Lancashire’s share of Kinesis’ third-party capital profits grows in Q3

Specialty insurance and reinsurance company Lancashire Holdings reported a growing contribution from its third-party reinsurance capital unit Kinesis Capital Management this morning, as its share of Kinesis’ profits and corresponding fee income grew.

For the third-quarter of 2014 Lancashire reported a share of profits of associates, which is largely due to Lancashire’s 10% equity interest in the Kinesis vehicle, of $1.8 million for the quarter. This is up on the $0.9 million reported in Q2 and $1.6 million reported in Q1, showing that the premium profit from Kinesis’ third-party reinsurance capital management business is beginning to flow through.

A year earlier in Q3 2013 the number was higher at $2.5 million, but that was related to Lancashire’s interest in the Accordion and Saltire collateralized reinsurance and retrocession sidecar vehicles.

For the first nine months of 2014 the share of profits of associates has reached $4.3 million, lower than that seen in 2013 of $8.7 million, but again the 2013 number was due to Lancashire’s more established Accordion and Saltire vehicles, while Kinesis Capital Management only began deploying third-party capital in earnest at the January 2014 renewals and it takes time for the premium income to flow through.

Additionally, as well as a share of profits, Lancashire reported that it earned an underwriting fee of $2.9 million for underwriting services that Kinesis Capital Management provided to the Kinesis vehicle. For the first nine months of the year that figure rises to $4.3 million for underwriting services rendered by Kinesis.

So Kinesis is continuing to show promise and is now more than paying its way, by returning profit and fee income to Lancashire. Kinesis Capital Management has now deployed approximately $340 million of fully-collateralized reinsurance capacity since the units inception and is likely in the midst of establishing its opportunities for the January renewals, so that number may grow further.

Lancashire is another re/insurance firm which has further diversified its operations over the last few years. Maintaining a largely specialty reinsurance risks focus and now writing much less property catastrophe retrocession business, the third-quarter saw its investment in Lloyd’s specialist Cathedral really adding to the firms income.

Lancashire reported increased premiums written and income with much of the growth coming due to the Cathedral acquisition. The combined ratio and loss ratio also improved in Q3 which helped the firm to extract more profit from the business underwritten.

The difficult market environment continues to require discipline and cycle management and Lancashire CEO Alex Maloney explained the firms approach; “2014 has been a challenging year for the specialty insurance market as we are firmly in the soft phase of the underwriting cycle. But managing the cycle is one of the key skills of the Lancashire Group of companies.”

In fact, market conditions right now are possibly the toughest that Lancashire has seen in its history, explained Maloney, but he feels that the firm has built the right team, strategy and platform to successfully navigate this soft cycle and to leave itself options as conditions improve.

As well as being disciplined in the reinsurance business it underwrites, Lancashire is also making the most of soft market pricing to ensure it uses outwards reinsurance to its best advantage.

“The silver lining of the highly competitive market is the ability for Lancashire to maintain its core inwards portfolio while managing net exposures through greatly improved pricing, terms and conditions on the outward placements. Lancashire has always said that we focus on the risk-adjusted return, and our net risk for both catastrophe and non-catastrophe exposures is now at an historically low level,” commented Maloney.

Lancashire is focusing on profitability per unit of risk underwritten, with the combined ratio being one of its most important metrics right now. Maloney continued; “The key is that Lancashire, Cathedral and Kinesis are continuing to manage the soft cycle phase with excellent combined ratios, which we believe are the strongest correlator to increasing book value per share over time factoring in our dividend.”

Lancashire looks set to continue to manage the current soft market cycle, with the help of its now broader platform and growing third-party reinsurance capital management options available through Kinesis.

Maloney said; “The market is not without challenges, but the Lancashire business model was always designed in the knowledge that we have to cater for all phases of the cycle. The work we have done over the last couple of years in widening the base of our income, and adding to our underwriting resources, reinforces our ability to trade successfully through all conditions. We are continuing to match our capital to the available opportunity and the current repurchase of our shares, as well as the announcement of our special dividend, are a continuing demonstration of the active management of our business throughout the cycle.”

More Lancashire Holdings and Kinesis Capital Management reading:

– Pricing pressure persists, renewals to see aggressive targets: Lancashire CEO.

– Kinesis raises another $50m for mid-year renewal deployment.

– ILS investment manager interview: Darren Redhead, CEO of Kinesis Capital Management Limited.

– Lower profits at Lancashire but third-party capital contributes positively.

– Lancashire discusses its Kinesis offering and why it’s different.