Lancashire’s third-party capital fees rise as transition to “harder stage of cycle” begins

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Specialty insurance and reinsurance group Lancashire Holdings Limited has benefited from higher fees within its now rebranded third-party capital collateralised reinsurance underwriting arm Lancashire Capital Management Limited, a reflection of increasing assets under management.

Lancashire Capital Management logoThis coincides with the improvement in pricing in the global reinsurance and retrocession market, which CEO of Lancashire Alex Maloney highlighted this morning as “early evidence of the transition to the harder stage of the cycle.”

Lancashire rebranded its third-party capital and collateralised reinsurance offering from Kinesis as of the January 2020 renewals, aligning its products and capital management offering with the rest of the business.

Evidence of further growth in terms of assets under management at the Lancashire Capital Management unit emerged, as underwriting fees reported by this unit rose year-on-year to reach $7.9 million for the year in 2019, an increase from $6.6 million in 2018.

At the same time profit commission also returned, as Lancashire Capital Management clearly had a more profitable year in 2019, in terms of returns from its portfolio of risk.

The unit earned $1 million of profit commission in 2019, up from zero in the prior year.

Lancashire Capital Management underwrites a multi-class, specialty and property catastrophe focused product used as retrocession by major reinsurance firms, leveraging third-party capital from institutional investors.

It’s a relatively unique product in the market and one that will be benefiting from the crunch in general retro capacity and disappearance of key retrocession strategies, so able to capitalise in rising retro rates at the renewals.

The improvement in underwriting fees at the Lancashire Capital Management unit is reflective of higher assets managed, as the company says that in 2019 it reflects an “increased level of premiums under management compared to 2018.”

The fact profit commission has bounced back is also a positive, as significant catastrophe loss activity meant the unit did not earn any in 2017 and 2018.

It all suggests a strategy that has performed much better for its investors in 2019 and that now looks ahead to 2020 pricing improvements with an enlarged pool of capital available to deploy.

As ever, Lancashire’s CEO Alex Maloney also provided some valuable comments on the state of the market this morning, as his company reported its results.

“The Lancashire Group has generated a strong RoE of 14.1% for the full year,” Maloney explained. “Our results reflect the measured pricing improvement that we have witnessed during the course of the year and our disciplined underwriting approach, with top line premium growth and a strong contribution from our investment portfolio.”

Continuing to say, “These are pleasing results and are early evidence of the transition to the harder stage of the cycle within insurance markets.

“However, whilst Lancashire has achieved a profitable underwriting performance with a combined ratio of 80.9% for the full year, we are still of the belief that further pricing improvement is needed in many lines of business before the market returns to a more sustainable environment.”

Maloney also noted that Lancashire’s focus on predominantly shorter tailed lines of insurance and reinsurance business has helped to insulate it from “the reserving stress experienced in casualty insurance classes.”

He also noted that “our reserving from prior year catastrophe events remains robust.”

“These developments illustrate that there is still a need for a continued focus on underwriting discipline. Over the last few quarters stronger investment performance has helped smooth earnings across the insurance market. Investment returns are part of our overall return for our shareholders. But our market must always insist on the right price for the underwriting risk which we take on,” Maloney said.

All of which bodes well for the short-tailed collateralised reinsurance and retro product offered by Lancashire Capital Management, in terms of timing, as it now faces a market that is firming and lacking in capacity in certain areas, with what appears an enlarged pool of capital and likely plenty of opportunity to deploy it.

It will be interesting to see how the underwriting and performance fees earned come out over the course of the year ahead.

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