Lancashire faces rate increases from clients and retrocession

Bermuda-based specialty re/insurer Lancashire Holdings has decided against paying a special dividend in 2017 and instead to deploy the capital in a hardening market but analysts commented that the company also faces higher retrocession rates, according to a Bernstein note.

Lancashire is well positioned to benefit from the rising rates and in turn Bernstein has increased its earnings per share (EPS) estimates for the company by on average 8 percent, according to the note.

Market observers expect significant rate increases particularly in the property business after the industry incurred an expected $100 billion of insured losses in North America from natural catastrophes.

Lancashire reported a net loss of $139.0 million for the third quarter of 2017 compared to a net profit of $40.1 million in the same period a year ago. The combined ratio deteriorated significantly to 213.3 percent in the third quarter from 73.8 percent in the same period a year ago.

Bernstein warned that there are significant uncertainties around the level of rate increases and how localized they will be. It remains unclear how third party capital, excess and idle opportunistic capital in the market will react. “We suspect significant firming in rates will be followed by capital re-entering those markets – which would dampen any rate benefit,” the analysts wrote.

Additionally, Lancashire itself will face rising retrocession costs. Lancashire has benefitted from cheap retrocession and mitigated some of the impact from the nat cat season – retrocessionaires will look to earn this back, according to the Bernstein note.

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