Lancashire lifts special dividend after low losses from Hurricane Patricia

Third quarter profits at Lancashire were ahead of market forecasts as tropical storm Patricia did little damage in Mexico, with the non-life insurer declaring a larger special dividend than expected due to a lighter resinsurance outlook.

Although gross premiums were down for the quarter, at $120.4m (£78.3m) down 21% compared to the same period last year, and net premiums down 20% to $110.1m, profits of $32.9m fell 8.9% year on year and were comfortably ahead of the $30m consensus forecast.

Underwriting results were solid, with a combined ratio for the quarter of 70.2%, down from 82.4% a year ago, or 66.6% if including fees and profit commissions on third party capital management activities.

With a dearth of major losses and investment strategies paying off with only a small negative return of 0.2%, management were comfortable proposing a special dividend of 95 cents per share, which was well ahead of the consensus figure of 72 cents.

Group chief financial officer Elaine Whelan said: "Overall results for the quarter were therefore reasonable, with an RoE of 2.6%, bringing us to 9.3% for the year to date."

She said larger dividend was due to the current reinsurance programme not needing as much capital as was currently being carried and said the outlook for 2016 was for a continuation of current market trends, with a the core book maintained.

For his part, chief executive Alex Maloney questioned the wisdom of driving for top line growt and after the flurry of deal activity in the industry, said this was being driven "by the need to rationalise and refocus oversized and over stretched businesses".

"We also continue to see a bout of initiatives and innovations in the market, the sustainability and longer term viability of which are questionable. These are symptoms of where we are in the cycle. We have seen these types of trends before and in all likelihood, will see them again."

City analysts were impressed, in the main.

Numis noted that, overall, the quarter's earnings were similar to the second, with strong reserve releases being offset by above-average loss activity on current year business.

"A better overall underwriting result in Q3 was outweighed by lack of investment earnings due to poor markets in the quarter," the broker wrote, calculating that net tangible assets at end September was $6.01 and therefore roughly $0.19 ahead of consensus.

Shore Capital said: "Unlike its quoted non-life peers, Lancashire reports full quarterly results which were well ahead of our forecasts and comfortably ahead of consensus."

After the CEO's reference to M&A, ShoreCap added: "Our view remains that Lancashire remains a prized asset in an ever-dwindling sector and would make a terrific addition to a predator’s portfolio if management were convinced of the strategic sense of such a deal."