Lancashire double-down and focus in challenging reinsurance market

by Artemis on May 19, 2015

There’s a lot of talk about innovation, new business models, alternative capital, start-ups and external investors in the insurance and reinsurance market right now, but there is another way to navigate the challenging market environment.

Insurance and reinsurance firm Lancashire is one that is refusing to be distracted by the noise surrounding this challenging market environment, with its attitude being to double-down and focus on what it is good at.

That’s being the best at underwriting, according to CEO Alex Maloney.

Maloney acknowledges that the reinsurance market is a challenging place to do business right now, but notes that this is to be expected, as the market is cyclical by its very nature.

“I think that underwriters can forget that our business is cyclical and in our opinion always will be, so we just have to deal with the current environment until things improve,” Maloney told analysts during Lancashire’s recent first-quarter earnings call.

“There is no point spending all your efforts complaining about it,” Maloney continued, adding that while other companies may attempt to underwrite their way around or out of a soft market and still more try to innovate their way out of a challenging environment, Lancashire, he said, will not do that.

“All we’ve focused on is being the very best underwriters we can be, with relentless risk selection and adjusting the risk we are carrying versus the opportunity we see,” Maloney explained.

Maloney perhaps undersells the Lancashire proposition a little here, as the firm is clearly innovative in nature and always has been, creating products that meet market needs, as evidenced by its third-party reinsurance capital unit Kinesis.

However the firm is perhaps best known for being a stickler for underwriting process and also a tough negotiator, traits which can make having Lancashire on your panel of capacity providers a positive thing for cedents.

Maloney continued, saying that the change seen in the re/insurance market has perhaps been quicker than anyone had foreseen. However some things don’t change no matter how challenging things become, he noted, “the fundamentals remain the same.”

“You have to add value to survive,” Maloney said. “Quality companies with established books of business and the best underwriters have the best chance to continue to provide acceptable returns for their shareholders. And I’m confident we’re still in the top tier of companies for our areas of expertise.”

“We will continue to be disciplined and stick to the areas where we feel we can add genuine value. We accept that we can’t swim against the tide, but we can take advantage of it,” Maloney explained.

He went on to say that Lancashire too finds opportunities in the market that can help it to optimise the returns for investors, taking advantage of “the best reinsurance market we have seen in 10 years” to lower its risk levels.

Interesting comments from Lancashire. The firm is a clear specialist in certain areas of the reinsurance market and offers some unique products that find it partnering with some of the larger cedents, that of course positions it well to find demand for its capacity.

So by doubling-down and focusing on where it knows it has an edge the firm can perhaps navigate the challenges of the softer market environment and excess capacity better than some. It won’t make the firm immune of course, no one is, but there is certainly something to be said for maintaining a strict focus on what works and not getting distracted.

Maloney noted in Lancashire’s first-quarter earnings release that the market might be showing signs of leveling off in terms of pricing, but that capacity continues to apply pressure.

“Whilst there is some evidence of a floor being reached in catastrophe bond and ILW pricing, there continues to be a glut of capacity with significant over-supply in every area.” he said.

“As an incumbent market on our core portfolio with significant and well-recognised leadership capabilities, we believe Lancashire is better positioned than many of our competitors. However we are not complacent and are working hard to stay close to our clients and brokers,” Maloney explained.

And there’s evidence that the strategy taken by Lancashire is working, Maloney said; “I’m pleased to say that, due to our line size and leadership capabilities, we are maintaining our shares and seeing our renewals.”

Lancashire is also taking advantage of opportunities to reinsurer some of its portfolio with markets that do not get to see the risks at renewal time. That probably results in quite favourable pricing and helps Lancashire to reduce its overall exposure even further.

“We always talk about managing the cycle and that’s just what we’re doing, bringing exposures down and taking tail volatility out of the portfolio as the risk/reward balance deteriorates. And the numerous facultative opportunities to reinsure parts of our exposure to those markets that are not able to access the original business provide additional risk and pricing mitigation strategies,” Maloney said on being better protected.

Finally, on M&A, Maloney explained that Lancashire stands ready to snap up teams or individuals that fit its needs, particularly on the specialist underwriter side.

“We are alive to the possibilities to bring in new underwriters or teams as the effects of M&A displace or displease talented people. But in general we are biding our time and sticking to the lines and classes we know best. Benign loss environments do not persist forever and we feel well prepared for any change in the market,” he said.

Lancashire may just be a lesson for some other firms that have rushed to expand, innovate, merge, acquire, or that are trying to underwrite around the softened market environment. There may be a very strong case for carrying on regardless, while maintaining discipline and providing the service your clients have always expected from you, rather than running scared in a challenging environment.

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