Lancashire Holdings (LRE) has indicated that it is likely to maintain its net property catastrophe footprint, shifting away from the expansion it has been pursuing since 2018.
These remarks came from a roundtable that investment bank Peel Hunt held earlier this week involving Paul Gregory, CUO of LRE. Peel Hunt said that LRE is increasingly confident that the property catastrophe reinsurance market is moving from a hardening to a hard market next year.
Peel Hunt added that the rate momentum is accelerating, and a hard market may last longer than previously thought. The long-term return, it said, is becoming more attractive but will remain volatile.
Peel Hunt wrote: “LRE will likely maintain its net property catastrophe footprint, which basically means write the same amount of net risk and soak up the rate increases. LRE has already been expanding its property catastrophe footprint since 2018 and is comfortable with the portfolio and the exposures it has.”
It was reported that LRE commented on ILS’s funding of the property catastrophe retrocession market in recent years.
Peel Hunt wrote: “ILS investors have been bruised by losses in the past five years and LRE does not expect significant inflows from ILS investors in the near term. Large pension funds and Sovereign Wealth managers are exiting the space and first want to see an improved industry track record.”
It added: “The industry will first need to establish a track record of delivering attractive returns over a three-year period before ILS Capital would consider re-entering. As an industry, there is a need to really push rates to make returns attractive for investors in a market where the demand for cover will remain as long as property catastrophe events happen.”
Lancashire said at the roundtable that it had ‘significant buffers’ up and above the 200% benchmark (270% at H1).
Peel Hunt added: “In addition, the ‘stock’ of specialty insurance profits is increasing which also helps absorb the volatility of the property catastrophe portfolio. As such, LRE has room to grow the net property catastrophe footprint if it makes sense to do so. Alongside property catastrophe strategy there is no change in the aim to build a diversified specialty (re)insurance book. In specialty insurance lines, rate increases are slowing down (no surprise after six years of increases) and more capacity is coming into the market as carriers exit property catastrophe classes and move into non catastrophe, less volatile lines. However, LRE does not expect the specialty classes to soften in 2023 in aggregate.”
Looking ahead, Peel Hunt said that the industry will first need to establish a track record of delivering attractive returns over a three-year period before ILS Capital would consider re-entering.
It went on: “As an industry there is a need to really push rates to make returns attractive for investors in a market where the demand for cover will remain as long as property catastrophe events happen. There is little risk that capacity that has exited will re-enter the property catastrophe market should it materially harden even in clean years. Also, if a carrier has decided it wants to write property catastrophe it is unlikely that it will change its mind already. As flagged earlier this year, LRE has retained more risk on a net basis at a 1/100y return period but reduced its risk exposures at the tail (net PMLs at 1/250y return period). This reflects the increased opportunistic purchase of protection of tail risk at an attractive price.”
