Lancashire profits dive in face of intense competition

The profits of Lancashire Holdings dipped in the first half of 2014, a trend its chief executive blamed intense competition driven by additional capital flowing into the industry.

Alex Maloney, chief executive officer of Lancashire Holdings, said he does not believe pricing has reached a floor yet and that he is seeing instances of indiscipline in the market.

The company’s profit before tax fell to $41.5 million in the second quarter of 2014 compared with $58.3 million in the second quarter of 2014. For the six months ended June 30, 2014, profits dropped 28 percent to $98.9 million, compared with $137.2 million in the six months ended June 30, 2013.

Its gross premiums written (GPW) increased 52 percent to $318.4 million in the quarter, compared with $209 million in the second quarter of 2013. Over the six months, GPW increased 50 percent to $635.1 million, compared with $423.9 million in the same period of 2013.

The substantial increase was largely driven by its acquisition of Cathedral in the fourth quarter of 2013.

Its combined ratio increased by nearly 8 percentage points to 74.6 percent for the quarter. For the six months ended June 30, 2014, its combined ratio hit 70.6 percent, a massive hike from 58.8 percent in the same period of 2013.

Its net operating profit also fell, from $54.2 million in the second quarter of 2013 to $43.4 million in the second quarter of 2014.

Maloney said: “There can be no doubt that the additional capital in our industry, not just new capital but also the undistributed retained earnings of many of our peers, is driving competition on pricing, terms and conditions.

“Most of this competition is still responsible and leaves acceptable underwriting margins and volumes for those underwriters like Lancashire, Cathedral and Kinesis who have the ability, experience and track-record that clients and brokers rely on to lead and structure policies. However, there are areas of the market where there are instances of indiscipline and Lancashire is always prepared to let underpriced business go.

“There is some discussion about whether pricing has reached a floor, and there have been signs of over-ambitiously priced programmes being rejected. But on the whole we think there is still pressure on pricing and, with business more scarce in the second half of the year, we wouldn’t be surprised to see some aggressive renewal targets.

“But we can mitigate the effects of up-front pricing impacts with very substantial savings on our own reinsurance and retrocession purchases, and for LICL and LUK we’ve also bought substantially more limit this year for both risk and cat covers. Cathedral has always been a buyer of extensive reinsurance but has also managed to improve retentions, breadth of cover and costs.”