Kinesis profit commission dips on held collateral from reserves

Lancashire Holdings third-party reinsurance capital management unit Kinesis Capital Management held back on distributing profit commission to its parent in the third-quarter while it awaits the confirmation of loss estimates from earlier this year.

Demonstrating why discipline is important in insurance-linked investment funds or vehicles, Kinesis reserved for a few potential losses from 2015 and as a result has held back collateral until the final determination of the size of any claim it needs to pay is made.

As a result in the third-quarter of 2016 Kinesis’ profit commission contribution to Lancashire’s results is recorded as zero.

Lancashire explained; “The lower Kinesis profit commission during the third quarter and first nine months of 2016 compared to the same periods in 2015 is due to the timing of confirmation of loss quantum and the resulting retention of some collateral held.”

This is the sensible way to deal with potential losses affecting a collateralised reinsurance vehicle, utilising standard reserving practices to ensure that affected contracts are segregated and have their collateral held in order to ensure a full loss payout could be made.

It also means that Lancashire will likely benefit from a boost of income from Kinesis in a future quarter, when the quantum of these losses has been fully clarified and any excess collateral held can be released at that point in time.

For the third-quarter, Lancashire reported underwriting fees of $2.2m, which is slightly down from the $2.6m reported in Q3 2015. Meanwhile the profit commission from Kinesis is reported as zero, due to the reserves being held, compared to $1.9m a year earlier.

Year-to-date Kinesis has delivered $3.3m of underwriting fees to Lancashire and $3.2m of profit commission, which compares to $4.1m and $7.2m in the first nine months of 2015.

Previously, Lancashire explained that it expects that as much as $4m of profit commission could flow back through to the firm, once loss quantum are established and reserves released, which if that occurs as anticipated would put Kinesis up for the year in terms of commission’s earned.

Lancashire’s share of profit of associates, reflecting the re/insurers 10% equity interest in the Kinesis vehicle, came in at $2.7m for Q3 2016 which is the same as in the prior year quarter. Year-to-date the share of profits of associates is recorded as $4.4m which is slightly up on the $4.3m reported in the prior year.

2015 saw the Kinesis vehicle suffer some losses from non-elemental or man-made losses to its multi-class collateralized reinsurance products. At this stage it’s not clear whether 2016’s higher natural catastrophe and severe weather attrition has had any additional effect, or whether any other losses could have hit Kinesis in 2016 so far.

Kinesis remains a very profitable vehicle though, when you consider its size is not of the scale as some re/insurers ILS funds. The unique product offering it provides and the expertise of Lancashire underwriting ensure that the margin generated from managing third-party capital at the firm is high.

The Kinesis vehicle returned approximately 15% to its investors for the 2014 underwriting cycle and the firm said that it hopes to do similar for the 2015 underwriting year, even allowing for the reserves it set in Q4 of 2015.

That remains a very attractive return for investors and for Lancashire generates a welcome source of profits from underwriting with third-party capital.