Better Pricing Bodes Well For Lancashire Holdings After A Tough Year

It’s been a challenging year for specialty insurer Lancashire Holdings (OTCPK:LCSHF) (LRE.L), as pricing has been slower to recover in reinsurance and losses from both natural disasters and “regular business” have taken a bite. Not only has Lancashire trailed other more traditional specialty insurers/reinsurers like Everest Re (RE), other Lloyds players like Beazley (OTC:BEAZY) and Hiscox (OTC:HCXLY) have also done better over the past year, though Lancashire has been outperforming more recently and does pay out a sizable percentage of its earnings as a dividend (having recently announced another large special dividend).

Lancashire will always be a challenging company to model, as management doesn’t prioritize or target growth like other insurers, and instead focuses on writing low-frequency/high-severity policies and returning a large percentage of its surplus capital to shareholders. While modeling a volatile business has its inherent challenges, I believe the shares still offer some worthwhile appreciation potential now that rates are firming up.

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Better Pricing Bodes Well For Lancashire Holdings After A Tough Year

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.

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Lancashire Holdings Heavily Leveraged To Improving Prices

Seeking Alpha: Endurance Specialty Is Getting Scale, But More Challenges As Well

Endurance Specialty (NYSE:ENH) chairman and CEO John Charman has made no secret of the fact that he believes Endurance needs more scale to be a truly competitive player in the evolving insurance and reinsurance markets. While Aspen (NYSE:AHL) rebuffed the company's takeover attempt, Montpelier Re (NYSE:MRH) put itself up for sale not long thereafter and the companies announced a merger on March 31 of this year.

While an acquisition of Aspen would have made more sense (at least superficially), the Montpelier deal should be accretive for Endurance on both earnings and ROE pretty much from day one. I'm a little concerned about the greater shift toward property catastrophe reinsurance, but it's not a transformative shift and it is one I believe Endurance can manage. What's more, Montpelier's Lloyds and Blue Capital assets may be a lot more valuable than the market currently projects. Valuing Endurance on the premise that the deal goes through suggests to me that the company could be more than 10% undervalued today, but there is going to be a "show me" process where management has to deliver on the proposed synergies to unlock the value.

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Endurance Specialty Is Getting Scale, But More Challenges As Well