S&P Global Ratings has revised its outlook to positive from stable for Lancashire Holdings Ltd. and its operating subsidiaries (LRE), as the firm has strengthened its competitive position over the past few years through a diversification strategy.
LRE produced strong underwriting profitability in 2023, expected to continue through 2026, barring any outsize catastrophe losses.
Therefore, S&P Global has affirmed all its ratings, including ‘BBB’ issuer credit rating on the holding company, Lancashire Holdings Ltd. At the same time, it also affirmed the company’s ‘A-‘ issuer credit and financial strength ratings on the core re/insurance operating entities.
A key factor for these ratings is LRE’s ability to adapt to market conditions, as demonstrated by its cycle management strategy of shrinking its re/insurance writings in soft market cycles and growing in hard market cycles, evident especially during 2015-2017.
S&P notes that the company has seen renewed growth in the past few years, benefiting from re/insurance rate increases across its business lines and expansion into new lines and regions.
The company’s gross premiums written reached $1.9 billion in 2023, benefiting LRE through expense efficiency and by enhancing its ability to absorb losses within its earnings and diversify its underwriting portfolio. The company also recently entered casualty reinsurance and U.S. excess and surplus lines.
LRE also benefits from excellent risk-adjusted capital adequacy, partially offset by its high-risk exposure, explained the ratings company.
The re/insurer is expected to produce a strong undiscounted combined ratio of 87%-90% (including a catastrophe load of 10-12 percentage points) and a return on equity in the mid-teens in 2024-2026, depending on investment returns. In 2023, the company generated a strong underwriting profit, with an undiscounted combined ratio of 82.6% compared with 98.7% in 2022.
S&P expects the company’s financial leverage to be between 20% and 25% and the fixed-charge coverage to be above 4 times in 2024-2026. At year-end 2023, LRE’s financial leverage was 23.8% and its fixed-charge coverage was 10.0x, compared with 26.1% and 4.9x the prior year, respectively.
The ratings for the company could increase in the next two years if it continues to successfully execute its diversification strategy, achieving scale while maintaining underwriting discipline and broadening its earnings diversity.
S&P is awaiting to see if LRE generates strong operating earnings in line with ‘A’ rated peers while sustaining capitalization redundant at the 99.99% confidence level.
