MIDAS STOCK TIPS: Premium income doubles and profits increase eightfold as Lancashire insurer covers disasters
The collapse of the Francis Scott Key Bridge in Baltimore was both horrific and deadly. Innocent people were killed, the disruption continues, and the consequences spread far and wide.
Just over a month after the disaster, the blame game began. City officials say the container ship that plowed into the bridge outside the Port of Baltimore was not seaworthy and the crew was incompetent.
The shipowners invoked a pre-Civil War law to limit their liability. The FBI has launched its own investigation and transportation regulators are also closely involved.
It’s an unholy mess, the cost of which will almost certainly run into the billions. For insurer Lancashire however, an event like this is almost ‘business as usual’. The company specializes in complex insurance – providing cover against disasters, from storms and earthquakes to oil spills and plane crashes.
Founded in the aftermath of Hurricane Katrina in 2005, Lancashire has become a leading player in its field, operating from Lloyd’s of London and Bermuda, with offices also in America and Australia.
The shares cost £5.86 and should increase in value as Lancashire is very profitable and should continue in that vein.
Horror toll: Disasters such as the Baltimore bridge collapse are covered by leading insurers such as Lancashire
Most large-scale insurance cases involve numerous insurers, and Baltimore is no exception. The crashed ship weighed almost 120,000 tons and had 4,600 containers on board.
Both the ship and the goods are insured, as are the bridge and surrounding infrastructure. Underwriters will have been chosen based on the prices they offer and the service they provide.
Lancashire is smaller than many comparable companies, with just 400 employees, but the group prides itself on competitive pricing, smart risk management and genuine customer support. CEO Alex Maloney, 50, leads by example. He started in the insurance industry at the age of 19 and has worked in the industry ever since. He joined Lancashire just after its inception in 2005 and took the top job ten years ago.
Large scale insurance is all done through brokers and knowing the right people is fundamental to success. Maloney has had plenty of time to build relationships in the places that matter and ensure his team does the same. He has also focused on diversifying Lancashire’s business so that the group has more customers in a wider range of industries and less exposure to certain sectors.
The strategy has helped Lancashire triple its premium income over the past five years, double the number of products it offers and create a larger and more resilient business.
The annual results for 2023 indicate that Maloney is on the right track. Premium income rose 17 percent to $1.9 billion (£1.5 billion), large claims fell from $329 million to $106 million and after-tax profits soared to $322 million. The final dividend increased by 50 percent to 15 cents (12p) and a special dividend of 50 cents (40.2p) was announced, the second such payout in just a few months.
Describing market conditions as the best in a decade, Maloney also announced a change to Lancashire’s future dividend policy, with the annual ordinary dividend increased by 50 per cent to 22.5p. This is likely to be supplemented by at least one 50p special offer again this year, with payments for UK shareholders translated into pounds, even though Lancashire’s results are in dollars, as the US currency dominates the complex insurance sector.
Disasters like the Baltimore bridge collapse are likely to increase shipping premiums, and climate change is making businesses aware of the need for coverage against storms, droughts and other weather-related events.
Rising interest rates have also increased investment income and may continue to do so. As a seasoned insurance executive, Maloney knows better than most that good times don’t last forever, but expanding into different business areas should make Lancashire more resilient.
The company once focused on energy, shipping, real estate and aviation. Today, no single industry is responsible for more than 20 percent of total premium revenue and the group is involved in the insurance of private jets, regional hotel chains in America and even equipment used by charities abroad.
Most employees also own shares, which motivates them to deliver results.
Midas judgment: Lancashire’s premium income has more than doubled and profits have increased eightfold. Yet shares have fallen from £8.50 to £5.86, hit by fears of unrest in the Middle East and war in Ukraine. These seem exaggerated, given that Lancashire deals with risk and has proven its mettle for many years. Decent dividends increase the stock’s appeal. Buy and hold.
Traded on: Main market ticker: LRE Contact: lancashiregroup.com or 020 7264 4000