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

Kinesis Capital Management Limited, the third-party capital and reinsurance-linked asset management division of insurer and reinsurer Lancashire Group Holdings, will provide its investors with an impressive 15% return for 2014 and roughly the same expected for 2015.

Demonstrating that double-digit returns are not a thing of the past in the insurance-linked investments and ILS space, despite the consecutive years of reinsurance softening, Lancashire revealed that its Kinesis vehicle will deliver impressive returns for the last two years underwriting.

A 15% return on capital deployed in the current environment, allowing for some small impacts from potential losses which Kinesis reserved for in Q4 2015, is very attractive. For Kinesis’ investors the attraction is not just the return though, but also the relatively unique product opportunity that investing in Kinesis’ multi-class reinsurance portfolio provides.

Kinesis is predominantly focused on writing a multi-class, specialty focused reinsurance product, which differentiates it in the current ILS market environment (more on this in our article from 2013 in advance of the Kinesis launch). There are other players targeting a broader, specialty focused approach, but these tend to be at lower risk/return levels.

Kinesis leverages the significant experience at Lancashire in the specialty underwriting space, and Lancashire can leverage the Kinesis product as a unique third-party capital backed, fully-collateralised reinsurance offering within its own product range. Hence the unit is a good fit within the company.

The returns were disclosed during Lancashire’s earnings call today and reflect a 15% return net of all fees and losses for the 2014 underwriting cycle, we understand. The same is expected for the 2015 underwriting cycle, despite some exposure to potential losses, which has been estimated and reserved for, in Q4 2015.

CEO Alex Maloney commented that Kinesis “continues to attract new investors who want to partner with someone who underwrites for them, not just deploys their capital.”

The returns achieved by Kinesis demonstrate that focusing on finding the quality underwriting opportunities and offering a bespoke product, rather than just continually raising more capital, works for investors and for Lancashire, Maloney explained.

Maloney also said that investors appreciate the fact that Kinesis has a targeted returns approach, meaning it will only deploy capital when it can achieve the returns it wants to achieve and also said that it is noteworthy that the 15% returns are not enhanced by any leverage.

At the recent January reinsurance renewals Kinesis “deployed marginally lower limits” CUO of Lancashire Paul Gregory explained during the call. However the unit expanded both its client and investor base at 1/1, ensuring it is well positioned to take advantage of any future opportunities.

Elaine Whelan, CFO of Lancashire, provided a little more colour on the loss reserves that we mentioned in our earlier article, saying that these were due to “mid-sized claims in the property risk and worldwide energy books from the January 2015 underwriting cycle.”

When it launched the unit, Lancashire was focused on developing Kinesis into the leading market for collateralized multi-class reinsurance protection, an opportunity it sees as about $10 billion in size, which would make it the leading specialty and non-elemental risk focused, ILS investment opportunity.

Achieving annual returns such as these, net of fees and any potential losses, should ensure that interest remains high and the Kinesis unit can grow as and when the reinsurance market opportunity allows.