In this series of interviews with investment managers from high-profile insurance-linked securities funds, collateralized reinsurance entities and reinsurance-linked investment firms, we hope to reveal a little more detail on the individual manager’s experience and the firm’s investment strategy.
Our latest interview is with Darren Redhead of Kinesis Capital Management Limited, the third-party capital and reinsurance-linked asset management division of insurer and reinsurer Lancashire Group Holdings.
Tell us a little about your background and how you got involved in ILS and reinsurance-linked investing?
I’ve gained more than 30 years of experience within the insurance and reinsurance industry, ranging from Lloyd’s of London to general insurance to insurance-linked securities. Back in 2001 I helped set-up Talbot Syndicate and also worked on one of the first non-elemental ILS notes in the 90’s. I held the position of Chief Underwriting Officer at DE Shaw, where I helped develop innovative multi-class collateralized structures for the hedge funds reinsurance arm.
What is it in particular about the sector that makes it an attractive place to work in your opinion?
I think the fact it as a fast growing asset class, due to it being in its early stages, is part of the reason and also there’s still a lot of room for further innovation. After withstanding the financial crisis very, well the sector gained wider acceptance and more and more participants are now interested in accessing this sector.
What is it in particular about the sector that you feel makes it an attractive place to invest?
I think the low correlation with the traditional financial markets plays a key part, and also that there is a big pool of talent working in this space. The ILS market is maturing more and more and is now accepted as a distinct asset class. ILS market track records are now available and observable and also again it comes down to coping very well through the financial crisis.
Now that the January renewals are completed can you give the Artemis audience an update on Kinesis Capital Management’s progress, assets under management and how you found market conditions?
We spent 9 months on research and development, which really came to fruition with Kinesis’ successful capital raising and deployment. We’ve managed to build a very well diversified portfolio of elemental and non-elemental risks, and total limits deployed are now nearing $300 million, with more to be deployed for the June/July renewals. We also did a special draw within a week of getting a quote out, with a large cedant who needed some capacity later in January 2014.
Pricing conditions weren’t as good compared to last year, but the negative effects were smaller in the multi-class space due to the very limited supply.
Now we’re looking forward to our next offering in June/July, which will still be geared towards multi-class covers, but could also probably include more offshore energy insurance in the Gulf of Mexico.
Is there anything about your approach or strategy to investing in the sector that you feel is unique?
There are not many ILS entities that will offer cedants both elemental and non-elemental protections under the same limit. Being backed by the Lancashire Group means Kinesis can leverage all its parent’s data, contacts, technology and infrastructure, which is clearly an advantage when compared to smaller ILS funds.
We have no (or very limited) conflicts of interest with our parent, as Lancashire doesn’t write multi-class reinsurance (too capital intensive). Also, no quota share is in place with them, so no adverse cherry picking can occur as all deals are sourced directly by Kinesis.
Also, our vehicle has been set up in a way where the same legal docs are used twice per year for the January and July underwriting cycles, and these can be reused for special draws during market dislocations at any time in a very quick fashion.
What do you believe gives your fund management operations an edge over competitors?
I feel that being backed by a very successful insurer/reinsurer with a tremendous track record gives us an edge, enabling us to better withstand market softening. We provide access to non-elemental classes, which basically only a few other ILS entities are currently accessing, and as I mentioned earlier we have no (or very limited) conflicts of interest with our parent, unlike other ILS entities.
By packaging elemental and non-elemental risks together we’re able to generate extra risk adjusted returns for our investors.
Also our team is worth mentioning, the Kinesis team is dedicated to sourcing, underwriting and pricing risks, and I feel our growth potential is higher than others.
Can you explain a little more about how you balance the risks within the investment fund to ensure good diversification and to minimise risk for investors?
At Kinesis we always try to combine elemental risks with at least one non-elemental risk, to limit the overall contribution of each individual peril. This enables us to bring more value to buyers, while reducing their reinsurance spending, and limit the downside to very large market events for our investors.
We always try to bring in some risks on a second or third event basis, to create an extra level of diversification and tweak the shape of the loss curve favourably; also, we always return excess cash back to investors if not utilized.
We also maintain an alignment of interest with Lancashire by requiring them to buy 10% of the shares for each offering. And lastly, at Kinesis we deal with large and sophisticated clients with good ratings, good reputations and strong existing relationships.
How do you see the sector developing over the next 5 or 10 years?
I expect more non-peak perils will be securitized on the property catastrophe side, in countries such as China, South Africa, etc. I also think the ILS market will take on more non-elemental perils such as marine, energy, aviation, satellite etc.
The total limits managed by ILS entities could grow up to $80-$100 billion, and could even be larger if a large event would occur. I also feel that the life space will see some decent growth.
Where do you see opportunities for the sector to grow?
New non-peak perils on the catastrophe side and non-elemental perils such as marine, energy, aviation, satellite, etc. There’s potential within the life space in general, even though it’s quite hard to securitize longer term liabilities for now, and there could be more trading volume for ILS derivatives.
Do you see any issues facing the sector that it will need to overcome in order to grow?
I think there’s a need for more transparency and a need to improve existing reporting standards. Also better standards and methods to value liabilities.
A much simpler legal infrastructure would also be beneficial.
Having the lead modeling agencies think outside the box and investigate non-elemental risks would be helpful as well, as would continuing the education process with the more traditional/conservative sources of capital.
I also feel that finding solutions to make the asset class more liquid and finding a way to convert longer-term liabilities in to shorter-term liabilities is an issue worth addressing.
Do you have any final words on your outlook for the space?
It’s still in the early stages of development, but over the last few years has had tremendous success and everyone needs to work towards the same direction to become a more mature and larger asset class.
ILS is widely accepted now and is here for the long run so insurers and reinsurers should embrace this asset class instead of trying to fight it.
Finally, Kinesis is very well positioned on all angles and is really thrilled to be part of this fast moving and constantly evolving asset class.
Our thanks go to Darren Redhead for his insight into the work of Kinesis Capital Management Limited.
Read previous Artemis interviews here. Would you like to be featured in an interview on Artemis? Contact us to discuss.