Lancashire focuses on building out multi-balance sheet platform

by Artemis on November 6, 2013

Lancashire Holdings, the global specialty insurance, reinsurance and third-party reinsurance capital management firm, continues to pursue its mission of building out a best in class platform featuring multiple balance sheets utilising multiple types of capital.

Lancashire announced its third-quarter earnings this morning, with premiums written up for the quarter compared to a year earlier, but down on the first nine months of the year.Lancashire has been selective in its underwriting in 2013, as so many others have, in an attempt to avoid areas where the returns are not commensurate with the risks in its opinion, hence a decline in premiums written across the year to date.

It’s not the most spectacular quarter in Lancashire’s history, profit for the quarter was slightly down on expectations, but at a highly competitive time in the market it appears that the firm is sensibly focusing on building out a platform which will be adaptable as it moves forward, allowing it to leverage multiple types of capital and multiple different markets.

Lancashire has spent much of the year focused on strategic initiatives at the firm, announcing the launch of Lancashire Capital Management, its subsequent rebranding as Kinesis Capital Management and the acquisition of Cathedral Capital giving it a Lloyd’s platform.

Much of the firms efforts in 2013 have been to position it as an insurance and reinsurance entity with multiple balance sheets, allowing it to take capital from multiple types of investors and with access to multiple markets and types of insurance or reinsurance business. Lancashire now has a good platform to move forwards attracting investors interested in equity type investments in re/insurance as well as investors more interested in directly accessing the returns of the re/insurance market through third-party capital vehicles.

Richard Brindle, Group Chief Executive Officer, commented on the third-quarter; “This has been a very active quarter for Lancashire and marks an important stage in the advancement of Lancashire from its beginnings as a Bermuda-based, single platform, specialty insurer and reinsurer to a resilient, relevant provider with multiple balance sheet and distribution capabilities. We now span insurance and reinsurance, Bermuda and London, traditional rated company, collateralised balance sheets and, following the imminent completion of the Cathedral transaction, Lloyd’s. We can provide clients and investors with several different ways to access Lancashire. But at the core remains a total commitment to underwriting expertise and capital management.”

Lancashire wants to encourage interaction between its core teams, at Lancashire itself, Kinesis Capital Management and Cathedral at Lloyd’s, so as to encourage innovation and new initiatives. This could result in some very interesting opportunities for investors keen to access the insurance and reinsurance space.

Brindle continued; “Already we’ve seen a lot of new ideas generated from the interaction between the different teams and I’m highly confident that in the coming years the group will become much more than the sum of its separate parts. Opportunities to expand our presence with existing clients using the different vehicles, as well as opportunities to expand our product range are already under consideration.”

There remains a focus on matching the right capital with the right opportunities and risk at Lancashire, so the broadening of its range of balance sheets will enable it to attract more and different types of capital while broadening the range of opportunities it can match capital with.

In the third-quarter Lancashire continued to grow its property catastrophe book of business as it redeployed capital from its property retrocession book. Lancashire has noticed worsening rates and terms and conditions in property retro and so has deployed capital elsewhere. This is likely as a result of increased competition in catastrophe retro, some of which has been created by inflows of alternative capital. This is one area where we see Lancashire finding the available returns not commensurate with its risk appetite or the ambitions of the capital it has to deploy and so taking action by pulling back.

Lancashire did not cede any more business to its Accordion retro sidecar vehicles in the third-quarter and its total cessions to Accordion in 2013 are down on a year earlier. It ceded $47.7m in the first nine months of 2013 versus $64.8m for the first nine months of 2012, which largely accounts for a decrease in ceded reinsurance premiums for the year. Lancashire also reduced its use of alternative reinsurance covers given its declining underlying exposures, instead focusing on more facultative purchases and program adjustments.

In terms of Lancashire’s various third-party capital and collateralised reinsurance vehicles, the firm generated a share of profits of $2.5m for Q3 2013 and $8.7m for the first nine months of 2013. This reflects Lancashire’s 20% equity interest in the Accordion sidecar vehicles and its 16.9% interest in the Saltire vehicle. In Q3 2012 the share of profits was $2.9m, slightly higher, but the first nine months of 2012 were lower at $4.4m, although this was only from Accordion at the time.

In terms of Kinesis Capital Management, the unit is now actively developing opportunities with a view to underwriting fully collateralised reinsurance business on behalf of its Bermuda domiciled special purpose insurance vehicle Kinesis Reinsurance I Limited.

So Lancashire has been busy establishing its capital agnostic platform, which allows it to leverage capital from multiple types of investor which can then be deployed across insurance, reinsurance, retrocessional, fully-collateralized and soon (once the Cathedral acquisition completes) Lloyd’s market opportunities.

This positions the firm as a good partner both for investors seeking to access the returns of the re/insurance market as well as for counterparties and cedents looking for flexible and capital agnostic coverage solutions.

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