Lancashire targets up to $500m initial funding for Kinesis Capital Management

Lancashire Holdings, the global provider of specialty insurance and reinsurance products and third-party reinsurance capital management firm, has revealed further details about its Kinesis Capital Management initiative. Kinesis Capital Management was recently revealed as the brand name for Lancashire’s third-party capital efforts.

Lancashire will seek to raise between $300m to $500m in initial capital funding for the Kinesis venture and it says it will have its own investment in the fund as well. The Kinesis efforts will be led by Darren Redhead, who Lancashire hired from DE Shaw in March, serving as CEO and Chief Underwriting Officer of Kinesis Capital Management and Mathieu Marsan, another recent hire and ex Pentelia employee, serving as a portfolio manager.

In the firms second-quarter earnings release, CEO Richard Brindle said; “Our research and development phase on Kinesis, the Lancashire Capital Management arm, is going well and we are having encouraging discussions with both investors and clients. We won’t have much to report until this phase has concluded but we believe our combination of non-elemental lines expertise and data and elemental optimisation skills will give Kinesis an edge in a competitive market.”

The firm has set up a Bermuda domiciled special purpose reinsurance vehicle, Kinesis Re, which will be used to underwrite reinsurance business on a fully-collateralized basis, using largely third-party capital. As we said, the target is to raise $300m to $500m for initial deployment at the January renewals, or before if opportunities present themselves.

The core Kinesis product will be a modified Saltire product, Saltire being one of Lancashire’s existing sidecar type vehicles. It will also incorporate Accordion and seek to further develop these third-party capital strategies. The Saltire type product will incorporate aggregate elemental and non elemental bespoke reinsurance covers with expected losses of 8% to 10%, according to Lancashire.

Kinesis will underwrite post-loss non-marine and marine retro reinsurance covers, as well as post-loss single-shot opportunities, such as Sirocco (another Lancashire sidecar vehicle) and JIA (which we assume to mean the Japanese Insurance Abroad reinsurance program, which Lancashire’s Accordion sidecar had participated in) on a special draw basis.

Fee wise, Lancashire is targeting to operate Kinesis with a fee structure similar to Saltire, although it said that may depend on the actual product.

With Kinesis Capital Management, Lancashire wants to become the leading market for collateralized multi-class reinsurance protection, an opportunity it sees as about $10 billion in size and with no meaningful seller of multi-class collateralized capacity in the space today.

It said that cedants brokers are increasingly looking for solutions for both severity and frequency protections in this space and that the pricing is most attractive in short tail, collateralized reinsurance, particularly multi-class. There is also a demand for capital relief products which it feels it can provide.

Lancashire clearly feels it is well positioned to take advantage of this opportunity, with its track record in elemental and non-elemental risk bearing evident from its combined ratio. Lancashire wants to leverage its track record and understanding of specialty lines of reinsurance business, which it feels positions Kinesis uniquely to access this multi-class collateralized market opportunity, along with its relationships in both the traditional and third-party capital space to make Kinesis a success.

In terms of the size of the opportunity with respect to Lancashire’s earnings, CFO Elaine Whelan said that as Kinesis builds up it could add 2% to 3% to Lancashire’s return on equity within a few years and then building on that number going forwards.

Lancashire will target Kinesis on product lines which are not written within the core Lancashire book and as such does not expect to encounter difficulties with allocation of risk, at least for the first few years. CEO Brindle said that Kinesis will offer a ‘wrap-around’ type product, similar to a product offered within Saltire before. If in the future Kinesis begins to operate in the same product lines as Lancashire it has a detailed allocations policy which would come into effect at that time.

Given Lancashire’s track record in third-party capital management there is no doubt that Kinesis will be attractive to capital providers. Given the slightly different spin on ILS, focusing on multi-classes of business and including non-elemental, Kinesis may offer a nice addition to the reinsurance-linked institutional investors portfolio. Time and track-record will tell and while Lancashire has a track-record in third-party capital, the new Kinesis structure and new team will be watched closely to see how they perform.

Also read our other article on Lancashire from earlier this week: Focus insulates Lancashire from pricing pressure, announces Kinesis Capital Management.