Headline numbers from renewal rates “quite deceiving”, Leadenhall’s Albertini

Insurance and reinsurance linked investment manager, Leadenhall Capital Partners witnessed divergent rate behaviour at 1/1, resulting in a “deceiving” January 2019 renewals period, according to the firm’s Chief Executive Officer (CEO), Luca Albertini.

After two consecutive years of heavy catastrophe losses, insurance, reinsurance and insurance-linked securities (ILS) market participants were hopeful of meaningful rate increases at the January 1^st 2019 renewals.

While improvements were evident in some instances, most notably in loss-affected lines, overall, the renewal has been described by many as disappointing. However, according to Albertini, some of the headline numbers from 1/1 aren’t exactly what they seem.

“I would say the headline numbers from the renewal rates are quite deceiving, because we found a very different rate behaviour depending on where you were in the capital structure,” said Albertini in an interview with Artemis.

According to Albertini, certain factors resulted in the riskier or aggregate investments having had the most significant percentage rate rises, while the less risky layers have experienced the most flattish, small increases.

“First of all, the protection buyers agreed to pay some payback to those invested in the layers that actually lost money, but also the fact that we’re seeing a few investors that traditionally invested in riskier layers, trying to de-risk a bit themselves, which makes some of the less risky layers more covered. That’s what happened.

“But the one point that made the latest renewal the most deceiving, was the fact that the real loss-affected contracts, and I say loss-affected by 2017 and 2018 creep, they still have to renew. And, that is where I guess there is going to be a very interesting tension because there is, of course, a general feeling that the rate increases we got last year were insufficient given the loss we had in 2017, but even more if you combine with the creep in 2018,” said Albertini.

After 2017 catastrophe events, which is one of the costliest cat years on record for the global re/insurance industry, the capital markets showed its commitment to the risk transfer universe. Alternative, or third-party reinsurance capital providers reloaded and the level available for deployment at the 1/1 2018 renewals actually expanded, putting to bed any suggestions that both sponsors and investors might exit the space when losses do occur.

But after a consecutive year of increased catastrophe events and subsequent losses, the ‘great reload’ of last year is not happening, with market players trying to reject two particularly bad years.

“We have grown, but we have grown more with our life business, nothing to do with what happened last year, nothing to do with rate rises,” said Albertini.

Leadenhall, which recently announced an ownership stake shift from MS Amlin to Mitsui Sumitomo, has increased its assets under management (AuM) by nearly 6% to $5.5 billion since June 2018, further cementing its place inside the top ten ILS managers in the world, as shown by the Artemis ILS Investment Managers & Funds Directory.

Prior to 2017, a major (Category 3 or above) hurricane hadn’t made landfall in the U.S. for a decade, so two bad years in a row isn’t anything exceptional but it is having an influence on ILS market dynamics and, of course, there’s always the possibility that 2019 is another above-average year for catastrophe activity.

“Ten years of good years is exceptional, two or three bad years is quite testing but it’s the combination that makes it more or less what is modelled.

“What is happening already is that it is harder to place aggregates, so I think the aggregates are becoming more expensive. When we started it was hard to buy aggregate retro in itself, and we may end up with aggregates becoming less favourable in the future,” said Albertini.

Looking forward, Albertini told Artemis that he doesn’t expect ILS market growth, in terms of volume, to be slower than last year, highlighting the significant amount of capital ready to play once things in the market become clearer and if there is a substantial reduction in capacity.

“So, the reduction is probably down to what’s happened, making sense of it and then continuing. Clearly, some of the money in the past came off a track record that was delivering every year above expected loss returns, and attracted by super low interest rates.

“So, there are some of these factors, and above average growth in the last year that are no longer here, but it’s unlikely that the money would retract in any measure, and if anything, it would expand with the market,” said Albertini.