Discussing the challenges faced in the insurance-linked securities (ILS) market as a result of the Covid-19 pandemic today, Darren Redhead, CEO of Lancashire Capital Management, explained how his unit is relatively insulated from issues related to redemption that some others in the ILS space have faced.
Redhead leads the specialist third-party capital management and collateralised reinsurance underwriting arm of specialty insurance and reinsurance group Lancashire Holdings and was asked about his thoughts on what the future holds, under the shadow of Covid-19.
As we explained earlier today, Lancashire Capital Management (LCM) delivered a higher level of fee income to its parent company in the first-half of this year, as profits of the unit have risen alongside increases in its assets under management and ability to deploy limits into collateralised reinsurance deals.
LCM underwrites a unique fully collateralised and multi-class reinsurance product and draws its main inflows from investors annually, which helps to make it better protected from investor capital flight.
The capital market and investment market volatility driven by the Covid-19 pandemic has resulted in some investor redemptions or downsizing of allocations from investors at some ILS funds through the first-half of the year, as institutions shift their focus to target returns from other asset classes at this time.
Redhead, speaking today during the Lancashire Holdings half-year earnings call, explained that LCM is, “Kind of insulated from that, as we raise the money annually,” adding that on his investor-base, “Most of them, for us, have an appetite to go forwards.”
He explained that it’s too early to forecast precisely how Covid-19 could impact the insurance-linked securities (ILS) space in general, as it will take time for losses to be realised.
Lancashire has said before that the company expects some ILS capital will be trapped towards the end of 2020 due to the Covid-19 loss threat, but given the LCM product strategy it is possible the company could avoid much of this issue, given its multi-class and retrocession focus, although being retro it also adds uncertainty given the one-step further removed nature of the portfolios covered.
It reflects the significant uncertainty facing collateralised reinsurance and ILS funds at this time, as there is still little clarity over how many calls for collateral to be trapped they could receive as 2020 unwinds towards the end of the year and cedents make their requests to hold onto coverage that they believe could be exposed.
In terms of the prospects for growth in ILS and at LCM, Redhead said that, “It’s all going to depend on investor appetite.”
But, at the very least, Redhead expects his unit will go into 2021 renewals in January, when LCM underwrites a significant proportion of its business, with a similar level of capital available as it has at this time.
“The initial expectation would be that LCM writes at least the same limit into 2021,” Redhead said.
Given the differentiated nature of LCM’s multi-class collateralised product, once investor appetite does recover from the dent caused by the pandemic it is likely to prove an area of attraction to them, as it will be benefiting from the rate hardening seen across reinsurance and retrocession at this time.