Lancashire Holdings has suffered a setback just days before the specialist insurer is due to complete a transformational acquisition, disclosing a bigger-than-expected drop in profits.
A mounting claims bill from floods and hailstorms in continental Europe, as well as a sunken oil rig off the coast of Angola, pushed third-quarter pre-tax profits down two-thirds from a year ago to $26m.
This was about $10m – or 29 per cent – lower than analysts forecast.
The FTSE 250 company made the announcement on the day senior managers made a series of presentations to investors to convince them of the merits of its £266m acquisition of Cathedral Capital.
The purchase, agreed in the summer, surprised some analysts given that Lancashire had avoided dealmaking since it was set up eight years ago.
But Richard Brindle, chief executive, said Cathedral – which will give Lancashire its first platform on the Lloyd’s of London market – would be “a great boost to our underwriting resources”.
The blow to investors of weaker-than-forecast earnings was softened as Lancashire on Wednesday unveiled plans to pay another special dividend – this time of 45 cents a share, worth $82m.
However, analysts interpreted this as a sign that Lancashire has limited opportunities to deploy the capital in writing profitable business.
Lancashire provided further evidence that specialist corporate insurers are feeling the strain both from weak investment returns and from pressure on the premiums they can charge.
The insurer and reinsurer made a return of only 0.4 per cent on its investment portfolio during the third quarter. Mr Brindle also said the pricing levels across several lines of business were “adequate but under pressure”.
Andy Broadfield, analyst at Barclays, said: “Softer pricing affects Lancashire perhaps more keenly than some of its peer group, due to its chosen specialities.”
He argued that Lancashire was also particularly vulnerable as mainstream investors buy “insurance linked” securities such as catastrophe bonds, rivalling traditional reinsurers.
However, Mr Brindle said Lancashire – which covers complex risks such as aviation, marine and terrorism – was “broader and better balanced than it has ever been” and has produced better returns than the wider industry.
Over the first nine months of the year, the group paid claims and incurred expenses totalling less than 70 cents for every $1 in premiums it has taken in – although this increased to 91 cents in the third quarter.
Shares in Lancashire fell 16.8p or 2 per cent to 802.2p.