The re/insurance market has “turned a corner” following the major catastrophe losses of 2017, but despite this the CEO of Lancashire Holdings expects 2018 will be another challenging year for the industry.
Lancashire reported a negative year for 2017, with return on equity falling to -5.9% for the year. But the outlook is a little brighter, with the company reporting rate increases in many areas of its book at the end of the year.
Alex Maloney, CEO of Lancashire, commented on the difficult 2017, saying, “These 2017 losses have provided a real time “stress test” for Lancashire’s enterprise risk management function, so it is pleasing that we have passed another important test of our model. Overall we feel that we had the right underwriting strategy, risk levels and capital headroom to absorb these events when balanced against the underwriting opportunity that presented itself during 2017.”
After passing the catastrophe loss stress test of 2017, Maloney feels that a better year is ahead and market conditions at the end of the year reflected an improvement in underwriting rates for Lancashire.
“With the impairment of capital due to these catastrophe losses, and attrition across many specialty classes, the market has finally turned a corner and we are witnessing rate increases, or at least stability, across most of the classes of business we underwrite,” he explained.
Lancashire reports that it saw positive rate movements in many areas of its book, particularly property reinsurance or retrocession and energy business at Lloyd’s both saw large rate uplifts, while aviation and marine lines also saw rates increase at Lloyd’s and the rest of its book saw relatively stable pricing.
That’s a big improvement on prior quarters, when rates have largely been on a steady decline. So with a better rate environment visible in the market, Lancashire aims to deploy all of its capacity to capitalise on this.
Elaine Whelan, CFO of Lancashire, explained, “Following the hurricanes of the third quarter, the fourth quarter of 2017 saw further catastrophe loss activity with the California wildfires. These events have led to a small loss for the quarter. Our RoE for the fourth quarter was negative 0.9% bringing our RoE for the year to negative 5.9%.
“With improved rates at the 1 January renewals, and our current outlook, we continue to expect to put all of our current capital to work this year.”
Lancashire has been pulling back over recent renewals, so market conditions are clearly conducive to deploying more capacity in order to capitalise on the rate increases that were available. As well as January, the mid-year renewals will also be key for Lancashire and the firm recognises the need for discipline.
“We remain committed to our capital management strategy and will continue to deploy capital where attractive underwriting opportunities present themselves, but also remain committed to our strategy of returning excess capital if we conclude the underwriting risk and return balance is not sufficient to support our view of the opportunity,” Maloney continued, “Underwriting expertise and discipline remains essential, but in the classes of business which we underwrite we are well positioned to take a lead in what may now prove to be a more interesting phase of the market cycle.”
He closed by saying, “I expect 2018 to be another challenging year for our industry, but I am confident that we have further demonstrated that the Lancashire Group has the appropriate business model, talent and access to capital to maximise underwriting opportunities to benefit our shareholders.”
Lancashire’s business model meant it was exposed to the major losses, but also that its discipline and protection it has in place prevented it from suffering as badly as it could have.
The company will be hoping to earn back the RoE loss for its shareholders, through the deployment of capital into higher rates across 2018.
You can read the full Lancashire results statement here.