Lancashire Holdings (LRE) has signaled it is likely to maintain its net property disaster footprint, moving away from the expansion it has been pursuing since 2018.
These remarks come from a roundtable that investment bank Peel Hunt hosted earlier this week with Paul Gregory, CUO of LRE. Peel Hunt said LRE is increasingly confident that the property catastrophe reinsurance market will turn from a hardening to a hard market next year.
Peel Hunt added that rate momentum was accelerating and a tough market could last longer than previously thought. Long-term yield, he said, is becoming more attractive but will remain volatile.
Peel Hunt wrote: “LRE will likely maintain its net property catastrophe footprint, which essentially means writing the same amount of net risk and absorbing rate increases. LRE has already expanded its real estate disaster footprint since 2018 and is comfortable with the portfolio and exposures it has.
LRE has been reported to comment on ILS funding of the disaster property retrocession market in recent years.
Peel Hunt wrote: “ILS investors have been battered by losses over 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 leaving the space and want to see an improvement in the industry track record first.
He added: “The sector will first need to establish a track record of attractive returns over a three-year period before ILS Capital considers re-entering. As an industry, there is a need to really push rates to make returns attractive to investors in a market where demand for hedging will remain as long as real estate disasters occur.
Lancashire said at the roundtable they have “significant buffers” above the 200% benchmark (270% in the first half).
Peel Hunt added: “In addition, the ‘stock’ of specialist insurance profits is increasing, which also helps to absorb the volatility of the catastrophe property portfolio. As such, LRE has the ability to increase the net property disaster footprint if it makes sense to do so. Alongside the property catastrophe strategy, the objective of building a diversified specialized (re)insurance portfolio remains unchanged. In specialty lines of business, rate increases are slowing (no surprise after six years of increases) and more capacity is coming to market as insurers move away from catastrophe property classes and into non-catastrophic and less volatile branches. However, LRE does not expect specialty classes to ease in 2023 overall.
Looking ahead, Peel Hunt said the industry will first need to establish a track record of attractive returns over a three-year period before ILS Capital considers returning.
He continues: “As an industry, there is a need to really push rates to make yields attractive to investors in a market where demand for hedging will remain as long as real estate disasters occur. There is little risk that the capacity that has disappeared will return to the disaster property market if it hardens materially, even in healthy years. Also, if a carrier has decided they want to underwrite a property catastrophe, they are unlikely to change their minds yet. As reported earlier this year, LRE retained more risk on a net basis at a return period of 1/100 years, but reduced its risk exposures at the end (net PML at a return period of 1/250 year). This reflects increased opportunistic buying of tail risk protection at an attractive price.