Lancashire expects growing demand for Kinesis’ collateralized products

Specialty insurance and reinsurance company Lancashire Holdings expects to see increasing demand for products from its third-party reinsurance capital unit Kinesis Capital Management at the January renewals and beyond.

Kinesis Capital Management is now around a year old, although the unit only began deploying third-party capital in earnest at the January 2014 renewals, and Lancashire hopes to see the approximately $340 million of fully-collateralized reinsurance capacity it has deployed since inception grow, as clients are showing a liking for its unique products.

In the third-party reinsurance capital management, ILS and collateralized arena, Kinesis is a one of a kind, offering an interesting product set firmly rooted in the specialty re/insurance market that Lancashire has become such a specialist in.

Kinesis offers capital markets investors a unique insurance linked investment opportunity, as the only third-party capital manager currently solely focused on specialty lines of reinsurance business and with a tendency towards multi-class reinsurance contracts as well. This differentiates it from other opportunities to invest directly in the returns of the reinsurance market and has been well received by both investors and cedents.

Lancashire Group CUO Paul Gregory discussed this during the firm’s recent third-quarter earnings call, saying; “Kinesis now has an established set of investors and clients which is a strong set of foundations to build from and Kinesis will look to deploy more limits at 1-1 if the underwriting opportunities exist.”

Gregory said that client and market feedback for the Kinesis products leads the firm to believe that more opportunities may exist in January; “At this point in time the outlook is positive, as both existing and new clients see the benefits of the Kinesis products signaling an increased demand.”

However Kinesis will not just raise capital to deploy with no thought for the quality of the opportunities it finds at the January renewal. Discipline is important to Lancashire and Gregory noted this by saying; “As always with Lancashire the viability of the underwriting opportunity will determine the course of action.”

Kinesis has increased its contribution to Lancashire earnings in the last quarter, as premiums underwritten throughout the year begin to flow through and seasonal premiums boosted its profit share and fee income from the unit.

CFO of Lancashire Elaine Whelan commented on the contribution that Kinesis makes to Lancashire; “On KCM, on capital deployed to-date we’ll earn about $6.2 million in underwriting fees this year.”

The fees earned from Kinesis have a seasonal element, making the third-quarter particularly good given the U.S. hurricane season is at its peak. Whelan explained; “We do earn those fees in line with the underlying exposure in Kinesis Re’s portfolio. Most of the exposure is over the U.S. hurricane season, so the bulk of the fees for the year are earned now, with $2.9m included in other income for the quarter and $4.3m for the year-to-date.”

So there could be another $1.9m of fees expected in Q4, Whelan explains how the seasonality breaks down the fee income being earned; “The earning pattern by quarter this year has been 10% in Q1, 12% in Q2, 47% in Q3 and 31% in Q4. Just bear in mind that depending on how the portfolio renews, those percentages might change a bit next year.”

The fee income earned in Q1 should be higher, according to Whelan, a sign that premium income will continue to grow as Kinesis continues to reach scale. Whelan explained; “We expect to recognize some profit commission in the first quarter of 2015. Depending on loss activity between now and the end of the year we could earn up to $5.8m.”

It will be interesting to see whether Kinesis Capital Management increases its capital under management and collateralized reinsurance limits deployed at the January renewals. With clients and investors clearly appreciating the model Lancashire has adopted for its third-party capital management unit we would imagine it has every chance of growing its capital base despite the challenging reinsurance market environment.

More Lancashire Holdings and Kinesis Capital Management reading:

– Lancashire’s share of Kinesis’ third-party capital profits grows in Q3.

– Pricing pressure persists, renewals to see aggressive targets: Lancashire CEO.

– Kinesis raises another $50m for mid-year renewal deployment.

– ILS investment manager interview: Darren Redhead, CEO of Kinesis Capital Management Limited.

– Lower profits at Lancashire but third-party capital contributes positively.

– Lancashire discusses its Kinesis offering and why it’s different.