Alex Maloney, the Chief Executive Officer (CEO) of Lancashire Holdings Limited, believes that the January 1st, 2021 reinsurance renewal season is going to be one of the hardest markets witnessed in years.
In response to a lengthy soft market state, heavy catastrophe losses and low interest rates, exacerbated by the impacts of the ongoing pandemic, insurance and reinsurance markets are hardening ahead of the key Jan 1st renewals.
Addressing the hardening market environment during Lancashire’s recent nine-month 2020 earnings call, CEO Maloney explained that in his opinion, this is just the beginning.
“My personal view is that this is the start of the hardening market. As I said earlier, we saw real momentum build from Q2. I think 1/1 is going to be one of the hardest markets we’ve seen in years, and I expect that to continue throughout 2021,” he said.
Looking any further than the next couple of years, he continued, is very hard to predict.
“But my personal view is that you can look at previous cycles and that will give you the answer to what will happen in this cycle. So, I think you’re going to go into a very good market for at least two years.
“Pricing will be reset, people will come off of business as you’re seeing already. So, people will reshape their portfolios; they will arguably clean up the sins of the soft market. I think for a good couple of years we’re into much better underwriting conditions,” said Maloney.
With recent pricing momentum poised to continue and potentially accelerate at 1/1, there’s an opportunity for profitable growth as market conditions continue to improve. As a result, there’s been a flurry of capital raises across the re/insurance sector, Lancashire included.
In June, the specialty re/insurer announced the successful completion of the placing of new common shares, raising gross proceeds of approximately £277 million. Following this, executives at the firm noted a willingness to expand its book into 2021 to take advantage of the hardening and dislocated market, including a venture into casualty risks.
Discussing the capital raise during the call, Paul Gregory, Lancashire’s Chief Underwriting Officer (CUO), explained that the proceeds remain fully-available and will looked to be deployed through the 2021 renewal season.
“The capital will be used in two main ways,” explained Gregory. “Firstly, for growth in catastrophe exposed lines such as retrocession, property catastrophe reinsurance, and property insurance. Market conditions have allowed us to grow in each of these lines during 2020, and we expect this to continue into 2021.
“Secondly, we’ll use some of this capital to retain more risk. We anticipate dislocation in the reinsurance markets, particularly for natural catastrophe exposed products, and we will not be immune from this. There will always be core reinsurance products we buy from core reinsurance partners throughout the cycle, and we will have to pay more for these. The capital just allows us the flexibility to retain more risk in certain areas if we feel this is the best risk adjusted decision.
“It’s worth reiterating that we remain both product and platform agnostic as to where we deliver this growth. The weighting will be dictated by the market opportunity.”
Later in the call, Maloney also discussed the capital raise and reminded listeners that at the time of the raise, Lancashire was already in a strong capital position following a very good 2019.
“We retained those earnings and we did have headroom in our PMLs, at that point. We also did the capital raise which just gave us more flexibility. So, we do have all of the capital that we raised in June, but we did have headroom in our PMLs already. So, yes, we can deploy more than the capital that we raised in June,” said Maloney.
Adding: “1/1 is the first real time to do that, and that’s exactly what we told our investors at the time. We said we’d deploy that capital within 6 to 12 months, so we’re completely on track.”