is strongly geared to the P&C pricing cycle, Morgan Stanley has updated its growth and combined ratio assumptions to reflect higher profitability. Now, Morgan Stanley is 4%, 17%, and 13% above consensus on earnings for 2020, 20201, 2022e, respectively.
Early analysis suggests that property catastrophe reinsurance rates-on-line increased by an estimated 26.1% at the June 1st, 2020 reinsurance renewals.
