Lancashire's interim profits beat forecast, capital return eyed in second half

Bermuda-based insurance company Lancashire Holdings' profits fell less than feared in the first half as it skirted most of the significant industry losses in recent months.

Profit before tax in the second half of the year fell sharply to $56.6m in the six months ended 30 June, ahead of the $54m market consensus but down just over a third from the $88.6m last year.

This came as the combined ratio rose to 76% from the 75% in the same period last year and bond yield reductions in the second quarter drove an investment return of 1.6%, up from 1.0% a year ago.

Gross premiums written increased to $430.6m from $423.6m last year, while at the net level premiums fell to $278.6m from $284.3m.

With industry premium rates and insurance policy terms and conditions under pressure, chief executive Alex Maloney said Lancashire's model helped insulate the balance sheet against a string of small to medium sized natural catastrophe and specialty market losses.

"We are starting to see evidence of the insurance industry sustaining a series of net losses during the first half of 2016. Against this background it is reassuring to note that Lancashire's reinsurance purchasing strategy has enabled the group to reduce our net liabilities by about $20m when compared to the reinsurance programme purchased in 2015.”

Diluted earnings per share for the FTSE 250 listed company fell to $0.30 for the first half of the year from $0.47 but the dividend was held at 5.0 cents per share.

If current market conditions continue, the company said it was likely to return earnings to shareholders at the end of the year.

Broker Shore Capital said this was an "excellent set" of interims that comfortably exceeded market expectations, with both the underwriting performance and investment return ahead of its forecasts, "which should allay any residual market fears over the group’s ability to navigate the current softening market environment and its ability to deal with the various defections witnessed from Cathedral over the past year".

Numis was also positive, saying: "As expected there was a higher level of loss experience than some previous quarters, although this looks to have been mitigated by Lancashire’s recent strategy to buy increased reinsurance protection as well as sound underwriting judgement and a good level of reserve releases."

Shares in Lancashire Holdings fell 1.13% to 614p at 0934.