Lancashire grows P&C reinsurance 100%, losses dent third-party capital income

Specialty insurance and reinsurance group Lancashire Holdings continued its story of expansion through full-year 2021, reporting a doubling in the size of its property and casualty reinsurance book over the course of the year.

But the high levels of natural catastrophes and severe weather losses meant that Lancashire has reported an loss for the year and this had a knock-on effect for its third-party capital management business, Lancashire Capital Management.

Overall gross premiums increased by 50% across the Lancashire business in 2021 as the company took advantage of firer pricing and some of the best underwriting market conditions in years.

P&C reinsurance premiums grew by 100% over the year, while insurance grew 43%, aviation 17%, energy 28% and marine 2.2%.

This rapid expansion in P&C reinsurance will have also provided opportunities to the Lancashire Capital Management, third-party capital collateralised reinsurance underwriting arm of the company throughout the year as well.

Overall though, $306.4 million of weather and large loss events drove Lancashire’s full-year 2021 combined ratio to 107.3%.

That drove the company to report a loss for the year of $92.9 million.

Alex Maloney, Group Chief Executive Officer, commented on the year, “2021 saw Lancashire successfully continue the long-term build-out of its franchise and expand into a number of new classes, with gross premiums written increasing by 50%. Much of this premium will continue to earn through in 2022 and is expected to provide earnings resilience in future years. Delivery against this aspect of our strategy means we are well-positioned for profitable growth in the most attractive market conditions of recent years.

“However, 2021 was also a poor one for returns. With Winter Storm Uri, hurricane Ida, European storms and floods, and Midwest U.S. tornadoes, among others, industry-wide estimates place insured losses from natural catastrophes between $105 billion and $130 billion making it one of the costliest years on record. These events show the critical role the industry plays in delivering risk solutions that protect people, economies, and businesses from uncertainty. When the worst happens, it means disruption and hardship for many and we recognise the human impacts these events have.

“Financial losses are always disappointing but 2021 was only the second full financial year that Lancashire made an overall loss since its inception. Strong underlying profitability after nearly four years of rate increases, as illustrated by improvement in our attritional loss ratio, was offset by weather and large risk events during the year. Given the magnitude and frequency of industry losses in 2021, these insurance losses were in line with our expectations and risk tolerances. Importantly, we have followed our usual conservative reserving philosophy to estimate the impact, which has served us well over time.

“Nevertheless, the overall impact of these events was a comprehensive loss of $92.9 million, a combined ratio of 107.3%, and a negative change in FCBVS of 5.8% for the year. Of this comprehensive loss $31.6 million relates to unrealised investment losses.

“Despite the disappointing returns of the past year, we are fully energised by the prospects for 2022 and profitable growth remains our main goal.

“Our strong capital position allows us to execute our ambitious business plans in which we expect further rate increases on our existing portfolio, with new underwriting teams delivering additional premiums and new business growth within both our catastrophe and non-catastrophe lines.”

Gross premiums over the year reached $1.2 billion for Lancashire, as the company continued to deploy capital into the improved market conditions.

Lancashire’s goal is to maximise the underwriting opportunity and the growth and expansion really reflected this in 2021, with a greatly enlarged book created and a strong runway built to continue to add scale.

The company expanded its business into both property catastrophe and property retrocession lines, using the new capital it had raised for 2021, where it said the rating environment continued to improve in 2021.

Lancashire has also retained more risk in 2021, although its own outwards reinsurance and retro spend rose 39% or $114 million for the year.

Net losses came out at $470.5 million for the year, which was the factor that drove the overall loss, as the elevated levels of severe weather and catastrophe events dented returns for the company.

At Lancashire Capital Management Limited, the third-party capital collateralised reinsurance underwriting arm, 2021 was a positive year in many ways, although catastrophe loss activity dented its contribution to the company.

Underwriting fees for the year rose slightly to $10.6 million for 2021, while profit commissions realised soared 189% to $5.2 million for the year, providing overall growth in third-party capital related fee income of 34% for the year from the collateralised retro reinsurance products.

But the catastrophe loss activity and Lancashire’s share in this, drove a loss of $3.9 million via the firms equity share in the third-party vehicle, denting overall contributions from the collateralised retro reinsurance business for the full-year.

Lancashire said that the loss, in terms of its equity interest in Lancashire Capital Management, was primarily driven by natural catastrophe losses from the first and third quarters of 2021.

Some additional value may flow back to Lancashire from the third-party capital arm over the coming year, we’d imagine.

But the increase in underwriting fees and profit commissions is reflective of the growth in the Lancashire Capital Management strategy over recent years and given the parent companies expansion in 2021, the unit should be in a strong position for 2022.

It’s also worth noting that the LCM vehicle tends to realise profits from prior years, as collateral can be unlocked and that may happen again after the major loss activity of 2021.

With a larger, stronger book underwritten and clear opportunities for its multi-class collateralised reinsurance product through 2022, especially in the challenged retro market, the third-party capital unit should continue to build its results potential for the company through 2022 and deliver an enlarged contribution, catastrophe losses allowing.