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Collateral release boosts Lancashire’s income from Kinesis


A release of retained collateral has helped to boost specialist London and Bermuda insurance and reinsurance underwriter Lancashire Holdings income from its third-party reinsurance capital unit Kinesis Capital Management during the first-quarter of the year.

Kinesis, which underwrites through Kinesis Re offering clients a unique multi-class product in the insurance-linked securities (ILS) and collateralised reinsurance market, had set loss reserves in Q1 2016 for potential impacts due to events in the 2015 underwriting cycle.

Now, after greater clarity has been gained over potential claims, a significant proportion of the held collateral has been released in Q1 2017 resulting in a boost to Kinesis’ contribution to the Lancashire quarterly results.

Lancashire reported that underwriting fees from Kinesis were up in Q1 2017 at $0.7 million, compared to $0.5 million in Q1 2016.

Profit commissions earned through Kinesis’ third-party capital activities jumped due to the release of collateral, hitting $5.4 million for the quarter, compared to $1.8 million a year earlier.

The third-party investors will have benefitted as well, as the higher profit from Kinesis due to the release of reserved collateral flowed through during the first-quarter.

Lancashire also reported a share of profits from Kinesis for Q1 2017 of $0.7 million, which is down from the prior years $1.3 million, which reflects the re/insurers 10% equity share in the Kinesis vehicle.

Lancashire explained that the quantum of Kinesis’ profit commission can be influenced by “the timing of loss experience and collateral release and therefore varies from quarter to quarter.”

Following the retention of collateral for losses from 2015 the profit commissions had dipped in Q1 2016, but now that flows back through which shows the benefit to investors of a prudent reserving strategy as it secures capital required to pay potential claims and protects investors from any deterioration in loss quantum. It can also benefit investors as by prudently reserving above loss estimates there will likely be a future collateral release to boost profits.

Lancashire continued; “The majority of the collateral for the January 2016 underwriting cycle has been released and therefore most of the profit commission for that cycle has been recognised in the current quarter.”

By saying that the majority has been released Lancashire suggests that a portion continues to be retained, likely in case of any worsening of loss estimates for the events in question. Of course that also means that this could flow back into Kinesis in future quarters if it is not required to pay claims.

Prudent reserving practices actually benefit investors, despite the initial dip in profits at the time of the reserving. For the long-term institutional type investors that tend to allocate to a collateralized reinsurance vehicle like Kinesis, this will be an encouraging outcome as it shows a steady hand in addressing potential losses.

Alex Maloney, Group CEO of Lancashire Holdings, commented today that; “Lancashire has always placed underwriting discipline at the core of its strategy,” as he explained that reinsurance market conditions remain soft and difficult.

He added that; “We have prioritised servicing the needs of our core clients and their brokers. We also ensure that we moderate our overall risk exposures, not only through discipline on our inwards books, but in our purchasing of well-priced outwards reinsurance. These are our principal tools for prudent exposure management in the current soft market.”

Maloney also said that he views the market as close to the bottom of the cycle, saying that; “The sector, when taken as a whole, is operating at very tight margins and indicates where we are in the cycle, even in what has been a relatively uneventful loss environment.”

“What is clear is that the insurance markets are currently operating at margins which will prove unsustainable in the long run. There are now clear signs of stress, with some evidence of retrenchment. Sooner or later a major loss event will stress the system even further, bringing it to a position where capital will be impaired, which we believe will change the dynamics of the current market,” Maloney continued.

This market stress event would provide the ideal opportunity for Lancashire’s Kinesis and many others managing ILS capital to upsize their vehicles, providing further efficiencies to help re/insurers navigate any sort of market turn (even if that isn’t a dramatic turn in pricing).

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