Kinesis contribution to Lancashire bottom-line grows again in Q2

Third-party reinsurance capital management activities at Kinesis Capital Management have once again increased their contribution to the bottom-line at specialist re/insurer parent Lancashire Holdings during the second-quarter of 2016.

Kinesis also looks to have avoided any serious impact from the second-quarter catastrophe and man-made loss events at this stage, however as the vehicle works on an annual basis any impact may not become clear until the end of this underwriting cycle.

But the key takeaway from Lancashire’s results with respect to third-party reinsurance capital management, is the fact that the overall contribution made by Kinesis from underwriting fees and profit commission is up year-on-year once again.

For the second-quarter, Lancashire reported underwriting fees of $0.6m and profit commission of $1.4m from Kinesis, so a total of $2m, up from $0.8m of underwriting fees and $0.2m of profit commission, a total of $1m, in Q2 2015.

Lancashire’s share of profit of associates, which reflects its 10% equity interest in the Kinesis vehicle, is down for the quarter at $0.4m compared to $0.9m a year earlier, which could reflect the impact of some loss activity, although it is hard to tell at this stage.

For the first-half of the year, Kinesis underwriting fees came in at $1.1m (down on 2015’s $1.5m), profit commission at $3.2m (down on 2015’s $5.3m) and share of profit of associates at $1.7m which is flat year-on-year.

The change in profit commission over the first-half of the year is due to the reserving undertaken in the first-quarter of the year for reserves and collateral retained for potential non-elemental loss events suffered from the 2015 underwriting cycle. As we wrote in Q1, there is an expectation that at least some of the reduced profit commission will flow back through to Lancashire in quarters to come, as the size of any losses suffered becomes clearer and some of the collateral at least can be released.

Lancashire’s results as a whole look impressive for a quarter when it will have had some exposure to the larger losses, which are within lines of business the firm focuses on. The re/insurers strategy of prudent and increasing use of reinsurance appears to have helped dramatically and the performance for the quarter looks impressive compared to other companies reporting this week.

Alex Maloney, Group Chief Executive Officer, commented; “Our RoE of 3.2% for the second quarter and 7.1% for the half year represent an excellent result achieved during challenging times. I have previously talked about our commitment to maintain a strong core book of business serving the needs of our valued clients and their brokers, whilst also bringing down overall risk levels in line with our view of the underwriting opportunity. These results are clear evidence that our stated model is working.

“At a time when premium rates and insurance policy terms and conditions are under pressure, our model has helped us not only to deliver the underwriting service which is expected of us but also to insulate our balance sheet against a string of small to medium sized natural catastrophe and specialty market losses. We are starting to see evidence of the insurance industry sustaining a series of net losses during the first half of 2016. Against this background it is reassuring to note that Lancashire’s reinsurance purchasing strategy has enabled the Group to reduce our net liabilities by about $20 million when compared to the reinsurance programme purchased in 2015.”

This is also beneficial to Kinesis and its third-party investors, as it can access business alongside Lancashire, where its multi-class product is a good fit alongside the re/insurers own product range. That means Kinesis can likely benefit from enhanced access to business, play off the protection Lancashire receives and use that as a way to access more selected business opportunities.

Whether Kinesis itself has any exposure to catastrophe events such as the Fort McMurray wildfire, or non-elemental events such as the Jubilee oil disaster, remains to be seen and likely won’t become clearer until later in the cycle.

Also read:

– Lancashire: $4m of Kinesis profit commission to come from reserves.

– Reserving impacts Lancashire’s profit commission from Kinesis.

– Kinesis to return 15% to third-party investors for 2014 and 2015.

– Kinesis third-party profit commission & fees add to Lancashire RoE.