Kinesis third-party capital income up year-on-year for Lancashire

Kinesis Capital Management, the third-party reinsurance capital management unit of specialty insurance and reinsurance player Lancashire Holdings continue to drive increases in income to the parent year-on-year, with both fees and commissions up at the mid-point of 2017.

Kinesis, which underwrites through its Kinesis Re vehicle and offers global clients a unique multi-class product in the insurance-linked securities (ILS) and collateralised reinsurance market, had benefited from collateral release in the first-quarter of 2017.

The timing of this release meant that profit commissions from the 2016 underwriting cycle were largely recognised in the first-quarter this year, with that boost helping to ensure Lancashire’s income from Kinesis is up year-on-year, also helped by an increase in underwriting fees and share of profits.

For the second-quarter of 2017 Lancashire has reported $0.7 million of underwriting fees and a $0.7 million share of profits due to its 10% equity stake in Kinesis. Those figures are both up on Q2 2016, which saw $0.6 million of fees and a $0.4 million share of profits reported.

For the half-year Kinesis has delivered $1.4 million of underwriting fees, $5.4 million of profit commissions (booked in Q1) and a $1.4 million share of profits to Lancashire, so a total contribution of $8.2 million for the half-year.

That’s up significantly on the first-half of 2016, which saw the collateralized third-party reinsurance capital activities deliver $6 million by the middle of the year.

Timing of reserve releases are all important and any releases Kinesis may benefit from in 2017 may not be seen until later in the year.

Lancashire has itself benefitted from reserve releases in the last quarter, as much higher than expected improvements flowed through. It’s possible some benefits could flow through to Kinesis due to reserve improvements later this year.

Overall Lancashire Group delivered a solid result in Q2 2017, with a net operating profit of $30.9 million, up from $25.9 million for Q2 2016.

For the half-year net operating profit is reported as $56.1 million, which is of course boosted by the $8 million of income booked thanks to the Kinesis collateralized reinsurance activities.

While the re/insurance market remains clearly challenging, CEO Alex Maloney highlighted the “current continuing soft market”, Lancashire continues to pull-back in certain areas of the market.

Maloney explained the market dynamic; “Premium rating pressure continues in the current market.  There is evidence from the insurance industry that many insurance classes are operating at marginal levels of profitability at best.”

Previously Maloney’s comments have been targeted at reinsurance lines so it is perhaps telling of where we are in the soft cycle that he now comments on primary lines as being close to becoming unprofitable as well.

Loss activity remains attritional rather than major though, which is helping the industry to report better results yet again and perhaps masks the effects of repeated renewals underwriting at reducing rates for those companies that have not pulled-back. Lancashire reduced its gross premiums written to $184 million down from $200 million for the prior year Q2.

“The dynamics of the loss environment cannot be accurately predicted in the short term, but it is evident that so far in 2017 there has been a lower level of catastrophe losses than occurred in the first half of 2016, whilst there has continued to be an active run of risk losses in the market,” Maloney said.

Lancashire believes it remains poised for any turn in the reinsurance market, with a size and depth of expertise just big enough to take advantage of market opportunities, while not being so big as to “require our business to “feed the beast” through imprudent top line growth,” Maloney continued.

Additionally, Lancashire is taking advantage of reinsurance market conditions itself.

“Outwards reinsurance remains attractively priced and as a group we have purchased more reinsurance protection for hurricane risk than in previous years,” Maloney said.

Navigating the soft reinsurance cycle isn’t easy for any firm, but Lancashire is certainly benefitting through this market phase from the additional income added by Kinesis and third-party reinsurance capital.