Third-quarter losses at London-listed insurer Lancashire Holdings Ltd. could put the company's special dividend at risk, one analyst has warned, while another cut dividend estimates. But analysts also pointed out that investors should expect volatility in the specialist insurer's results.

Dividend concerns

Lancashire announced Oct. 8 that it was expecting a $30 million loss on its marine portfolio in the third quarter, which analysts believe is partly from a German shipyard fire, and a combined claim of between $25 million and $45 million for recent natural catastrophes, including Hurricane Florence and typhoons Jebi, Mangkhut and Trami. The insurer said it expects to remain profitable for the first nine months of 2018, having booked $75.8 million of after-tax profit attributable to the company in the first half.

The company paid at least one special dividend each year from 2009 through 2016, announcing one with third-quarter results every year and frequently another alongside full-year results. However, it did not pay one in respect of 2017 earnings, saying in November that it expected better underwriting conditions than in recent years and therefore wanted to deploy all of its capital to take advantage.

As such, it declared just its ordinary dividend of 5 cents per share with 2017 and 2018 half-year results and 10 cents per share with the full-year 2017 figures.

The announcement that it now expects a third-quarter loss pushed Lancashire's shares sharply down at the start of Oct. 8 trading, and they were off nearly 6% as of just after 4 p.m. London time. The announcement came ahead of a scheduled meeting with analysts that day.

Investec analyst Ben Cohen said in a research note that the losses imply a cut of more than 30% to the consensus pretax profit estimate for full year 2018. He added that his company had not forecast a special dividend for the full year, "but much of consensus does, and we think this must be at material risk."

UBS analyst Jonny Urwin said in a research note he had cut his full-year 2018 earnings-per-share estimate by 44% following the news. He is now expecting a 5% dividend yield from the company, compared with his previous 9% estimate.

UBS's "buy" recommendation on Lancashire is based on strong dividend yield support and an improving energy market in 2019, which represents a growth opportunity for the insurer, Urwin said. But he added: "This profit warning erodes [estimated 2018] dividend yield support, which is negative to our thesis."

A volatile business

Urwin was also surprised by the level of losses, saying that although Lancashire's 2013 acquisition of Lloyd's of London insurer Cathedral has brought more volatility to the group's bill for smaller, or attritional, claims, "we did not expect Lancashire to be this exposed in this sort of quarter." Even so, Urwin noted that while the losses were "unhelpful," Lancashire's business model is "inherently more volatile than most in the sector" and so quarterly earnings volatility is a feature, rather than a bug.

In addition to the buildup of windstorm losses, Lancashire is also said to be facing a big bill for a mid-September fire at the Lürssen shipyard in Bremen, Germany. Sources told Re-Insurance.com in September that Lancashire had the largest share, at around 9% or €70 million, of the €590 million building risk insurance policy for the shipyard, where a superyacht under construction was severely damaged in the blaze.

Others agree with Urwin's view of Lancashire's business. Shore Capital analyst Paul De'Ath said in a research note that as a specialist insurer, the company is exposed to global risks and so the losses are "not that surprising."

"Performance such as this in any given quarter is always a possibility and long-term investors should view it as such, in our view," he added.

Investec's Cohen, who has his recommendation on Lancashire under review, said one of the key reasons for investing in Lancashire is "its potential as a takeover target" and that he expected this to "provide some support to the shares."

Lancashire is one of three remaining listed Lloyd's insurers, alongside Beazley PLC and Hiscox Ltd., which also saw their shares fall Oct. 8 on the back of the Lancashire warning. Re-Insurance.com reported that Beazley was carrying 5.5% of the Lürssen risk, while RSA Insurance Group PLC was carrying 6%.

RSA shares fell more than 9% on Sept. 28 after it said its U.K. and London market business produced a third-quarter underwriting loss of £70 million, with its marine portfolio hardest hit. Its shares fell Oct. 8 as well, down 1.7% as of just after 4 p.m. Beazley was off 3.8%, and Hiscox was down 2.3%.