The pressure on reinsurance pricing persists, as overcapacity both from new capital and traditional reinsurers remains a feature of the market, leading to an expectation that aggressive renewal targets may be seen later this year, according to Lancashire CEO Maloney.
Global specialty insurance and reinsurance provider Lancashire Holdings, which owns the Kinesis Capital Management third-party reinsurance capital unit, reported its second quarter results this morning. The release contains a strong statement on the market environment from Group CEO Alex Maloney, in which he cites the tough market environment and an expectation that pricing pressure will persist through the rest of the year.
“There can be no doubt that the additional capital in our industry, not just new capital but also the undistributed retained earnings of many of our peers, is driving competition on pricing, terms and conditions,” Maloney comments.
Discipline in such a softening and competitive market environment is an issue which manifests itself in many ways. For some this involves writing more business at ever decreasing profitability, but for Lancashire that is not the case.
Maloney explained; “Most of this competition is still responsible and leaves acceptable underwriting margins and volumes for those underwriters like Lancashire, Cathedral and Kinesis who have the ability, experience and track-record that clients and brokers rely on to lead and structure policies. However there are areas of the market where there are instances of indiscipline, and Lancashire is always prepared to let underpriced business go.”
The market environment is challenging for firms like Lancashire, with pressure coming from all angles, so discipline is key in order to maintain reasonable returns for investors during soft market environments. The Lancashire strategy has always been to wait out the market and position itself to take advantage of any upturn.
“Lancashire’s strategy since day one has always been to write the most exposure in a hard market and the least in a soft one,” Maloney said. “We will stick to our strategy in the knowledge that when an event comes, we are well prepared through all three of our platforms to take advantage of subsequent opportunity.”
On pricing, Maloney is not convinced that we have reached the bottom yet and in fact believes that more price pressure is ahead, with the renewals likely to see some cedants targeting more aggressive price levels. “There is some discussion about whether pricing has reached a floor, and there have been signs of over-ambitiously priced programmes being rejected. But on the whole we think there is still pressure on pricing and, with business more scarce in the second half of the year, we wouldn’t be surprised to see some aggressive renewal targets,” he explained.
The market also provides opportunities for Lancashire to improve its own protection and the firm has been actively doing so. Lancashire has always been proficient at securing opportunistic covers when the market offers good terms, using instruments such as industry loss warranties (ILW) as well as traditional reinsurance to protect itself from losses and market conditions.
“We can mitigate the effects of up-front pricing impacts with very substantial savings on our own reinsurance and retrocession purchases, and for LICL and LUK we’ve also bought substantially more limit this year for both risk and cat covers. Cathedral has always been a buyer of extensive reinsurance but has also managed to improve retentions, breadth of cover and costs,” Maloney commented.
Encouragingly, Maloney explained that the synergies between and contribution of Kinesis and Cathedral to Lancashire continues to grow, with strong involvement at key executive meetings and in contributions to the groups bottom line. In a tough market environment the multi-strategy approach of Lancashire, with a focus on the specialty side, seems to be a good one.
The results themselves were not stunning, unsurprisingly in the market environment, with a fall in profits from last year as well as in earnings per share. However, Lancashire continued to return substantially all of its earnings to shareholders in dividends this year and more could be ahead.
CFO Elaine Whelan said; “With the continued pressure on the trading environment, we expect to manage our risk levels accordingly. As ever, the balance of capital we hold will match the underwriting opportunities we foresee. If there are no major events, and no change in the market, it remains likely that we will return the majority, if not all, of our earnings to our shareholders later in the year.”
The response to the Lancashire results from shareholders is always telling and this morning the firms share price has risen by 5.5% (at the time of publishing) in its initial response to the announcement. It’s likely that investors are looking beyond the pure numbers and considering the portfolio being built, the possibility of more dividends in the near future and the long-term platform being built.
Lancashire continued to pull back on property lines of business due to pricing declines, with growth in premiums across the book largely attributed to the inclusion of the Cathedral business in the results. The announcement explains; “We reduced exposures and premiums in some areas of the property catastrophe excess of loss book, New Zealand being one such example, and the retrocession portfolio as pricing came under further pressure during the second quarter.”
Showing how the pricing environment also benefits a firm like Lancashire in terms of reinsurance buying, the announcement says; “Lancashire also took advantage of lower reinsurance rates to purchase some new non-marine retrocession aggregate cover and to buy substantial additional limits for the marine, energy, AV52 and terrorism programmes.”
Lancashire earned a $0.9m and $2.5m share of profit of associates for the second quarter and first six months of 2014 respectively largely due to its 10% equity interest in the Kinesis third-party capital reinsurance vehicle. Also for the second quarter there is an underwriting fee of $0.8m that Kinesis Capital Management earned for providing underwriting services to the Kinesis vehicle, which ramps up to $1.4m for the first half of 2014.
So Lancashire continues to navigate the difficult market environment and while the numbers are down it does seem well positioned to take advantage of any market uptick or opportunity that comes along. Lancashire, with its strong specialty underwriting focus, is not just positioned to take advantage of opportunities in property catastrophe, like so many are focused on, but could take advantage of rate upticks in areas like aviation given the recent spate of losses.
Kinesis Capital Management, which recently raised another $50m for mid-year renewal deployment, continues to provide valuable income and with further growth likely the contribution should grow over time. The multi-strategy; specialty insurance and reinsurance, Lloyd’s access through Cathedral and third-party reinsurance capital play through Kinesis should give Lancashire the ability to continue to navigate the market, even if, as Maloney suggests, price pressures persist through to 2015.