Kinesis’ third-party capital profits continue to build at Lancashire

by Artemis on July 29, 2015

Once again, third-party reinsurance capital unit Kinesis Capital Management has provided an increased profit contribution to specialty insurance and reinsurance company Lancashire Holdings, which will be welcome as the re/insurer remained disciplined in challenging specialty market conditions.

To date Kinesis has deployed more than $340m of fully-collateralized protection through its unique, multi-class reinsurance product offering. The product has proved popular with cedents to date and is now bringing in a growing profit for Lancashire, helping the re/insurer to offset declines in lines of business where it has pulled-back due to market conditions.

During the second-quarter of 2015 the Kinesis unit did not write any new business, reporting that there were no additional premiums managed by Lancashire from the Kinesis Re vehicle in Q2.

However, the profit share and commission, from the $62.2m of managed premiums delivered by Kinesis in the first-quarter of 2015, as it participated in the January renewals, and business written in 2014, delivered a slightly increased profit boost for the Lancashire bottom-line.

For the second-quarter of 2015 Lancashire booked a share of profits of associates, due to the firm’s 10% equity interest in the Kinesis vehicle, of $0.9m (up from the $0.7m reported in Q1). That compares to a share of profits of associates of $0.9m for Q2 2014, but that was related to both Kinesis and the now run-off Accordion vehicle.

For the first-half of 2015, the share of profits of associates is reported as $1.6m, which is down on H1 2014’s $2.5m largely due to the remaining profit coming out of the Accordion vehicle which is now run-off.

In Q2 Lancashire reports that Kinesis Capital Management earned underwriting fees of $0.8m, for underwriting services provided to the Kinesis vehicle, which is the same as seen in Q2 of 2014.

In addition $0.2m of profit commission was reported from Kinesis, compared to zero in the prior year quarter.

Year to date Kinesis has realised $5.3m of profit commission on the business it has underwritten, compared to zero for 2014, reflecting the fact that the vehicle has now been deployed for over a year and as a result these commissions will now continue to flow through regularly.

Further growth is likely in the future at Kinesis, as and when reinsurance market conditions allow we would expect the vehicle to raise additional third-party capital to deploy. This could happen towards the end of the year and in fact may have happened in time for the July renewal, as the report only covers to June 30th.

Alex Maloney, Group CEO at Lancashire, explained that the insurance and reinsurance firm has tried to remain disciplined in the face of ongoing price pressure and rate reductions. Lancashire, with its focus on specialty lines such as marine, energy, aviation etc, faces pressure from capacity that has spilled over in a search for better rates outside of property catastrophe.

Lancashire reported a reduction of almost 44% in gross premiums written during the second-quarter, as it navigates the challenging environment. However it’s important to note that a significant portion of this decline in premiums is due to multi-year contracts not needing to be renewed at this juncture and taking those out means the decline was closer to 11%.

Kinesis, while still a growing piece of the overall profit at Lancashire, is now helping to offset some of the pull-back in premiums on specialty lines as well as softening the more lumpy renewal cycle due to multi-year contracts.

Maloney explained; “Lancashire has, as usual been proactive about managing the cycle and we continue to see the benefit of having three business platforms, with contributions from Cathedral and Kinesis bolstering the Group’s RoE for the quarter and year to date.”

The $1.9m of profit contributed by Kinesis in Q2 2015 is almost 5% of the re/insurers total net profit for the quarter, a meaningful contribution. Year to date that contribution to the Lancashire net profit from Kinesis grows to almost 9%, at $7.9m, again meaningful.

Lancashire noted that while there continues to be evidence of slowing rate declines in property catastrophe reinsurance, specialty lines is now where the competition has shifted its attention.

“Whilst there has been some evidence of the brakes being applied to premium reductions in natural catastrophe markets during the second quarter, indiscipline in the specialty markets continues,” Maloney commented.

As a result Lancashire has again become a protection buyer, as it seeks to take advantage of rates in order to shave off some of its peak exposures. This approach will also assist it with maintaining some underwriting in the markets that are most softened.

Maloney continued; “We have continued to purchase more reinsurance as pricing continues to be favourable; as we have said before, the silver lining in a difficult market is when we are the customer.”

But discipline comes first, he insisted, adding; “It is not all one-way traffic but there’s no hiding the fact that this is a difficult market and we have to work hard and, if necessary, decline inadequately priced business.”

Kinesis is providing a valuable contribution and helping Lancashire as it continues its disciplined approach to underwriting in a challenging market. Once the conditions are right for growth, Kinesis should be well-positioned to attract new capital given its more unique product proposition in the collateralized market.

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