Kinesis, re-engineered at higher attachment points, sees opportunity in 2020

Kinesis, the soon to be re-branded collateralised reinsurance offering of specialty insurance and reinsurance group Lancashire Holdings Limited, has been re-engineered in response to recent catastrophe activity and sees opportunities for 2020 given expectations on market conditions.

Lancashire revealed recently that its third-party capital collateralised reinsurance underwriting arm Kinesis Capital Management would be re-branded in time for the January 2020 renewals, bringing its name into line with the group as Lancashire Capital Management Limited.

The Kinesis vehicle offers institutional investors a way to access the returns of the Lancashire specialty underwriting strategy, through the unique, multi-line collateralised retrocessional reinsurance product it provides to large reinsurers.

Speaking during the Lancashire earnings call last week, senior executives of the company explained how Kinesis is positioned and said that the way the market is moving is likely to present opportunity in 2020.

With catastrophe loss activity and in particular the recent typhoons in Japan and hurricane Dorian on the analysts minds, the executives were asked whether Kinesis is exposed and what that might mean for Lancashire’s commissions and fees it earns from the structure.

Paul Gregory, Group Chief Underwriting Officer at Lancashire explained, “The first thing to say on Kinesis is obviously they have cat exposure and there’s been losses, some of which are ongoing. So it’s a little early to talk about profit commission impacts. We will know more at the end of the year.”

Darren Redhead, Chief Executive Officer, Kinesis Capital Management, then explained that his team have looked closely at the structure in responce to recent catastrophe years.

Redhead commented, “We have seen increased loss frequency in 2017, 2018 and 2019, so we re-engineered it to be at higher attachment points, than it has been in 2017 and 2018.”

Asked whether they are witnessing a retrenchment of investors and ILS capacity, Redhead added, “You saw some investors being more picky through 2019 and this rationalised some of the managers, and that is just being accelerated going into 2020. Managers will be rationalised down over the next couple of years.”

Gregory then explained how the retrocession market is responding to the loss activity and frequency of events, as well as what this means for Lancashire and the Kinesis strategy going forwards.

“Events helped to ensure that rate momentum continued. Additional events are likely to create further retro market dislocation at 1/1. Trapped funds, loss creep and increased demand have pushed rates up,” he explained.

“We expect this to persist at 1/1,” Gregory added. Saying that, “Kinesis will have the opportunity to write better priced and structured business.”

Gregory said that the market’s response is again expected to focus on where the losses have occurred though.

Explaining that, “Much like 2019 we expect a lag in property cat rates at the start of year. Loss-impacted lines later in the year are expected to see more rate.”

The opportunities that the 2020 rate environment may present could prove positive for Lancashire’s strategy in collateralised markets, with the soon-to-be-named Lancashire Capital Management platform and its investors likely to benefit.