Lancashire bucks the loss creep trend, Kinesis underwriting fees rise

Specialty insurance and reinsurance group Lancashire Holdings Limited has benefitted from setting prudent reserves for the major hurricanes of 2017, reporting today that its ultimate loss estimates for those events have fallen when others have crept higher.

Lancashire has been hit by 2018 wildfires and other catastrophe events, which have dented its results somewhat and will also have dented the returns its third-party investors make from Kinesis, but still the third-party collateralized reinsurance unit delivered higher underwriting fees thanks to growth in premiums written.

In reporting its results today Lancashire said it generated a positive return on equity for the full-year 2018 of 2.4% despite the impact of losses. This compares to an ROE of -5.9% for 2017.

Lancashire’s CEO Alex Maloney commented, “The fourth quarter of 2018 once again witnessed higher levels of loss activity than average, with the occurrence of hurricane Michael in October and a further series of catastrophic wildfires in California causing a tragic loss of life. When considered with the other major loss events during the year, 2018 ranks amongst the four largest loss years of the last couple of decades. Following 2017, this is the second year in succession of well above average global insured catastrophe losses. Against this backdrop, the Group has generated a positive RoE for the full year of 2.4%. Overall, I am pleased at the resilience of our portfolio and our reinsurance programme, given the loss environment.”

Maloney also cited 20% underlying premium growth for 2018 as Lancashire continued to expand its business. Additionally he cited “some signs of an improved rating environment in many of our specialty lines” which make up over half the Lancashire book, suggesting he hopes for better underwriting returns going forwards as well.

“Encouragingly, the pricing trends remain positive across most of our business lines,” Maloney explained.

One very positive factor is the ability of Lancashire to escape from the trend of loss creep and escalation related to the 2017 hurricanes, something that has likely also helped investors in Kinesis as it benefits from similar loss reserving strategies.

Maloney noted, “I am also pleased that, as the specific underlying losses have developed, the ultimate loss estimates which we established in 2017 in respect of hurricanes Harvey, Irma and Maria have reduced over the year.”

Given the amount of loss creep that has been reported widely by both traditional reinsurance firms and insurance-linked securities (ILS) players, Lancashire appears one of the few that set its reserves at a suitably substantial level to avoid this.

As we said, it’s likely that Kinesis Capital Management unit, the collateralized reinsurance arm of Lancashire that underwrites a unique multi-class, specialty and property catastrophe focused product which is used as a retrocession protection by major reinsurance firms, benefitted from these reserving practices as well during the year.

It will be interesting to see whether Kinesis can release any of those reserves going forwards, as that would benefit its investor base.

Kinesis continued to deliver positive underwriting fees to Lancashire in the fourth-quarter and over the full-year 2018 Kinesis underwriting fee income reached $6.6 million, up from $5.8 million in 2017.

The increase in underwriting fee income was due to increased premiums being underwritten. Kinesis has grown its asset base over the period, currently having more than $500 million of deployable assets under management, according to Artemis’ ILS Fund Managers data.

No profit commissions were recognised in 2018 by Lancashire from Kinesis due to the impacts of catastrophe loss events from 2017 and they will likely be dented in 2019 as well, as Lancashire shares in the burden of any losses the collateralized reinsurance vehicle suffers.

Lancashires share of Kinesis’ losses in 2018 was lower than the prior year, at $7.1 million down from $9.4 million, reflecting a slightly lower loss burden. It’s notable that $7 million of that loss was from Q4 2018 and driven solely by catastrophe activity in the period including the California wildfires.

Looking ahead, Kinesis will be hoping to deliver on higher returns for its investors thanks to the slightly better rating environment that Lancashire CEO mentioned. While at the same time the increased AuM will continue to deliver higher underwriting fees for Lancashire from its third-party capital operations.