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Credit Suisse upgrades Lancashire to 'buy' but drops target price
Credit Suisse upgraded non-life insurer Lancashire Holdings to 'buy' from 'underperform', saying that despite its fourth-quarter pre-tax losses missing consensus expectations, the share price offered a better level of risk/return.
Swiss bank dropped Lancashire's target price to 580p from 620p, citing potential risks to their target price coming in the form of large losses, reserving and investment risks, with Lancashire's outlook comments "less positive than expectations", which had driven the shares lower.
Analysts pointed out that rate increases following Lancashire's heavy losses in 2017 were expected to be in the "mid-single digit level", and as new business opportunities had been limited as the insurer's peers had defended their long-term relationships, but said, "nevertheless, given the share price de-rating and potentially positive read-across from a pick-up in M&A activity, we think that the shares now offer a more balanced risk/return."
As Lancashire has material exposure to catastrophe and tail risks, the firm's management, which had previously expected substantial price increases that could have led to improved shareholder returns to come on the back of the large losses witnessed in 2017, had scaled back their expectations for 2018, suggesting that initial indications had initially been too optimistic and that the environment became more competitive as January renewals approached.
"While these developments pose questions on Lancashire's longer-term strategy, we continue to think that the company still plays an important role in the current (re)insurance market albeit one less levered on catastrophe risks," the Friday morning note read.
"We trim our 2018E but raise our 2019E/20E estimates by 4%-5% on higher investment returns," it concluded.