Lancashire Holdings, the specialty insurance and reinsurance group with a third-party capital management platform, is set to raise around $365 million through a share placement, citing opportunities in the currently hardening market environment.
Lancashire says that its long-term strategy is to deploy more capital into a “hardening” market and today’s market environment qualifies for the company, as it launched an equity raise today.
Our sister publication Reinsurance News has all the details here, but to summarise the company is looking to raise up to $365 million through a new placing of shares that it says won’t exceed 19.5% of the firm’s existing issued share capital.
Update, Jun 10th: Lancashire successfully raised UK £277 million, which is around US $354 million from its share placing, which represents a discount of around 3.6% to the closing share price of 726 pence on 9 June 2020.
The company is clearly bullish about market conditions and Lancashire has always been very clear that it would only raise more capital as and when the opportunities existed to make it worthwhile and prudent to do so.
So with Lancashire stepping forward to raise capital today, it does raise the question of who will be next?
We’ve already seen RenaissanceRe, Hiscox and Beazley raise capital, while numerous other capital raising efforts are underway, from the sidecar market, to start-ups, to run-off, fronting, as well as debt capital raises from incumbents and more.
Capital is king right now and in some cases it seems to be at any cost.
But that’s not the case in these public share issues of listed players like Lancashire, where the market will support its need for capital and it can be raised at the least onerous terms.
Lancashire says it will use the proceeds to fund organic growth and to take advantage of new opportunities it is seeing.
This includes in property catastrophe reinsurance, where the company cites a successful June renewal with rate increases of 20% to 30% in Florida.
In addition, Lancashire said that, “The rapid increase in rates and dislocation in reinsurance and retrocession markets that are currently being witnessed imply a return to a traditional “hard” market over the next six to 12 months.”
As a result it feels the time is now to raise more capital to take advantage of this and be ready to assume opportunities that come along.
Recent dynamics from the pandemic have driven the final firming wedge in to lift rates more considerably, it seems.
“Most significantly, the recent COVID-19 pandemic has generated (re)insurance market losses both in terms of the claims environment and the negative impact on the investment markets. In the face of these challenges there has been a retrenchment in (re)insurance market risk capital and capacity. This in turn has led recently to continued rate increases in many of the Group’s core insurance segments and accelerated rating dislocation in the catastrophe exposed reinsurance lines,” Lancashire explained.
What’s interesting to us is the opportunity for the 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.
Lancashire Capital Management has the ability to make so-called ‘special draws’ from investors as the year progresses, enabling it to respond to market conditions and take advantage of them to raise additional funds and deploy more limit, should it see the potential to do so.
Right now, with parent company Lancashire out raising a relatively large sum to capitalise on market conditions, at a time when the retrocession market has been squeezed and is being called dislocated, you’ve got to imagine that the opportunity exists on the collateralised side for Lancashire Capital Management as well.
We’d assume that products like the very bespoke ones that Lancashire Capital Management offers in the retro reinsurance market are seeing more demand right now, while at the same time the pricing must have risen considerably as well.
We know that the unit could have the option to draw more capital down around this mid-year renewal period, but it is likely the real opportunity could come towards the end of this year as the true impacts of Covid-19 on ILS collateral, particularly retro, become clearer.