We don’t believe all ILS capacity can race back in for 1/1: Maloney, Lancashire

Speaking today, Lancashire holdings CEO Alex Maloney said that it is unlikely that all ILS capacity can race back into the market in time for the key January reinsurance renewals, but explained that his firms Kinesis vehicle will be ready to reload for any opportunities that arise.

Maloney was discussing the state of the market in the wake of the recent major catastrophe losses during the third-quarter earnings call for his firm, specialty insurance and reinsurance group Lancashire Holdings Limited.

Answering questions from analysts, Maloney said that the question over how the ILS market will react and cope with its losses, with the key January 1st reinsurance renewals ahead, “Is something we could debate for hours.”

“But, from what we know, there’s been a lot of impairment in that world and we don’t believe that capital can race back for 1/1,” he continued.

Maloney said that Lancashire is confident in being able to deal with these losses and trade forwards, with capital available to expand should it want to.

“If the market gets really interesting and things get more dislocated than we think, we will deploy more capital if we get paid for it,” he said, continuing, “We will be as nimble with capital on the way up as we will on the way down.”

Paul Gregory, Chief Underwriting Officer at Lancashire, agreed and said that it is the company’s view that January may be a bit of a rushed and late renewal, but that conditions in the reinsurance market should continue to improve beyond that.

“As we move through 2018 the underwriting environment will get progressively better,” he explained.

Maloney said that it is Lloyd’s and the ILS market where the heaviest impairment is likely to be seen, explaining, “Lloyd’s will be heavily, heavily impaired and if you look at the third-party capital space, where those guys are writing retro to make the numbers work, those guys will be heavily impaired.”

Lancashire sees a range of opportunities emerging for the firm as it moves into 2018, with the direct and facultative insurance market likely to be a key area for its Cathedral syndicate at Lloyd’s, which it sees as a key portfolio to build on over the next year.

Gregory said that this portfolio is important to the firm as, “We think there’ll be lots of opportunities in D&F and a lot of room for us to grow there as opportunities manifest themselves.”

Maloney agreed and said, “We are hearing lots of examples of really sloppy underwriting, with PML’s in the Caribbean that are horribly wrong.

“I can’t believe a number of carriers are going to be able to continue to write the cat business they have been and we think that business will come back to the market and be repriced.”

Lancashire hopes to take advantage of any opportunities and is planning to put capital to work at 1/1, rather than return more to its shareholders. This is unlike some other reinsurers which, despite their hopes for higher rates, plan to continue to return excess capital rather than trying to enlarge their market share at this time.

Should Lancashire need to recapitalise at all, after recent losses, the company sees this as being completed through either an equity raise or through the use of reinsurance capital, including third-party through Kinesis.

There is little conflict between Kinesis and Lancashire’s book, as the business Kinesis underwrites does not sit as well on a traditional balance-sheet as it can be capital-intensive. Hence raising more capital for Kinesis to maximise opportunities at this time, to increase the fee income flowing back to Lancashire makes perfect sense.

On the subject of trapped collateral, a major factor in the ILS market, Lancashire sees its Kinesis strategy as not affected, due to the way the vehicle has been structured.

Darren Redhead, CEO of Kinesis Capital Management, explained, “We structured Kinesis slightly differently as we raise money annually.”

He acknowledged that Kinesis will have trapped collateral, but as a fresh fund is raised for each January renewal it is not a case of the trapped collateral meaning less capacity to underwrite, rather that the current years fund will run-off and a new pool of capital raised for the upcoming renewal season.

“One of our thoughts has always been, trapped funds will happen and we will see this happen. That’s why we’ve set Kinesis up as a new fund every year,” Redhead continued, adding, “Unlike competitors who run continuous funds, who will be raising money into existing structures or setting up new funds, we have the flexibility to react quickly.”

Redhead said that Kinesis will raise more capital and grow if the opportunity allows.

“We will be working with our investors to increase the assets under management for 2018,” he said. “It’s all going to be price dependent, yes there will be growth in Kinesis but it depends where the opportunities are seen.”

And on the cedent side, Redhead said, “Existing clients will be the priority, but we will look for new accounts as well.”

He went on to say that capital raised will be either deployed at the prices that Kinesis wants and feels appropriate, or it will be returned to investors, adding, “We’ll look to raise capital to suit the opportunities.”

So, while not all ILS vehicles may be able to raise new capacity as fast as they want for 1/1, Kinesis feels certain that its structure of a single-year vehicle and the area of the market it targets will provide it with the opportunity to raise and deploy more capital at the price breaks it wants to see in the wake of recent loss events.