Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Kinesis adds investors, ready to expand when opportunity arises: Alex Maloney


Kinesis Capital Management, the third-party reinsurance capital management arm of specialist re/insurer Lancashire Holdings, has expanded its investor base so far in 2017, with many partners equipped to increase their allocation when the opportunity arises, according to Lancashire Group Chief Executive Officer (CEO), Alex Maloney.

So far in 2017 the Kinesis platform has continued to provide Lancashire with increased income, year-on-year, and during the insurer and reinsurer’s second-quarter 2017 earnings call, executives discussed its growing base of sophisticated third-party capital investors.

“We had more investors in Kinesis this year, as we continue to build out our investor club, with many partners who can deploy multiples of their current stakes when the opportunity arises,” said Maloney.

The Lancashire CEO explained that in the firm’s opinion, the investors in Kinesis are all “smart people that understand our industry and what can happen, and how you can lose your capital.”

Some of these investors, explained Maloney, previously held multiples of their current Kinesis allocation in various insurance-linked securities (ILS) structures, such as catastrophe bonds, and have since pulled back in light of market conditions, waiting for an opportunity to deploy more capital via the Kinesis platform.

However, and despite ongoing reinsurance market headwinds underlined by persistent rate declines, Maloney expressed confidence that the firm doesn’t expect any of these investors to pull-back their allocation from Kinesis.

And while in the current environment, and in line with group strategy, it’s not expected that any will increase their allocation and will instead remain disciplined, “they’ve definitely got the deep pockets for the right opportunity,” added Maloney.

Throughout the soft reinsurance market cycle Lancashire has consistently expressed the need to remain disciplined, resist writing business for the sake of it and the challenges with trying to buy your way out of the current market cycle. And it’s apparent that it’s disciplined approach exists across the entire group, as Kinesis expanded its investor club in 2017 while its assets under management (AuM) has stayed relatively the same for some time now.

Maloney explained that in the industry there is definitely “smart third-party capital investors,” but also some that may have drifted into the re/insurance world searching for yield, some of which may have never paid a loss on the business they used to do and that could be in for a shock when catastrophe losses normalise.

“I think the proof for everybody will be when we have losses and how those people react, and do they lose some of their capital in the kind of loss they expect to. I think for any of these guys, if you lose your capital in Florida or California, that’s what everyone expects. If you lose your capital in a Turkey quake or a flood loss in somewhere they’ve never heard of, I think that’s more of an issue.

“There’s definitely smart money there, there’s definitely dumb money there, but we’ll have to wait and see,” said Maloney.

“Dumb money,” or ill-disciplined third-party money that lacks the understanding of the exposures and discipline required in the softening landscape, could experience losses beyond expectations owing to a lack of transparency and education surrounding the risks, when losses do start to mount.

Maloney underlined the importance of transparency and clarity with ILS investing, explaining that you wouldn’t want to get sued by ILS providers as a result of taking someone’s money without really telling them the truth, and then an event happens and you lose their capital in a way they weren’t expecting.

“We would suggest there are some funds who are being rather economical with the truth, and bended their model results and bended their expected returns to their capital providers and as usual, we don’t do that, we are very vanilla, there’s no leverage in our fund, we take our investors through every deal,” said Maloney.

At some point a major loss event or events will happen, ultimately removing a substantial volume of capital from the market, but it doesn’t necessarily mean that a flood of capital that is believed to be sat on the sidelines will enter, said Maloney.

“I think there’s lots of capital in the world in general but I think a lot of the smart people will come in at a certain level, and it’s not inconceivable that the industry could have a reasonable size loss and nothing happens. The industry could go flat, people might not pull-out and that may surprise some people,” said Maloney.

What does appear clear, is that Kinesis boasts a growing investor base that is disciplined in line with the group, and that have the ability to substantially increase the fund’s AuM when conditions are right and the opportunity presents itself.

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