The insurance and reinsurance market looks increasingly disciplined and as a result Lancashire Holdings has taken some opportunities to grow in the first-quarter and expects this discipline to persist, driving further improvements in risk pricing, CEO Alex Maloney said today.
Lancashire Holdings reported that it has set up a reserve of $35 million for potential losses due to the Covid-19 pandemic this morning, after reinsurance and reinstatement premiums, based on a review of its book and potential exposures from the first-quarter.
It said these are “principally in relation to our property segment” and explained the uncertainty associated with the situation, saying “our final COVID-19-related losses may be materially different from those booked to date.”
In addition, the company explained that it has minimal exposure to event cancellation coverages, plus does not underwrite other lines expected to be affected such as travel, trade credit etc.
“The Group has more than adequate liquidity and solvency headroom and management will continue to monitor and regularly review the longer term impact of the COVID-19 pandemic on the Group,” the company further explained.
An additional concern could be demand going forwards due to the global economic hit caused by the pandemic and given Lancashire’s specialty reinsurance and insurance focus.
But Chief Executive Officer Alex Maloney explained, “Whilst we expect economic challenges for clients in a number of sectors, including aviation, marine and energy, we have thus far seen demand hold up in many of our business classes.”
Maloney said that business continues as usual right now and said that Lancashire’s trading activities have been uninterrupted by the global crisis.
The Lancashire CEO has always said that Lancashire would only look to grow into areas of the market where disciplined pricing is being seen and where that pricing is commensurate with the risks and making a profit from the underwriting of them.
So it is notable that Lancashire has increased its premiums at and around the January 2020 reinsurance renewal season by 12%.
“Looking at the developments during the first quarter, the January 2020 renewal season saw an increase in our year on year premium income of about 12% and an RPI of 108%,” Maloney explained.
Adding, “This is evidence of improved market discipline and, with the recent stress to many insurance industry balance sheets, we consider that the need for improved risk pricing will continue during 2020.”
These are positive comments from the Lancashire CEO, who is often one of the last to be impressed by talk of market firming, preferring to see the evidence in his underwriting teams abilities to deploy more capital at rates meeting the companies strict targets.
Every time Lancashire finds opportunities for profitable growth, so too tends to its Lancashire Capital Management unit, the third-party collateralised reinsurance arm that underwrites a multi-class, specialty and property catastrophe focused product used as retrocession by major reinsurance firms.
As Lancashire discovers better underwriting conditions that provide it with opportunities for growth, Lancashire Capital Management and its investors tend to benefit from these market conditions as well.
As we explained before, Lancashire Capital Management Limited grew roughly 20% during 2019, entering the 2020 renewal season with somewhere north of an estimated $600 million of limit available to deploy.
Given the premium growth at the parent company at a much improved renewal price index (RPI), it’s safe to assume the third-party capital collateralised business of Lancashire Capital Management has constructed a portfolio with higher return potential for 2020.
Lancashire has noted some weather and single risk losses during the first-quarter, saying that Q1 2020 was more active than the prior year.
So there is the potential for the Lancashire Capital Management unit to have shared in some of this first-quarter exposure, we assume, however it does not sound like it was particularly significant for the company overall.
Lancashire is always a good bellwether for market conditions and Maloney is rarely bullish about pricing unless the firm really feels more price improvements are ahead.