The share of profits and fee income that specialty insurance and reinsurance company Lancashire Holdings earned from its third-party reinsurance capital unit Kinesis Capital Management grew again in the latest quarter.
Lancashire’s share of Kinesis’ profits and corresponding fee income jumped in the third-quarter of 2015, reflecting the increasing assets under management and scale at the firms collateralized reinsurance investment management unit.
Lancashire will welcome the increasing contribution that Kinesis makes to its earnings, particularly in the challenging specialty insurance and reinsurance market environment which has forced the re/insurer to remain disciplined.
Kinesis has deployed over $340m of fully-collateralized reinsurance protection through its unique, multi-class product offering. The product itself has proved popular with cedents and is returning increasing amounts of capital as profits and fees to Lancashire, helping the re/insurer to offset declines in lines of business where it has pulled-back due to market conditions.
Lancashire reports a $2.7 million share of profit of associates earned from its 10% equity investment in Kinesis for Q3 2015, up from $1.8 million a year earlier. For the first nine months of the year Lancashire took a $4.3 million share of profits, which is the same as the first nine months of 2014.
The reason the nine month profit share has not grown is that in 2014 there was an amount earned from the running off Accordion collateralized reinsurance vehicle.
Lancashire also generates fee income from managing and providing underwriting services to Kinesis.
Underwriting fees from Kinesis amounted to $2.6 million in Q3 2015, slightly down from $2.9 million in Q3 2014. Profit commission earned from Kinesis hit $1.9 million for the quarter and $7.2 million year to date.
So adding up the Q3 figures of $2.7 million share of profits of associates, plus $2.6 million of underwriting fees and $1.9 million of profit commission, gives a total of $7.2 million of profit, fees and commissions earned by Lancashire from Kinesis in a single quarter.
With Lancashire reporting another pull-back on premiums underwritten, as it navigates the challenging reinsurance market, the contribution from Kinesis will be increasingly welcome.
Lancashire reported net profit of $37.1 million for Q3 2015, which means the $7.2 million of profit, fees and commission earned from Kinesis accounts for over 19% in the quarter, an impressive contribution.
Lancashire continues to display discipline, in terms of not underwriting for the sake of deploying capacity, again pulling back in some areas to protect returns for shareholders.
Group CEO Alex Maloney explained; “Whilst capital continues to accumulate, the downwards pressure on reinsurance and insurance pricing and terms also continues. Given this environment, I am pleased to report a return on equity for the quarter of 2.6%.
“Our principal strategic objective is to generate attractive risk adjusted underwriting returns over the course of the market cycle. Underwriting is what we understand and what we do best. We do not subscribe to the model, used by some in our industry, of ramping up risk on the investment side when underwriting conditions and returns remain depressed.
“I believe that in the current market the most important priority remains to focus on disciplined underwriting, adding value for our clients and brokers (many of whom are themselves facing challenging times) and thereby maintaining and servicing with excellence a core book of business.
“Premiums are down for the quarter – in line with experience across the market and as I would expect. In the current market one has to question the wisdom of driving for top line growth.”
Maloney also questioned some of the rationale behind the M&A activity in reinsurance, as well as some of the initiatives being pursued by others, blaming this as symptomatic of the stage in the market cycle we are currently in.
“The year to date has seen a flurry of activity on the M&A front within the industry, much of this, in my view, is driven by the need to rationalise and refocus oversized and over stretched businesses. We also continue to see a bout of initiatives and innovations in the market, the sustainability and longer term viability of which are questionable. These are symptoms of where we are in the cycle. We have seen these types of trends before and in all likelihood, will see them again,” Maloney explained.
As Lancashire continues to act rationally in the current market the growing addition of profit, commission and fees from Kinesis will help to offset declines elsewhere. That shows an intelligent use of third-party capital, particularly as the Kinesis product is something more unique which is not offered widely in the marketplace.
Kinesis may grow further at the end of this year, if demand for its product and reinsurance market conditions allow the unit to raise additional third-party capital to deploy. The January reinsurance renewal is a key time for the Kinesis team to deploy capacity, given the type of collateralized product it offers, hence it would perhaps be the right time to launch a new capital raise.