Kinesis delivers higher fees to Lancashire, profits still trapped after 2017

Kinesis Capital Management has delivered higher underwriting fees to parent specialty insurance and reinsurance group Lancashire Holdings Limited for the second-quarter, but the profit commissions from 2017 remain trapped following the major catastrophes experienced.

Kinesis is the third-party collateralized reinsurance capital management unit of Lancashire, underwriting a unique multi-class, specialty and property catastrophe focused product which is used as a retrocession protection by major reinsurance firms.

The unit was, like most ILS and reinsurance investment ventures, hit by the major hurricanes and other loss events of 2017, resulting in some collateral of affected contracts being trapped.

This has reduced Kinesis’ profit contributions to Lancashire and likely will do until the final bill for the 2017 losses has been realised, after which there may be an opportunity for some of the trapped collateral to be released.

But Kinesis continues to deliver positive income in the form of underwriting fees, with $1 million delivered in Q2 2018, up from the previous Q2’s $0.7 million, taking the full-year total so far to $2 million, up from the prior years $1.4 million.

That reflects the enlarged and more profitable portfolio underwritten by Kinesis at the beginning of this year, as Lancashire took advantage of the higher reinsurance rate environment.

During the second-quarter Lancashire also reported a $0.6 million share of losses from Kinesis, compared to a $0.7 million share of profits in the prior year. However the share of loss, which is Lancashire’s share of the impacts of 2017 loss events through Kinesis, has dropped since the $1.8 million share of loss reported for Q1 2018.

This is likely due to greater clarity being found on the loss totals from 2017 and evidence of this is seen in Lancashire’s results, where the company reveals that its total estimated net loss for the major losses of 2017 has come down over the first-half.

Lancashire’s total estimated net loss for Hurricanes Harvey, Irma and Maria plus the Californian Wildfires was $171.5 million at 31 December 2017, but then fell to $163.6 million at 31 March 2018, and has now dropped again to $160.3 million at 30 June 2018.

This suggests some reserve recoveries for Lancashire, as the true scale of the 2017 catastrophe losses becomes clearer and it’s possible that Kinesis will also be experiencing some improvement in its loss estimates as well.

Further into the future Kinesis may be able to release some of the trapped collateral from the 2017 losses and realise some profit commissions as a result, but this process will take time as the affected contracts unwind.

Many ILS strategies have been affected by loss creep in recent months, but the fact that parent Lancashire has seen its estimates decline could mean that Kinesis has experienced similar. Time will tell as the loss clarity increases.

On rates and pricing, Lancashire as usual gave some useful colour and the firm feels that pricing has now passed its post-catastrophe loss peak.

Lancashire Group CEO Alex Maloney commented on the firms results (which you can read in full here), “With a strong underwriting result and a decent investment performance, despite the volatility in the investment market, the Group has delivered a solid set of results for the year to date with an RoE of 5.9%.

“Our earlier predictions of how the insurance market would respond following the 2017 loss events are proving to be accurate. Pricing peaked at the January renewals and we are now experiencing a decline from those levels, although we remain in positive territory for the year to date.”

Maloney went on to say that while rate is now decelerating, after what can perhaps now be called the shortest post-loss hard cycle in reinsurance market history, Lancashire has still been able to take advantage of better pricing during the second-quarter to continue building a more profitable book.

“While it may appear that our second quarter premiums don’t support that statement, with a year on year reduction of 4.3%, the rate increases and growth we saw in the quarter are masked by the impact of the timing of renewal of some multi-year deals and some prior underwriting year premium that came through in the second quarter of 2017. We are pleased with the new business we have been able to add, in particular across our property book, and our new energy onshore and power underwriters are steadily building their books,” Maloney explained.

Maloney noted that further catastrophe loss experience could change the trajectory of the market, perhaps resulting in more sustained hardening.

“We will watch this year’s wind season with interest. While we believe that there is still too much capital in the market, another year of losses may serve to dampen appetites. We are witnessing some of our competitors exiting unprofitable lines of business and Lloyd’s is also beginning to take action on under-performing syndicates and lines of business. Time will tell what impact this will have on the market. In the meantime we will continue to execute our strategy – supporting our core clients and building out some new lines of business where the pricing and margins achievable make sense to do so. We expect our risk levels to therefore stay materially the same,” he commented.

It’s going to be interesting to see what profits the Kinesis third-party capital backed portfolio underwritten for 2018 could deliver in the following year, if the current period remains free of major losses.

The higher returning book should increase the Kinesis profit contribution to Lancashire, which along with any profit from 2017 that can be released could turn into much more meaningful inputs to Lancashire’s own results in quarters to come.