Lancashire gets consistent Kinesis contribution, bulks up on reinsurance

Specialist London and Bermuda insurance and reinsurance underwriters Lancashire Holdings have benefited again from the contribution that third-party reinsurance capital management unit Kinesis Capital Management provided in 2016.

Lancashire saw a consistent contribution to its full-year 2016 return on equity (RoE) from Kinesis Capital Management, which added the same amount as last year. In fact Lancashire as a whole generated a consistent RoE, which in the current market environment and given the lines of business Lancashire underwrites across its London, Lloyd’s and Bermuda platforms is impressive.

“Proving the strength of our platforms in yet another challenging year, I am pleased to report an RoE of 2.8% for the quarter, bringing us to an RoE of 13.5% for the year. Relative contributions from Lancashire, Cathedral and Kinesis were 9.1%, 3.6% and 0.8%, respectively, consistent with last year’s contributions,” CFO of Lancashire Elaine Whelan said in the company’s results today.

Kinesis’ third-party capital backed , specialist multi-class reinsurance underwriting products generated 0.8% of Lancashire’s RoE for the year, which is the same contribution as in 2015. The fact that this came in flat is notable given the continued softening in the reinsurance market and also the fact Kinesis deployed a little less limit in 2016.

Lancashire’s overall results have pleased analysts this morning, as the company beat expectations and forecasts for the final quarter of 2016.

During that quarter the contribution from Kinesis was once again evident, particularly so as profit commission bounced back after coming in at zero in Q3 2016 due to collateral held for potential loss events from earlier in the year.

Kinesis underwriting fees came in at $1.1 million for Q4 2016 and $4.4 million for the full-year 2016, which are both down from $1.5 million and $5.6 million respectively in the prior year. The reason for this dip is that Kinesis deployed slightly less limit in 2016, likely a function of the market and the availability of attractive opportunities.

Profit commission earned by Kinesis came in at $3 million in Q4 2016 and $6.2 million for the year, compared to $0.1 million and $7.3 million for the prior year. The lower full-year figure is due to the held collateral from potential loss events in early 2016.

But that additional profit commission is expected to flow back into Lancashire, once the loss quantum on these events is fully understood.

Lancashire’s results explain; “The slightly lower profit commission for 2016 compared to 2015 is due to the retention of a portion of the collateral held on the January 2015 underwriting cycle which is awaiting the confirmation of claims quantum. We anticipate receiving the remaining commission in the first quarter of 2017.”

Perhaps the best metric for tracking profitability of Kinesis is Lancashire’s own share of profits, for the 10% equity stake it owns in the third-party reinsurance capital vehicle.

$0.7 million was earned in Q4 2016, and $5.1 million for the full-year 2016, both up on the -$0.2 million and $4.1 million earned in the prior year.

Lancashire also benefits from third-party name capital deployed at Lloyd’s of London, through its Cathedral syndicates. Adding profits from this capital management as well takes the re/insurers total third-party capital managed income to $11 million for Q4 and $25.6 million for all of 2016, both up on the prior year.

Managing third-party capital has been a valuable contributor to Lancashire’s profits for some years, with its collateralised reinsurance sidecars having been a fixture for some time now. Kinesis plus the profit from capital managed at Lloyd’s both show that specialist underwriters like Lancashire can earn good commissions, fees and profit shares from underwriting for third-party investor capital, while also benefiting from the efficiency of third-party funds.

Also of note is the fact that Lancashire has continued to de-risk itself, adding even more reinsurance as it takes advantage of soft market pricing in order to reduce its chances of major loss.

With an outlook on 2017 that forecasts little change in terms of market conditions and pricing, Lancashire has positioned itself in order to carry as little risk as it can, while also being ready to capitalise on any opportunities that appear.

CFO Whelan explained; “At 1 January we have once again been able to further reduce our exposure levels with additional reinsurance purchases, and our risk levels are lower now than at any other point in our history. We are therefore carrying a bit more of a capital buffer than we typically would, which gives us the ability to take advantage of any opportunities that may materialise this year.”

That position also benefits the third-party capital investors in Kinesis, as the vehicle can also benefit from Lancashire’s positioning in the marketplace.