Lancashire Holdings Heavily Leveraged To Improving Prices

Bermuda-based, London-run specialty insurance company Lancashire Holdings (OTCPK:LCSHF) (LRE.L) hasn't had the best run in recent years. Even with a 25% rally from its 2016 lows, the shares are down almost 20% over the past five years as the company endured withering price erosion across its property, energy, and specialty markets. While the company's combined ratio remained healthy due to the company's disciplined underwriting approach and its policy of cutting exposures when rates are not adequate, Lancashire nevertheless saw a 30% decline in book value as it returned capital to shareholders and saw a 10% decline in premiums.

I believe operating conditions are much more favorable for Lancashire now. Rates improved at the January renewal, and Lancashire has adequate capital to deploy to take advantage of hardening markets. Improving energy prices should also help the energy business, while the company's third-party capital management business can leverage its underwriting capabilities to generate lucrative fee income. Last and not least is the scarcity value of a well-run Lloyds operator that could attract M&A attention.

I'm not expecting especially strong earnings growth, but even modest growth can support a fair value more than 10% above today's price, with further upside possible if and when the markets harden further. Investors should note that the company's ADRs are not very liquid, and those investors who are willing and able to invest in the local shares would likely be better-served going that route.

Follow this link for more:
Lancashire Holdings Heavily Leveraged To Improving Prices