Lancashire rate experience suggests more profitable portfolio at Kinesis

Commentary on rate improvements experienced at specialty insurance and reinsurance group Lancashire Holdings Limited suggest that the enlarged portfolio underwritten by its third-party collateralized reinsurance capital unit Kinesis Capital Management will deliver more profits throughout the year ahead.

But first the impacts of 2017 catastrophe events have to be worked through and in reporting its results this morning, Lancashire reported figures for Kinesis that show performance is currently held back by the development of losses from last year’s hurricanes and other events, as well as the resulting trapping of collateral.

Lancashire reported that Kinesis delivered $1 million of underwriting fees, up from $0.7 million in the prior year, a positive start to the year on that front and likely a reflection of the enlarged and more profitable portfolio underwritten.

However, no Kinesis related profit commissions were reported for Q1 2018, compared to $5.4 million in the prior year period, as Lancashire explained that, “Following the significant catastrophe activity during the second half of 2017, and resulting trapped collateral, there was no recognition in the first quarter of 2018 of any profit commission for the 2017 underwriting cycles.”

Additionally, Lancashire also reported a $1.8 million share of losses from Kinesis, compared to a $0.7 million share of profits in the prior year.

This could be due to some loss creep on certain contracts impacted by the 2017 events, as has been seen across the insurance-linked fund market in the first-quarter of 2018.

On the positive side, Lancashire has reported experiencing a better rate environment in Q1, leading it to underwrite more risk in the property and retrocession classes, as well as some specialty lines. This bodes well for Kinesis, which having underwritten a larger book at the January renewals with around 30% more limit deployed, now stands to benefit from the better rate environment and should begin to deliver improved results as the year progresses and the extent of the 2017 losses becomes clearer.

Lancashire Group CEO Alex Maloney commented, “We have also seen an improved rating environment following the major catastrophe losses of 2017 with rate increases across a high proportion of our product lines, so we are in a slightly more interesting trading environment than we have been for a number of years.”

However, the market environment remains one where Lancashire has not significantly increased its overall risk appetite, given the excess capital in reinsurance and the pressure that remains on pricing.

Maloney explained, “Whilst that is pleasing, the demand supply dynamic has not shifted sufficiently to bring about fundamental rate change across the board. In this environment the Group has continued to focus on the underwriting discipline of matching risk and return. The Group has written new business where the risk reward dynamics make sense; there were opportunities to do this during the first quarter with both existing and new clients. The rate improvements are very much in line with our communicated expectations following the experience of 1 January renewals. Although moving in the right direction, the rates have not yet improved enough to warrant a material increase in the Group’s level of overall risk which currently remains broadly similar to that of 2017.”

Lancashire reports its Renewal Price Index (RPI), which reflects the price increases the company has seen expressed as an approximate percentage of pricing achieved on similar contracts underwritten in 2017.

For the property and retrocessional reinsurance class of business, Lancashire reports an RPI of 111%, suggesting a roughly 11% increase on last year’s pricing. The company also reported RPI’s of 110% for Gulf Of Mexico energy business, 103% for worldwide offshore energy, 100% for terrorism, 97% for marine, and 96% for aviation.

Given where the Kinesis product sits, in being a unique multi-class, specialty and property catastrophe focused product, that is used as a retrocession protection by major reinsurance firms, it suggests that the Kinesis portfolio underwritten at January 2018 will have benefited from these rate increases.

Which suggests a greater chance of profit throughout the year, once the influence of the 2017 losses has waned. The increase in underwriting fees already reflects the enlarged amount of limit deployed, which should continue throughout the year as well.

Should this year remain relatively free of major losses, then the profit commissions that Lancashire will stand to earn from the Kinesis business will also be attractive in quarters to come.

But for now, Kinesis, like so many other ILS and collateralized reinsurance or retrocession businesses, still has to work through the effects of last years major hurricanes.

Register now for our upcoming ILS conference, July 12th 2018, Singapore