Lancashire Holdings PLC (LON:LRE) shares were the top riser on the FTSE 350 on Wednesday as investors and analysts hailed its aggressive approach in raising cash to take advantage of sharply improving prices after the initial hit from coronavirus.
The underwriter said it had successfully raised £277mln, equivalent to 19.5% of its existing share count, at a price of 700p a share that was a 3.6% discount to the previous close.
Lancashire’s noted that its long-term strategy is to deploy more capital into a ‘hardening’ or improving market, in which pricing strengthens due to market capital constraints, and to lower the amount of capital it deploys in ‘softer” markets, where pricing is weaker due to an over-supply of risk capital.
Management said they intend to use the proceeds of the placing “to fund organic growth and take advantage of rate rises that the company is currently seeing across the majority of its business lines”.
Having delivered an average return on investment of 17.2% since inception along with an average combined ratio of 70.7%.
Analysts at UBS said it was a major statement of intent, noting that the insurer had stuck to its estimated US$35m (£27mln) of net claims from COVID-19 driven by property lines, as it does not underwrite travel, trade credit, accident & health, directors & officers or liability insurance.
“Our sensitivity analysis had indicated a potential net loss in the region of US$135m based on LRE's typical market share so we saw this as a positive outcome. Having side-stepped this major loss, we estimated LRE had circa US$650mln of capital to deploy to growth,” the UBS analysts said.
“A further capital raise beyond this level is therefore a big statement, in our view.”
Analysts at broker Shore Capital were in agreements.
“We view this as an offensive move versus the arguably defensive move of its peers,” they said.
Comparing the numbers with peers, ShoreCap noted that Lancashire’s estimates of its COVID-19 losses of US$35m was less than 10% of the capital raise.
In contrast, Beazley (LON:BEZ) raised US$300m on May 19 versus its estimated losses of US$170m, while Hiscox’s May 6 capital raise of US$465m “will arguably be 100% used to fund its potential COVID-19 insured losses of up to $475m (although it allows the company to use organic capital generation to benefit from the improving market)”.
“Put simply, Hiscox’s capital raise covers its potential losses, Beazley will be able to fund both the insured losses and have additional capital to continue to fund growth, while Lancashire’s is purely for growth,” was Shore Cap's summation.