Analysts at Jefferies have suggested that Bermuda-based re/insurer Lancashire Holdings could look to reduce its gross catastrophe exposure next year, if the company is unable to purchase retrocession cover at a good price.
Jefferies expects Lancashire’s net catastrophe exposure to remain broadly flat in 2023, albeit with net premiums still growing due to rate increases.
Ideally, the company will grow on a gross basis, whilst maintaining its retrocession and reinsurance purchasing such that net exposure remains similar to 2022, it said.
However, given capital in the retrocession market is constrained, there is a risk that Lancashire is unable to purchase this at a good price, and in this scenario, it’s thought that Lancashire would look to reduce gross exposure, whilst simultaneously reducing the amount of business ceded such that net exposure remains broadly flat.
Analysts at Goldman Sachs similarly reported that Lancashire’s overall catastrophe exposure for next year will likely be determined based on how favourable rates prove to be first at the January renewal period, and then later into the year at June and July.
These analyst comments follow Lancashire’s investor day this week, during which the company’s management noted that the the pricing environment looking very strong heading into 2023 – particularly in property catastrophe reinsurance.
Thus, whilst net catastrophe exposure is likely to remain broadly flat in 2023, net premium growth should arise through rate increases, which in turn should improve margins.
But Jefferies notes that uncertainty remains whether this is achieved by growing gross volumes whilst maintaining net exposure, or reducing reinsurance spend.
“Whilst Lancashire did not quantify the level of rate increases that they expect at the 1/1 property reinsurance renewals, it was clear that management and the presenting underwriters were bullish on the pricing environment heading into 2023,” Jefferies analysts wrote.
“Whilst we expect premiums to grow for Lancashire next year, we expect this could largely be driven by positive rates. Given the positive pricing environment, underlying margins should improve going forward. Lancashire’s margins have always been a major focus amongst investors, however we believe underlying margins could be particularly scrutinised next year in the absence of significant exposure growth.”
Goldman Sachs analysts were also interested in whether Lancashire would consider an equity raise in light of an attractive market environment, particularly given Beazley’s recent equity raise.
On this, management highlighted the priority is to focus on margins and deliver good return on shareholder equity before considering equity raises.
“In our view this suggests the company has sufficient capital to take advantage of hardening pricing at Jan 1st, but raises the potential for a capital raise in 2023 if pricing remains robust into the important June 1 / July 1 renewals,” analysts wrote.
