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Lancashire targets up to $365m equity capital raise

9th June 2020 - Author: Steve Evans

Lancashire Holdings Limited, the specialty insurance and reinsurance underwriter, has joined the ranks of companies seeking to take advantage of market conditions by raising fresh capital, with an up to $365 million target for a new equity share placing.

lancashire-logoLancashire follows other specialty players including RenaissanceRe, Hiscox and Beazley who are looking to raise more capital so that they can capitalise on a firming insurance and reinsurance marketplace.

Lancashire said that it will seek to place roughly 39.6 million new Common Shares, not to exceed 19.5% of the firm’s existing issued share capital.

Based on a price of 726 pence per common share as at 4.00 p.m. on 9th June 2020, Lancashire said this capital raise would generate it gross proceeds of around UK £287 million (roughly US $365 million).

Lancashire’s capital raise compares to Hiscox’s UK £375 million and Beazley’s UK £247 million.

As with both of these companies, Lancashire has noted accelerating rate increases across many of the lines of insurance and reinsurance business that it operates in, leading it to target an increased balance-sheet size to take advantage of better pricing.

Lancashire’s senior executives have always said that they would only right-size the business to the opportunities available and have been reluctant to discuss capital raising, but always saying that it’s an option and that if or when they did pull the trigger they would move rapidly.

The re/insurer said that it will use the proceeds to fund organic growth and take advantage of rate increases seen across the majority of its business lines.

It also said that it expects growth opportunities will be “strongly aligned to Lancashire’s core areas of underwriting expertise and relationships.”

Lancashire further explained, “Lancashire’s long-term strategy is to deploy more capital into a “hardening” market, in which pricing strengthens due to market capital constraints, and to lower the amount of capital it deploys in “softer” markets, where pricing is weaker due to an over-supply of risk capital. Lancashire matches its capital to the market opportunity, and has historically returned capital to investors when it has not been required to support attractive underwriting opportunities.

“This strategy has generated attractive returns across the economic cycle, having delivered an average RoE of 17.2% and an average combined ratio of 70.7% since the Group’s inception.”

The company explained in its announcement on the capital raise that having seen renewal rates rising at some of their fastest paces in certain lines during the first-quarter of this year and with the Covid-19 pandemic having created losses and uncertainty, Lancashire notes “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,” the company continued.

At the June 1st renewals, Lancashire said that it has secured rate increases of 20% to 30% for its Florida property catastrophe reinsurance portfolio and “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.”

“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,” Lancashire further explained.

Specifically, Lancashire said that it sees opportunities to deploy more capital into catastrophe risks, where it believes rate increases will be more pronounced in the U.S. in particular, as well as new lines of business where the company now sees the potential for strong returns.

In addition, Lancashire’s Board believes the current market conditions offer the company a chance to strengthen existing customer relationships and to attract new business, as well as offering larger, better priced participations to existing clients and taking advantage of a more dislocated market environment.

Lancashire now joins those that have already raised capital, or are in the process of doing so, alongside a growing number of private equity capital raises for new start-ups, some debt financings on the private side, as well as other capital raising activity for acquisitions.

There’s no shortage of capital in the world, but we haven’t seen a capital raising environment like this for some years in insurance and reinsurance.

Right-sizing the opportunity to the capital raised will be key for all involved and incumbents like Lancashire, for who raising capital will have been an extremely well-considered endeavour, should stand well-placed to make the most of the market conditions through the rest of this year and into 2021.

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