The non-life insurance industry is not typically the most rock 'n' roll place to invest but shareholders in specialist Lancashire (LRE) will likely feel like they're on the 'Stairway to Heaven' today. The company served up a double-whammy surprise of much better-than-expected full year pre-tax profits and another hefty cash return, worth roughly 33p per share, adding the 75p extra payout paid in the third quarter.

Upgrades to forecasts look inevitable. Analysts at Westhouse Securities anticipated pre-tax profit’s falling 13.7% to $188.1 million, but the insurer actually reported a 4% rise to $226.5 million. The broker was also far too conservative on its special payout estimates, anticipating a total of $1.35 per share versus an overall $1.70 of special dividends for 2014.

So while the shares rally 5% to 117.12p in trading today, investors might be left feeling that the market is being a little stingy.

Web - Lancashire - 12 Feb 2015

That said, catastrophe insurers continue to find it tough to generate suitable returns by using their profits to write new business while struggling against widespread premiums pricing pressure. Alternatives have been to return cash to shareholders, as Lancashire has done through the past 12 months, or hit the acquisitions trail for value-enhancing deals, a strategy that carries its own risks.

Lancashire’s profit rise is the result of lower claims, which Westhouse’s Joanna Parsons says is 'encouraging as it points to the ongoing quality of the book.'

Gross written premiums improved 33.5% during the year to $907.6 million, mainly due to its Cathedral Capital acquisition in 2013.

'The investment return improved materially year-on-year, says Parsons, flagging the $22 million of net investment income, net realised gains and losses, impairments and net change in unrealised gains and losses, compared top $6.9 million in 2013. But the analyst also spells out that the group has further work to get all its income streams delivering the best return possible.

Issue Date: 12 Feb 2015