Lancashire profits nosedive

Bermuda and London-based short-tail, specialty property insurer Lancashire has applied to join the London Stock Exchange and announced results showing a massive drop in pre-tax profits from $392m (£276m) to $98m (£69m).

Financial highlights for the 12 months to 31 December 2008:

• Gross written premiums of $638.1m, down from $753.1m in 2007
• Net written premiums of $574.7m, down from $666.8m
• Loss ratio of 61.8%, up from 23.9%
• Combined ratio of 86.3%, up from 46.3%
• Pre-tax profits of $97.6m, down from $391.9m
• Net profit after tax of $97.5m, down from $390.9m

Fourth quarter results:

• Gross and net written premiums of $130.1m, down from $154.3m;
• Loss ratio of 11.5% from 15.7%
• Combined ratio of 35.4%, from 38.1%
• Pre-tax profit of $83.1m, down from $115.7mm
• Net profit after tax of $81.1m down from $115.3m

Richard Brindle, Group Chief Executive Officer, said: “2008 was one of the toughest years that many of us have experienced in the insurance industry. To grow book value per share by 7.5% is a considerable achievement, and further proof if any were needed that our risk management has been thoroughly tested on both sides of the balance sheet. Lancashire has achieved an excellent combined ratio of 86.3% despite exposure to Hurricane Ike, one of the largest offshore and onshore market losses that the insurance industry has seen. We also achieved a very strong investment return. On Hurricanes Ike and Gustav, we originally forecast a net impact on our financial results of approximately $150m and this estimate remains unchanged. These results are a great testament to our team.”

He said: “The market has undoubtedly turned. As in 2006, we expect the rate increases we have seen in January to gain momentum as the year progresses. Sections of the market are less than nimble and take some time to adjust their business plans to the new reality but the fundamental shift in the demand/supply equation is inescapable.

“Looking forward, I can only reiterate that I believe we enter 2009 well placed to take advantage of some extraordinary opportunities. We are ready for the challenge.”

The company said: “The year on year reduction in written premiums was driven by most classes experiencing lower rates than in previous periods, and a corresponding greater proportion of submissions declined. However, there was some evidence of rate reductions reversing during the fourth quarter and an improvement in Lancashire's Renewal Price Index ('RPI') certainly versus the third quarter of 2008.

“The reduction in premium income in the fourth quarter, year on year and excluding renewals where the timing was different from initial expectations, was largely driven by anticipated construction projects being cancelled or deferred as a result of the current economic climate. Lancashire's Q4 RPI, which considers both pricing and terms and conditions, shows the following renewal comparisons between the fourth quarter of 2008 and the same period in 2007: Property 100%; Energy 108%; Marine 99%; Aviation (AV52, aviation war and satellite only) 96%; Overall 101%.

“January is a key renewal date for a number of specialist lines we underwrite. For the month of January we achieved an overall RPI for the group of 105%. We analyse our RPI by sector as follows: Property 104%; Energy 112%; Marine 113% and Aviation 100%. These figures do not include Gulf of Mexico energy business as this class did not have any renewed contracts in January.

“No reinsurance was purchased in the fourth quarter of 2008 compared to $4.1m in the fourth quarter of 2007. Ceded premium reduced from $86.3m for 2007 to $63.4 million for 2008. Contributing factors were the reduction in the amount of energy Gulf of Mexico business written, with a corresponding impact on business ceded, and a reduction in the purchase of protection against natural catastrophes, including the commutation of the quota share cession to the Lancashire sponsored energy sidecar, Sirocco Re, at the end of 2007. This was partially offset by an increase in reinsurance purchased to mitigate losses from events other than natural catastrophes, most of which was purchased in the first quarter of 2008.

“The net loss ratio of 11.5% for the fourth quarter reflects a very quiet quarter for loss activity combined with some positive prior year development. The net loss ratio of 61.8% for the twelve months to 31 December 2008 represents a strong underwriting result despite above average industry risk losses and catastrophe losses. The net negative financial impact of Hurricanes Ike and Gustav on our 2008 results was $150.8m and $2.1m respectively. Net reserves experienced favourable prior year development of $12.5m for the quarter and $28.6m in 2008.