There is evidence that the insurance and reinsurance market is going through a transition right now, according to Lancashire Holdings CEO Alex Maloney.
After the consecutive years of softening rates across many areas of insurance and reinsurance, followed by two years of challenging catastrophe losses that have hit certain areas of the industry particularly hard, a lot of the commentary coming out of the end of Q1 2019 reporting season suggests that the market turn may be more persistent than at first thought.
When rates began to turn at the start of the year and promised to even accelerate into the mid-year, the expectation was that appetite and weight of capital would return, eventually pressuring rates once again.
But many are hoping for something more long-lasting, in terms of rate firming. Now whether this is wishful thinking remains to be seen, but underwriters are so far sticking to their guns as evidenced by the increasingly complex situation unfolding for the mid-year renewals.
Maloney said this morning that Lancashire’s performance so far in 2019 has been, “encouraging, with rate and business momentum,” adding that underwriting margins remain “in line with our expectations.”
Lancashire had been pulling back for a number of years in some areas of the market, but rates in 2019 have instilled a little more confidence and given the firm the ability to grow its book once again.
Not everywhere, we should add, as the pull-back in energy lines continued at Lancashire in Q1 2019, as the firm found rates harder to justify.
But overall, the outlook from Maloney for his firm is much more positive thanks to the improved rate environment and the CEO has more confidence in the industries willingness to hold onto such gains, it seems.
“There is evidence that the insurance and reinsurance markets in which we operate are now going through a period of transition,” Maloney explained.
Going on to say that, “The heavy global insured losses sustained by the markets over the last 24 months have demonstrated that premium levels in many classes had fallen too low. However, we are now beginning to see early signs of greater market discipline.”
This has delivered opportunities for Lancashire to expand some of its underwriting books and these opportunities have also extended themselves to the companies Kinesis Capital Management unit, the third-party collateralized reinsurance arm that underwrites a multi-class, specialty and property catastrophe focused product used as retrocession by major reinsurance firms.
As Lancashire itself generates more opportunities for growth, Kinesis and its investors will benefit too.
Kinesis had already grown its assets under management by around 20% year-on-year, but it’s likely the third-party capital unit will find opportunities to grow again at the mid-year, as rates allow.
Maloney commented, “Lancashire prides itself on its ability to manage the challenges of the insurance cycle through a combination of careful risk selection, planning and nimble capital management, all key pillars of our strategy. The Group has demonstrated its ability to respond flexibly to market conditions and take advantage of opportunities as they present themselves. In particular, we have been able to strengthen our presence and premium income in our specialty lines. Whilst pricing in our property reinsurance classes remains subdued outside of loss impacted territories, we believe that we have the expertise to develop profitable opportunities across our platforms and portfolios in this period of transition.”
The company no longer breaks out Kinesis related performance fees in Q1 and Q3 reporting, having shifted to a trading statement at these junctures.
But we hope to gain greater visibility of its progress once again in later quarters, or through managements commentary later today.
The transition that Maloney refers to is helping underwriting focused firms to grow steadily and at higher margin levels that meet their costs-of-capital, in the main.
As a result, now is the time for book growth for these players, meaning now is also the time for investors looking to partner up with ILS specialists to tap into the insurance-linked securities (ILS) markets ability to deliver relatively uncorrelated returns.
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