Lancashire Capital Management fee income rises as strategy expands

Lancashire Capital Management Limited, the third-party capital collateralised reinsurance underwriting arm of specialty insurance and reinsurance group Lancashire Holdings, has delivered higher fee income to its parent in the first-half of 2020, as profits of the unit rise alongside its increased assets under management.

Lancashire Capital Management grew roughly 20% over the course of 2019, entering the 2020 January renewal season with somewhere north of an estimated $600 million of limit available to deploy.

The increased limit means more premiums under the management of Lancashire’s third-party reinsurance capital unit and this is evident in higher fee income and performance flowing through in the re/insurers results that were reported this morning.

Lancashire reported that underwriting fees earned through the Lancashire Capital Management (LCM) fully collateralised and multi-class reinsurance product rose to $2.7 million for the first-half of 2020.

That’s up significantly on the $1.9 million earned in the first-half of 2019.

Profit has also rebounded for the third-party reinsurance capital activities at Lancashire, as the LCM unit delivered a $1.1 million share of profit of associates in the first-half of 2020, much higher than the $0.1 million of profit commission earned in H1 2019.

Perhaps of note though, Lancashire reported an underwriting loss this morning, as the firms estimate of ultimate net losses from the Covid-19 pandemic rose to $42 million and the company also suffered a surprising amount of prior year development impacts.

Lancashire has experienced a number of late reported attritional claims from prior years in the recent weeks, which may be a signal that other underwriters will have been experiencing similar.

Most surprising, perhaps, of these is adverse development on New Zealand earthquake related exposures from 2010 in the firms property segment, further evidence of the long-tail of earthquake losses.

Lancashire also experienced late reported claims from the 2019 accident year and adverse development on some marine claims from 2017 and 2019 as well in the recent period.

It’s not clear whether any of the adverse development could hit any collateralised contracts written by the LCM unit.

The result was an underwriting hit, although the underlying combined ratio was strong at 88.9%, it rose to 106.9% including COVID-19 impacts for the first-half. The result was a net loss of $14.7 million for the first-half of 2020.

But gross premiums written rose by 15.3% year-on-year, as Lancashire put money to work from its recent equity capital raise.

The Lancashire Capital Management (LCM) is especially valuable in times when the main business suffers due to loss activity, providing a welcome boost to earnings for the company.