Lancashire expects discipline at 1/1, Kinesis fees flow despite loss activity

In reporting its results today, the CEO of specialty insurance and reinsurance group Lancashire Holdings Limited said he is anticipating a more disciplined market in terms of pricing at the key January 2019 renewals.

Lancashire fell to a loss in the third-quarter of the year, as the impact of both man-made and catastrophe loss events hit the firms profits during the period.

Alex Maloney, Group Chief Executive Officer, explained, “The third quarter of 2018 was at least as active as 2017 in terms of the number of events to impact the industry. The magnitude of insured loss, however, has been much smaller. We have, nonetheless, produced a small loss for the quarter as a result of these events. While it’s always disappointing to lose money in any quarter, we remain in positive territory for the year to date. The loss events during the quarter are a well understood part of our business model; we are prepared for such events and they lie within our risk expectations.”

But while loss activity has dented the latest quarter for Lancashire, the firm feels that market conditions have improved since the 2017 catastrophe losses and also foresees catastrophe activity this year having an effect on discipline for the end of the year renewals.

“Overall, rates are directionally up on last year and, pleasingly, we continue to see rates improving across our specialty lines of business. In our property catastrophe lines, recent loss events may stimulate that market to maintain more discipline over pricing in the run up to the January 1 renewals. While optically our gross premiums written have declined in the third quarter, rate increases and growth in the quarter are masked by the impact of quarter on quarter reinstatement premiums plus the impact of the timing of renewal of some multi-year deals in addition to exposure adjustments on prior underwriting year contracts. We have again added new business in the quarter, including across the new teams we have recruited into the Group this year,” Maloney continued.

Maloney also noted the push for improved performance in the Lloyd’s market, which he expects to have an overall effect of helping to maintain pricing discipline.

He said, “With the market in a state of flux, and as others in the market exit lines of business that are underperforming, we are well positioned to build out our offering by attracting high-calibre underwriters to our team where we see opportunities. We have also recently seen Lloyd’s take a tougher stance on the need for market underwriting discipline and for a return to pricing levels which are fundamentally profitable. The Group’s philosophy has, for many years, stressed the central importance of disciplined underwriting and we have a record of tailoring our income levels and our exposures accordingly and therefore welcome these actions.

“I believe we will have a growth opportunity in 2019 in our specialty lines. The risk exposures in our property catastrophe lines are likely to remain at similar levels as for 2018, although we remain open to opportunities in these classes too.”

The company reported a net operating loss of $24.6 million with a combined ratio of 135.2% for Q3 2018, but remains profitable for the first nine months reporting a profit of $53.7 million for the year so far and a combined ratio of 86.9%.

Elaine Whelan, Group Chief Financial Officer, commented, “In an active quarter for both risk losses and natural catastrophes, we experienced a number of losses – none individually material, but the accumulation of loss events resulted in a negative return on equity for the Group. Our return of negative 1.9% for the third quarter brings us to a return on equity of 3.9% for the year to date. Our year to date combined ratio stands at 86.9%. Our investment portfolio performed well through further interest rate increases and volatility, producing a return of 0.5% for the quarter.

“Our outlook for 2019 is a continuation of current market trends. We expect to maintain our core book of business and continue to expand our specialty insurance lines of business. While we will take advantage of any opportunities we see in the reinsurance lines, due to further enhancements in our reinsurance program, we do not anticipate needing any more capital for those. We are therefore returning approximately $40.0 million of capital via a special dividend. That represents 97.3% of comprehensive income for the year to date. We have now returned $2.8 billion or 108.4% of total comprehensive income since inception. We will, as ever, monitor our capital needs on an on-going basis.”

As ever, Lancashire also provided some visibility of the results and profit generated by its Kinesis Capital Management unit, the third-party 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.

Kinesis delivered Lancashire $2.7 million of underwriting fee income during the third-quarter of 2018, up by half a million on the prior year. Year to date the underwriting fees earned from Kinesis are $4.7 million, up from $3.6 million in the prior year.

The increased Kinesis underwriting fees for 2018 reflect a higher level of premiums under management by the vehicle compared to 2017.

Profit commission from Kinesis was zero again for Q3, due to the impacts of 2017 losses which trapped some collateral and are yet to be finalised for the vehicle.

As we said before, further into the future Kinesis will likely be able to release some of the trapped collateral from the 2017 losses and realise a little profit commission from that year as a result, but this process will take time as the affected contracts unwind.

Interestingly, during Q3 Lancashire reported a positive share of profits from Kinesis of $2.3 million, despite the loss activity that drove its own results negative. This suggests that Kinesis has stopped being as affected by the loss events from the prior year and bodes well for future quarters.

Lancashire will now be looking ahead to the end of the year, with capital to deploy at the renewals from its own balance-sheet and the collateralized reinsurance product provided by Kinesis.

The rate commentary suggests conditions may be no worse than a year ago, when Kinesis underwrote a higher performing portfolio of business, so this bodes well for the 2019 book that the vehicle underwrites.