Lancashire “encouraged” by improving discipline & pricing: CEO Maloney

Lancashire Holdings is “encouraged” by the evidence of improvements in discipline and pricing across the insurance and reinsurance market, according to its CEO Alex Maloney.

The global specialty focused insurance and reinsurance firm reported its results today, along with the CEO giving his view on how the market is responding to the challenges of back-to-back loss years.

Lancashire reported strong book growth, as gross premiums expanded to $429.6 million for the first-half, from $392.5 million in the prior year, but net operating profit fell to $42.9 million, down from $78.3 million.

It seems this was largely due to an increase in the combined ratio, but not all due to loss creep in the latest quarter as the company did report overall net favourable development of its prior year claims, although some adverse development on the 2018 accident year due to late reporting of claims.

However the comparison is a difficult one, as the first-half of 2018 was not a heavy loss period for the firm, so that H1 delivered naturally higher results. A higher net loss ratio and accident year loss ratio, as well as seemingly lower reserve releases, for H1 2019 dented the results compared to the prior year.

Return on equity was actually up, at 6.9% for the half-year (from 5.9% in H1 2018), but operating RoE fell to 3.9% (down from 6.9%).

Maloney commented on the results and the state of the market, saying, “I am pleased with our performance in the first half of 2019. I am also encouraged by the emerging evidence that the (re)insurance market is now experiencing the long anticipated improvements in discipline and pricing in many of the Group’s core business lines.

“We have seen good new business momentum in the first half of 2019, as we were able to benefit from our longstanding disciplined underwriting approach. In the face of a more cautious underwriting environment and evidence of market retrenchment in the specialty lines in which we write, we were able to take advantage of improving terms and demand.”

Lancashire is among the firms that has been able to expand, as there has been a pull-back from some markets that were particularly badly hit in recent years.

It’s likely the firm also benefited at Lloyd’s and will have been able to take advantage of gaps in availability of coverage created by the performance review actions there.

Maloney continued, explaining the loss activity impacts that Lancashire felt, “While the market overall was characterised by a number of attritional losses in the first half of 2019 and substantial loss creep on prior year events, it is worth noting that our ultimate net loss estimates for the 2018 and 2017 catastrophe events have remained largely stable, allowing us to deliver a solid combined ratio of 86.6% for the half year.”

Elaine Whelan, Group Chief Financial Officer, added, “The Group produced an RoE of 6.9% with a combined ratio of 86.6%. While we experienced some adverse development on the 2018 accident year due to some late reported claims, we had overall net favourable development on prior accident years. In addition, there were no major losses in the first six months of the year.”

Adding on the renewals, “Our renewals went well and were in line with expectations. We have seen some growth across several lines of business, including the new lines that we added last year. We continue to remain well capitalised to take advantage of the opportunities we see for the remainder of the year.”

In terms of where Lancashire has been taking advantage of better pricing, the company said it underwrote 14% more property business, 15% more marine, 39% more aviation and 12% more at Lloyd’s, while its energy book shrank 11% in the first-half of the year.

The company said it experienced rate and exposure increases in property, adding that at the renewals, “There was also new business across several lines of business particularly in the political risk and property catastrophe lines of business, including some new opportunities in the Florida market.”

Lancashire also purchased more cover for itself, to shore up its positions in new lines of business, ceding $48.5 million or almost 31% more over the course of the first-half compared to the prior year.

Whelan said on the renewals, “Our renewals went well and were in line with expectations. We have seen some growth across several lines of business, including the new lines that we added last year. We continue to remain well capitalised to take advantage of the opportunities we see for the remainder of the year.”

Encouragingly for Kinesis Capital Management unit, the third-party collateralized reinsurance arm of Lancashire that underwrites a multi-class, specialty and property catastrophe focused product used as retrocession by major reinsurance firms, the fact prior year losses developed positively will likely prove a benefit over time.

As Lancashire generates more opportunities for growth, as seen this first-half, Kinesis and its third-party ILS investors will benefit too.

Kinesis grew its assets under management by around 20% year-on-year at the start of 2019, and has been seeing more opportunities due to market conditions, especially in retrocession.

As a result, the third-party capital unit may have found additional opportunities to grow at the mid-year as well.

Lancashire reported its Kinesis fees at the half-year, having stopped breaking them out in reporting at Q’s 1 and 3.

Kinesis underwriting fee income is reported as $1.9 million for the first-half, down very slightly on $2 million reported in H1 2018.

Kinesis also delivered a $0.1 million share of profits to Lancashire in the first-half, much better than the -$2.4 million share of losses that Lancashire took in H1 2018 and the first profits in a while.

That suggests an improving position at Kinesis, as it deals with the impacts of its losses from the 2017 and 2018 underwriting year and some positive performance flows through from the current year.

We should see that increase again at the end of the year, loss activity allowing, as Kinesis may get the chance to free up some trapped collateral as well as deliver on full-year profits at that time.

No profit commission came from the 2017 and 2018 underwriting years, as you’d expect, given the heavy loss activity there.

But with more assets under management in 2019 and the better pricing environment, it’s likely that the 2019 portfolio that Kinesis has underwritten will be well-positioned to deliver returns to its investors, loss activity allowing.

The positive outlook continued from Maloney who said, “Looking ahead, the recent evidence of better market discipline and pricing will take time to feed through to our bottom line. However, I believe that we have the talent and capability to capitalise on the next stage of the (re)insurance cycle, and our strategy has positioned us well to maximise the improving underwriting opportunity.”