Lancashire’s growth continues but cat losses again hit third-party capital income

Lancashire Holdings, the specialty insurance and reinsurance group, continued its strong growth trajectory in 2022 with a 35% rise in gross written premiums (GWP), but while the firm’s underwriting performance improved, losses had an impact on its third-party capital management business.

GWP rose, year-on-year, by 35% to $1.7 billion, as net premiums written (NPW) increased from $816 million in 2021 to $1.2 billion in 2022. Since 2017, says the firm, its GWP have increased by almost 280%.

Reinsurance GWP increased by a significant 50.1% to $842 million in 2022, primarily due to new business in the casualty reinsurance class as the firm continues the build out of new product lines within this class.

Lancashire also notes strong growth in property reinsurance, with rates continuing to harden with RPIs of 111%. In specialty reinsurance, all lines of business witnessed small increases in premiums on the back of new business growth.

Reinstatement premiums were $45.1 million for the reinsurance segment in 2022 against $42.8 million a year earlier.

The insurance segment’s GWP rose by 22% year-on-year to $810 million in 2022, with higher premium seen in the majority of insurance classes during the year.

So, Lancashire continued to expand its footprint in 2022 and has taken advantage of organic growth opportunities, as well as improved rates, across many of its product lines.

In terms of outwards reinsurance premiums, the dollar spend increased 13.5%, or by $55.2 million when compared with 2021, although the company says that the proportion of outwards reinsurance premiums to gross premiums written has decreased year-on-year. The higher reinsurance spend is primarily driven by the growth of the inwards portfolio and, to a lesser degree, by an increase in outwards reinstatement premium, explains Lancashire.

During the year, Lancashire’s the net impact of catastrophe, weather and large loss events totalled $308.8 million, excluding the impacts of reinstatement premiums. Of this, catastrophe and weather related losses, excluding reinstatement premiums, were $218.4 million, of which $163.3 million relates to Hurricane Ian.

Additionally, the company’s provision for large risk events for the year amounted to $90.4 million and include $65.8 million related to the ongoing conflict in Ukraine, and $24.6 million from an accumulation of four large losses in the energy upstream and power generation lines of business.

Despite these losses, Lancashire’s combined ratio strengthened from 107.3% in 2021 to 97.7% in 2022, as underwriting income improved from $69 million to $150.8 million.

Overall, however, Lancashire has reported a comprehensive loss of $92.6 million for the full-year 2022, compared with a loss of $92.9 million a year earlier.

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

While it wasn’t a bad year for Lancashire Capital Management, catastrophe loss activity dented its contribution to the company, as was the case last year.

Underwriting fees for the year fell from $10.6 million to $3.1 million, as profit commission decreased from $5.2 million to $0.9 million. At the same time, Lancashire Syndicates’ fees and profit commission increased slightly from $2.4 million to $2.5 million, leading to total income from these third-party capital activities of $6.5 million, which is down on the $18.2 million seen a year earlier.

However, catastrophe loss activity and Lancashire’s share in this, drove a loss of $6.5 million via the firm’s equity share in the third-party vehicle, denting overall contributions from the collateralised retro reinsurance business for the full-year.

The firm notes that the volume of Lancashire Capital Management profit commission recognised is driven by the timing of loss experience, settlement of claims and collateral release and therefore varies year on year.

Alex Maloney, Group Chief Executive Officer (CEO), commented: I’m very pleased to report that Lancashire continued its strong growth trajectory during 2022, increasing gross premiums written year-on-year by 35% to $1.7 billion and delivering a combined ratio of 97.7%. In the five years since 2017 our gross premiums written have increased by almost 280%.

“Our robust underwriting performance in 2022 came against a backdrop of high industry losses and a volatile macroeconomic environment.

“In line with our ‘underwriting comes first’ principle, we have continued to expand our footprint and take full advantage of the organic growth opportunities and rate increases being seen across the majority of our product lines.

“This growth has come from those lines where we have longer-term strength and expertise and from those we have added over the past few years as part of our actions to diversify and fortify our portfolio.

“Traditionally, Lancashire has been seen as an established writer of natural catastrophe risk business meaning that when such events occur it is expected to impact our performance. However, during 2022 we have demonstrated that the growth and diversification of recent years now allows us to absorb significant catastrophe losses, such as hurricane Ian. While this event is estimated to be the second most costly hurricane on record, we have still produced a net underwriting profit.

“This is a notable positive step-change for the business and testament to the clear long-term strategy we have set out.

“Catastrophe and weather related losses for the year, excluding the impacts of reinstatement premiums, were $218.4 million. This includes the impact of hurricane Ian, which was within our expectations for these types of events and at the lower end of the $160 million to $190 million range provided at Q3.

“We previously set aside $22 million for direct claims emanating from the conflict in Ukraine. In Q4, we subsequently revised this to include an additional management margin for any potential indirect claims related to the conflict across a number of classes. Our potential claims related to the conflict now total $65.8 million. Given the nature of the conflict, the ultimate claims relating to the event are subject to a high level of uncertainty.

“On investments, the volatility in the global financial markets and higher interest rates have understandably affected our 2022 investment result, which was negative 3.5% including mark-to- market losses. These losses are largely unrealised and were the most significant driver of the negative change in FCBVS of 6.7% for the year. Going forward, we expect to see higher investment income as a result of the higher interest rate environment.

“From a capital perspective, we held a very strong position throughout the year and we have the necessary headroom to continue to write profitable business, and deliver returns, during what we expect to be a harder market in 2023.

“As we look into 2023, wider capacity constraints – due particularly to the increasing cost of capital and historic loss activity – are expected to give us considerable opportunities to further strengthen our franchise at a time in the cycle of expanding margins.

“I very much look forward to the opportunities for further profitable growth that the next 12 months may bring, and I’d like to thank all of our colleagues for their hard work, and our investors, clients, and their brokers for their support during the past year.”

At the recent January renewals, Lancashire has underwritten a sizeable amount of the business that more typically would have flowed to its Lancashire Capital Management strategy on its own balance-sheet, as the company looked to give certainty to its cedents in a more challenging marketplace.