Focus insulates Lancashire from pricing pressure, announces Kinesis Capital Management

Richard Brindle, CEO of Lancashire Holdings, a global provider of specialty insurance and reinsurance products and third-party reinsurance capital firm, said that the firm is insulated from feeling too much of the impact of new third-party reinsurance capital due to its focus on specialty and non-elemental exposures.

Brindle commented; “Whilst a lot of the discussion this year about the insurance business has been focused on the influx of new capital into the property reinsurance market, it is important to remember that the bulk of Lancashire’s business is in the direct specialty lines where barriers to entry are much higher.”

He explained that the absence of widely accepted models for third-party capital to participate in the underwriting of non-elemental exposures and the complexity of these coverages such as energy, terrorism and marine, which make up a large part of Lancashire’s book of business, makes this a harder prospect for third-party capital.

To access these lines of business effectively third-party investors need the support of experienced and well-respected underwriters, said Brindle. This is where he feels Lancashire has an edge, given that more than two-thirds of its business is focused on specialty lines such as terror and political risk, energy, aviation and marine. In these niche markets, Brindle says Lancashire’s experienced team of underwriters and claims staff, as well as the relationships built up with brokers and clients, make the difference and make Lancashire a preferred partner.

Some smaller players may face tough times, said Brindle, especially if they cannot offer large enough line sizes a decent track record and experienced team. It should be noted here that there are a number of ILS managers who are branching out into specialty lines of business at the moment and this is a trend set to continue, so Lancashire may find the market in third-party capital more competitive in years to come.

Brindle also said that Lancashire has reduced its activities in property retrocession, as planned, with Lancashire noticing competition fro non-traditional capital in this area of the market. It has however increased its underwriting of property catastrophe in some regions such as the U.S. Northeast Region, Florida, California and Texas as well as Japan, Thailand, the United Kingdom, Continental Europe, and Australia.

Brindle explained that while property catastrophe pricing is clearly facing pressures, partly due to the influx of alternative capacity, there is still well-priced business available particularly at the exposure levels that Lancashire favours.

Brindle discussed the recently formed Lancashire Capital Management division, which will focus on managing third-party capital to be deployed in Lancashire’s underwriting. The division now has a name, Kinesis Capital Management Limited, and Brindle said that the development of Kinesis is well underway and that encouraging discussions are taking place with both investors and clients. He noted that there won’t be much to report on Kinesis until the research and development phase has concluded, adding; “We believe our combination of non-elemental lines expertise and data and elemental optimisation skills will give Kinesis an edge in a competitive market.”

Elaine Whelan, Group CFO at Lancashire, gave more colour on activities at the new Kinesis Capital Management third-party capital division. She said that Kinesis Capital Management Limited and a Bermuda domiciled special purpose insurer Kinesis Reinsurance I Limited (Kinesis Re) were both established in this quarter.

Both entities are authorised by the Bermuda Monetary Authority and Kinesis Capital Management will provide underwriting services to Kinesis Re, which is a segregated accounts company. Darren Redhead, who Lancashire hired in March, will serve as CEO and Chief Underwriting Officer of Kinesis Capital Management. Mathieu Marsan, another recent hire, will serve as a portfolio manager.

Whelan said that third-party investors will be invited to invest in Kinesis Re segregated accounts, giving them access to specific underwriting opportunities. Kinesis Capital Management will underwrite multi-class reinsurance business for Kinesis Re, and expects to begin deploying capital by the January 1 2014 renewals, or perhaps before if opportunities present themselves.

Lancashire has hired Goldman Sachs as placement agents for Kinesis. Whelan said; “The Kinesis facility will provide a flexible platform to align third-party investors with reinsurance opportunities. In the longer term, it is expected that KCM will generate a stream of fee income for Lancashire.”

Lancashire made a $3.3m second-quarter share of profits, $6.2m for the first-half of 2013, from its 20% equity interest in the Accordion sidecar vehicle and 16.9% interest in the Saltire sidecar vehicle.

So now Lancashire’s plans for expanding its third-party capital activities under this new Kinesis Capital Management brand are released and the firm must be working hard on raising capital for the new venture. It will be interesting to see how quickly it can raise capital for Kinesis, something we will perhaps get a picture of in 2014 after it has deployed capacity at the January renewals.

You can read Lancashire’s Q2 results press release here.