Florence could tie up retro collateral: Luca Albertini, Leadenhall

As Hurricane Florence bears down on the US East Coast as a category 4 storm, Luca Albertini, CEO and founding partner of Leadenhall Capital Partners warned that regardless of whether it is a market-changing loss, it could trap collateral in retro programmes.

This in and of itself, regardless of whether or not Florence results in a $10 billion-plus loss for the industry, could be enough to harden property catastrophe rates, he thought.

“It is most likely going to be an earnings event based on what we see now,” he told Artemis during an interview at the Rendez-Vous de Septembre. “What if this year a material part of the retro programmes are held again. It may not even trigger a loss throughout the retro programmes, but could tie up collateral.”

“So if you have an investor who last year reloaded and this year you say, ‘your collateral is trapped’ there could be less enthusiasm to come back. And that would lead to a real pricing cycle.”

Referring to the merger between Nephila and Markel, Albertini quipped that he would crack a joke to Nephila’s Frank Majors that “finally he thinks the same as me on the business model.”

Leadenhall has operated a joint venture with reinsurance company MS Amlin since it was set up in 2008, with MS Amlin increasing its stake in the ILS fund manager to 75% in 2014.

“When I started my business I always felt the independent model lacked on two points,” he said. “One is the breadth and depth of the analytics and the understanding of the risk that you get from your reinsurance partner. And the second is the fact you need a lot of support from traditional partnerships to transact in this market.”

“So if you can manage the conflict of interest, which is the only drawback of the model where you have third-party capital sitting side-by-side with traditional reinsurance, and you can address those conflicts in a pretty easy way, it is the winning model.”

Addressing the capital reload in the aftermath of last year’s major catastrophes, Albertini noted that some investors “were probably disappointed” by the relatively muted rate increases in property catastrophe reinsurance.

“Most commentators are saying, ‘it’s not as much as we wanted’, but there has been an increase and so better returns than before. Last year I did predict that it could temper investor appetite if the losses were not properly rewarded, so maybe the opportunistic component on the reload will no longer be there going forward.”

Albertini revealed he was less opportunistic “in the short to medium term” about the sector’s ability to reload as bullishly as it did in Q3 and Q4 2017 given the loss creep issues that are still being resolved.

“I don’t want to put out alarm bells it’s just that new investors will be trying to understand the history before they make an investment this year. I hope we’re getting there but I think the development of this hurricane [Irma] is longer than the average hurricane.”

“It’s nobody’s fault,” he continued. “It’s just taking a bit more time and we haven’t had a major cat for many, many years, and now there are new loss adjustment techniques and requirements and legal tools available to claimants – so all of that is having an impact.”

“Maybe it is a good test to understand the real implications so that this will be a properly priced risk in the future,” he added. “What used to be a loss adjusting expense is different now and it’s about making sure the assumption is built into the pricing.”

It’s still too early to know the real impact of the loss creep on third-party capital behaviour, said Albertini, but it would probably become clear towards the end of 2018 and that it was important that lessons were learnt. “For people who rely on third-party capital to ignore some components of the loss in the pricing would be short-sighted,” he concluded.