RBC Capital raises target price on Lancashire Holdings

RBC Capital said that it forecast net income of $42.0m for Lancashire in 2022, up from previous estimates of $22.0m - owing to lower-than-expected natural catastrophe losses outside Hurricane Ian, and, to a lesser degree, stronger growth.

For 2023-24, RBC increased its estimates by 6-7%, primarily from stronger growth, reflecting the "harder rating environment", while its combined ratios were roughly unchanged at 79%/77%.

"LRE's high share of cat business makes it more geared towards cat loss trends, an area of elevated uncertainty owing the experience in recent years. The current valuation however appears to have overly discounted this, and we see good value at current book multiples," said RBC, which also reiterated its 'outperform' rating on the stock.

"The inherent volatility of a specialty P&C business makes the projection of future cash flows less reliable. As such, we see a price-to-book valuation approach to be the most appropriate, using our forecast ROE excluding MTM effects and a bottom-up cost of equity. We value LRE shares at 600.0p based on an implied price-to-book multiple of 1.3x on our 2022e BVPS estimate. The implied book multiple is derived from our 2022-24 average ROE forecast of circa 19% and a bottom-up cost of equity of 14.7% reflecting the company's risk profile."

Reporting by Iain Gilbert at Sharecast.com