Numis Securities has raised its target share price on London-listed carrier Lancashire on the back of its specialty lines expansion, highlighting the potential for strong returns and capital distributions in future years.

Lancashire

This morning, Numis raised its target share price on the London-listed firm by 20 pence to 825 pence per share, which implies an increase in its price-to-net tangible assets multiple to 1.69x for full-year 2021.

Numis cited improving risk/reward dynamics and forecast Lancashire shares will provide good returns for investors with projected distributions of 120 pence over the next three years.

Shares in Lancashire were trading 1.13 percent higher in London on Friday at 713.45 pence. Its stock has shed almost 1 percent in the year to date but is trading up more than 25 percent from its March 2020 lows following the pandemic-related sell-off in global equities.

Numis analyst Nick Johnson noted a “subtle shift” in Lancashire’s previous catastrophe-centric underwriting profile, adding that the carrier’s continued expansion into capital-light specialty lines is expected to enhance cross-cycle return on net tangible assets (Ronta).

Lancashire entered three new classes in 2021 – casualty reinsurance, specialty reinsurance and accident and health.

On its recent Q1 earnings call the carrier said it expected to at least reach the top end of its $40mn-$60mn premium estimate for the three classes in 2021. 

“As well as the potential Ronta benefit, we think there could be longer-term advantages from becoming a more diverse and potentially less cyclical business,” he explained.

Lancashire YTD share price…

The analyst further pointed to management guidance that the carrier will continue to focus solely on maximising longer-term risk-adjusted Ronta rather than seeking growth for its own sake.

Johnson was also positive on Lancashire’s bullish outlook for the underwriting environment, noting that price adequacy is sufficient for accelerated growth.

“Reassuringly, Lancashire says it is currently turning down more business than it writes, which suggests continued underwriting discipline and a strong flow of broker business that is perhaps indicative of capacity shortage in some segments,” Johnson added.

The move follows Lancashire’s first-quarter trading statement, which saw the carrier record gross written premium of $354.8mn during the opening three months of 2021, growth of 46.1 percent year on year.

Although it did not disclose a combined ratio in its first-quarter trading statement, Lancashire said its underlying performance was in line with expectations with no deterioration in its provisions for Covid-19.

As a result, Numis has raised its full year gross income growth assumption from 26 percent to 32 percent. However it dropped its FY21 earnings per share forecast by 22 percent due to an increase in Lancashire’s cat budget to accommodate Winter Storm Uri, and also debt retirement costs of £10mn.

Lancashire reported that Uri would cost the company between $35mn and $45mn, slightly ahead of analyst expectations.

“We have increased our FY21 catastrophe budget by $20mn in order to leave sufficient headroom for further losses during the remainder of the year,” Johnson said.