Kinesis results resilient in Q4, as market turns a corner for Lancashire

Third-party collateralized reinsurance capital unit Kinesis Capital Management displayed a resilient set of results in the fourth-quarter of 2017 for parent specialty insurance and reinsurance group Lancashire Holdings Limited and after the challenging year, CEO Alex Maloney feels the market has turned a corner.

Due to its underwriting of a unique multi-class product in the insurance-linked securities (ILS) and collateralised reinsurance or retro market, including property catastrophe exposures, Kinesis was impacted by hurricanes Harvey, Irma and Maria and the second-half 2017 catastrophe activity.

That resulted in a negative third-quarter and full-year 2017 for Kinesis, but the strategy delivered positive results for Lancashire in the fourth-quarter, demonstrating its resilience.

For Q4, Kinesis delivered $2.2 million of underwriting fees, up from $1.1 million in the prior year and Lancashire also benefited from a $2.3 million share of profits, up from just $0.7 million in the prior year.

While those results are up on a year earlier, Kinesis profit commission was zero for the quarter, down from $3 million in the prior year, but this is dependent on the timing of loss experience and collateral release, so not surprising after Q3’s losses.

For the full-year 2017, Kinesis delivered $5.8 million of underwriting fees, up on 2016’s $4.4 million, $5.9 million of profit commission, slightly down on 2016’s $6.2 million, but a -$9.4 milllion share of losses, compared to a $5.1 million share of profits in 2016.

Lancashire said that the higher underwriting fees was due to more limit being placed, compared to the prior year, reflecting growth in the vehicle. It will be interesting to find out if more limit was deployed through Kinesis at the January 1st renewals, as with Lancashire reporting rate increases in lines of business Kinesis focuses on and its multi-class product used as a retro protection by major reinsurance firms, the Kinesis product may have been in demand at 1/1.

Lancashire CEO Alex Maloney discussed the state of the market at 1/1, saying, “With the impairment of capital due to these catastrophe losses, and attrition across many specialty classes, the market has finally turned a corner and we are witnessing rate increases, or at least stability, across most of the classes of business we underwrite.”

In fact, Lancashire’s Renewal Price Index metric shows a positive 7% move in property retrocession and reinsurance, with other specialty classes looking relatively stable with pricing clearly better than in prior quarters.

At Lloyd’s, pricing looks even better across the board, with positive movements in aviation, energy, marine, and property reinsurance or retro lines. Energy particularly moved for Lancashire, citing a positive 9% move in its renewal price index.

These pricing movements will flow through to Kinesis, given its multi-class, specialty and property catastrophe, product focus, which will benefit Lancashire and the third-party investors in the vehicle if loss experience is more predictable in 2018.

However, despite the positive movement in pricing and the potential for a better year’s underwriting results, Maloney remains cautious, recognising that the market remains challenged.

“We remain committed to our capital management strategy and will continue to deploy capital where attractive underwriting opportunities present themselves, but also remain committed to our strategy of returning excess capital if we conclude the underwriting risk and return balance is not sufficient to support our view of the opportunity,” he explained.

Continuing, “Underwriting expertise and discipline remains essential, but in the classes of business which we underwrite we are well positioned to take a lead in what may now prove to be a more interesting phase of the market cycle. I expect 2018 to be another challenging year for our industry, but I am confident that we have further demonstrated that the Lancashire Group has the appropriate business model, talent and access to capital to maximise underwriting opportunities to benefit our shareholders.”

After a tough 2017, Lancashire and the Kinesis team will have looked to capitalise on rates at the renewal, so it’s likely that capital deployment at 1/1 will have been higher than in the prior year, where rate movements were positive.

For the full-year 2017 Lancashire fell to a loss, but protection and retrocession, as well as the firms disciplined underwriting helped to minimise the impact.

CFO Elaine Whelan explained, “Following the hurricanes of the third quarter, the fourth quarter of 2017 saw further catastrophe loss activity with the California wildfires. These events have led to a small loss for the quarter. Our RoE for the fourth quarter was negative 0.9% bringing our RoE for the year to negative 5.9%.

“With improved rates at the 1 January renewals, and our current outlook, we continue to expect to put all of our current capital to work this year.”

This is the first time in a number of years that Lancashire has been so bullish on the underwriting prospects in the market, suggesting Kinesis will also have benefited and deployed as much limit as it could at 1/1.