Specialty insurance and reinsurance group Lancashire Holdings is looking to expand its book in the current hard market conditions, with more property catastrophe risk expected to be underwritten and the firms first foray into underwriting casualty lines in 2021.
Lancashire CEO Alex Maloney explained recently that market conditions have allowed his company to expand its book more meaningfully for the first time in some years.
Lancashire has always had the view that you only underwrite to the opportunity that can deliver the returns its shareholders need, so deploying additional capital hasn’t really been a feature for the company over the last decade.
But in 2020, Maloney explained, “We have been able to respond rapidly to take advantage of the improving (re)insurance market, generating a 15% increase in gross premiums written in the first half of the year.
“In the face of the challenges generated by the COVID-19 pandemic to both sides of the balance sheet, there has been a retrenchment in (re)insurance market risk capital and capacity. In the year to 30 June 2020, we have witnessed double-digit percentage rate increases in many of our lines of business and accelerated rating dislocation in the catastrophe exposed reinsurance lines, resulting in rises in the range of 20%-30% for 1 June renewals in Florida.”
These conditions look set to continue and make Maloney and his team bullish about the underwriting opportunity at this time, seeing many segments of the market as dislocated and even property catastrophe risks as one of the key opportunities, an area Lancashire had shied away from over the prolonged period of softening seen in the last ten years.
“I believe that the economic fundamentals now dictate that this pricing trend is likely to strengthen throughout 2020 and into 2021 across a number of our business lines,” Maloney said, adding that “Current market conditions present an attractive opportunity for growth consistent with our strategy of deploying capital in line with the insurance market cycle.”
Lancashire even raised new equity funds this year, for just this purpose of responding to the underwriting cycle and taking advantage where rates are commensurate with the returns the company seeks.
Maloney said, “We were pleased to have executed a successful equity capital raise as announced on 10 June 2020. We took this step to allow us to deploy capital to take advantage of the growth opportunities presented by the improving pricing environment.”
Maloney further explained that, “In a rapidly changing market, we are seeing attractive opportunities to develop many of our existing lines of business and to establish new ones. Our business is well positioned to grow our underwriting portfolio and to develop opportunities to improve the risk adjusted returns for our business and our investors.”
Lancashire saw significant growth in property catastrophe risks during the second-quarter of 2020, the company said in announcing its half-year results recently.
Speaking during the firms earnings call at the time, CEO Maloney said that, “Catastrophe lines are improving, but other areas require more attention,” as Lancashire still sees the need for more rate increases elsewhere in its portfolio.
CUO Paul Gregory also commented on how rates are firming during the Lancashire earnings call.
“Since 2018, the market has been moving steadily forward, now things have shifted gear and Covid-19 has accelerated the pace of change,” Gregor explained.
Adding that, in the second-quarter, “This momentum has picked up pace.”
Capacity continues to contract in a range of lines of business Gregory said, adding that “Third-party capital in its various guises is also likely to be less abundant in the future.”
All of which adds up to opportunities for underwriters that can raise the capital, originate the business and provide client continuity through a challenging stage in the cycle it seems.
Maloney said that he sees rate increases persisting for a time, as, “Even if hurricane season goes clean I don’t think it will change the momentum. We’ve got ILS capital trapped at the end of the year by Covid-19, casualty line issues, product lines that have been badly priced for years, and the uncertainty of Covid-19.
“If we do get a major hurricane it will complicate an already messy year.”
Developing new business lines is where Lancashire’s venture into casualty lines come in, as the company is set to enter that marketplace in 2021 thanks to a new hire.
“We’re not changing the shape of Lancashire,” Maloney told analysts on the earnings call, but he said the company feels the timing is right for this move into longer-tailed lines.
CUO Gregory said that this is an area of the re/insurance market Lancashire see’s as particularly dislocated and added, “We don’t have that expertise in-house currently, so we’re adding it for 2021.”
“We’ll only add people and teams if we think we can make money over the longer-term and if they fit our underwriting and culture,” Gregory said.
He also explained that Lancashire will be targeting expansion across its platform, in Bermuda, at Lloyd’s and in the company market.
“We’re looking to grow everywhere that we see opportunity. We will be asking for growth at Lloyd’s, but working with them on that,” Gregory said.
That goes for property catastrophe risks too, and it’s, “No surprise we’re expanding our underwriting footprint,” Gregory said, adding that Lancashire has experienced good growth recently, particularly in property catastrophe and property direct.
“As the market continues to improve we will continue to expand,” he added.
Of course, Lancashire also has the ability to raise third-party capital to support such opportunities and it would be interesting to see if the opportunity in property catastrophe risk were large enough to support another Lancashire sidecar, such as the ones the company managed in the past.
The Lancashire Capital Management unit should benefit from all of this expansion as well, with increased access to risk and interesting opportunities emerging for its investors as a result.