Lancashire Capital Management Limited, the third-party capital collateralised reinsurance underwriting arm of specialty insurance and reinsurance group Lancashire Holdings Limited, expects to deliver an impressive mid-teen return to its investors from its investment strategy for 2019.
Reflective of a year when rates were increasing and catastrophe losses and large risk losses were lower, the Lancashire Capital Management strategy performed strongly it seems, with investors set to benefit from this and Lancashire also set to reap the rewards in terms of profit commissions earned over the coming quarters.
Lancashire’s now rebranded third-party capital management and collateralised reinsurance underwriting unit delivered increased fees to its parent for 2019, as we explained earlier today.
Speaking during the Lancashire Holdings earnings call today, Darren Redhead, CEO of Lancashire Capital Management, explained, “We had a good year and we’re anticipating mid-teen returns net to investors and the profit commission from this will turn up later in 2020.”
Discussing the state of the insurance-linked securities (ILS) and alternative reinsurance capital market around the January renewals, Redhead said that while ILS capital was dented this didn’t impact Lancashire’s activities in the space.
“Alternative capital was down -7% to -10%, in our view down more than that if you take into account trapped collateral,” he explained.
Adding that, when it comes to the impact of loss creep on the ILS market, investors are just keen to ensure that they are getting paid for the risk they take and that his teams approach to investor communication has helped them in recent years, saying, “We’ve benefited from full disclosure to our investors over the past few years, which some others have struggled with.”
Lancashire Capital Management’s performance related fee income tends to lag behind typical management fees, so the benefits of a mid-teen year may not be seen in the Lancashire results until later in 2020 and into 2021 as well.
But a mid-teen return, at higher levels of reinsurance limit deployed after the Lancashire Capital Management team raised some more funds for 2019 underwriting, along with the effects of higher pricing in the retrocession market in general, should mean the performance commissions earned are a healthy boost to Lancashire when they are accounted for.
Discussing progress at Lancashire Capital Management, Paul Gregory, the Chief Underwriting Officer of Lancashire, said that the unit has benefited from market conditions.
“We increased limits deployed at Lancashire Capital Management for the second consecutive year in 2019 and increased limits deployed at the January renewals as well,” he commented during the call.
That suggests higher assets under management at Lancashire Capital Management after the key 1/1 2020 renewal season, which should bode well for higher underwriting management fees over the course of this year, which will be boosted by the performance fees from 2019 as the year progresses.
All in all it looks like a healthy year 2019 and a potentially healthy 2020 as well for Lancashire’s collateralised reinsurance play Lancashire Capital Management.
As it continues to steadily grow and delivers such attractive investor returns in the mid-teens, the increased assets and limit deployed as well as performance commissions will in turn see the fee income contribution to its parent increasing as well.