Investors “supportive” but attracting new ones is challenging – Redhead

Investors backing Lancashire Holdings third-party reinsurance and retrocession capital manager Lancashire Capital Management are being “supportive” as the key January renewals approach, according to the units CEO Darren Redhead.

Asked about the environment for raising new capital for collateralised or ILS vehicles during the Lancashire Holdings quarterly earnings call last week, Redhead explained that the environment remains challenging.

Redhead leads the specialist third-party capital management and collateralised reinsurance underwriting arm of the specialty insurance and reinsurance group, with Lancashire Capital Management (LCM) underwriting a unique fully collateralised and multi-class reinsurance product that is used as retro by major players.

Redhead explained that Lancashire Capital Management (LCM) has a supportive investor-base already, implying perhaps that they will support any need for increased capacity to take advantage of the opportunities available at 1/1 renewals.

“Existing investors are very supportive of where we are and the target returns,” Redhead explained.

But he acknowledged the difficult fund-raising environment the insurance-linked securities (ILS) market is currently facing, saying that, “Getting new investors is challenging. Not impossible, but very challenging for the sector as a whole.”

The comment is reflective of the ILS market as a whole, where investors that have already allocated to reinsurance and are familiar with the sector, or that have already completed research and due-diligence, are in many cases ready and looking to deploy more capital into the firming market.

But for those investors still gaining an appreciate for the ILS asset class, or who have not done due-diligence yet, getting them over the line in the currently uncertain environment is going to be much harder.

For Lancashire as a whole, the reinsurance market and the hardening rate environment presents opportunities for both its collateralised capacity and also its rated balance-sheet.

CUO of Lancashire Paul Gregory explained that retrocession is one area where Lancashire could look to do more at the renewals next year.

“We do a write a lot of retro through LCM and we feel in a reasonably good spot there, given the context of the market,” Gregory explained, referring to the collateralised retrocession side of the Lancashire business.

“But as retro rates improve, then it’s something we’ll certainly be looking to underwrite through the rated carrier, particularly the platform in Bermuda as well as we move into 1/1.

“We have the ability to do that and have done that many times in the past,” Gregory said.

Which suggests that Lancashire may look to become a bigger player in the global retrocession market at 1/1, using both third-party collateralised and rated underwriting paper.

Gregory added that it isn’t just a question of directing clients to Lancashire’s own balance-sheet, saying, “The preference is we’ll do both, ultimately it will be a clients decision as to what paper they want and we have the ability to offer them both.”

Redhead also noted that this gives Lancashire optionality and a broader product offering in retro, saying that, “Both entities sell slightly different products as well, so it will be what the client chooses as the product they want.”