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

Weaker Than Expected Pricing Spoiled Lancashire's 2018 Story

Significantly leveraged to higher insurance prices and much more heavily leveraged to reinsurance than fellow Lloyd's insurers like Beazley (OTC:BZLYF) and Hiscox (OTC:HCXLF), Lancashire Holdings (OTCPK:LCSHF) (LRE.L) has been an underperformer this year. A weak January renewal period (and management's subsequent guidance) largely dashed hopes that last year's catastrophes would support meaningfully higher rates, and Lancashire is keeping its underwriting ambitions more modest given the less attractive returns that have appeared in the market.

Although Lancashire does still look undervalued and a time-tested underwriter with strong capital discipline and an above-average track record, the mid-year renewals are not likely to lead to a new rush of enthusiasm for the stock. The long-term annualized return potential looks worthwhile, but this is a name that is going to require some patience, and there's no shortage of well-run insurance companies trading at what look like attractive multiples.

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Weaker Than Expected Pricing Spoiled Lancashire's 2018 Story