Catlin will look to third-party capital if profitable opportunities exist

by Artemis on August 19, 2013

Catlin, the global specialty property and casualty insurance and reinsurance firm with a strong base at the Lloyd’s market in London, will look to take on more third-party capital to manage if profitable growth opportunities are available, said the firms chief executive Stephen Catlin recently.

Catlin is no stranger to managing third-party capital, having previously established a number of strategic third-party capital arrangements in the form of special purpose syndicates operating at Lloyd’s of London. Catlin hailed its flexible capital sturcture for allowing it to form these vehicles quickly to take advantage of underwriting opportunities at Lloyd’s.

These special purpose syndicates have allowed Catlin to manage third-party capital within a familiar syndicate structure and were dedicated to whole account quote shares with Catlin Syndicate 2003. In the first-half of 2013 the Catlin Group made $13m in commissions and fees from managing the capital and special purpose syndicates, up from $5m in the first-half of 2012.

So there’s no doubt Catlin sees the benefits that managing third-party capital within a reinsurance business can bring to the firm but it intends to go about any expansion of these activities in a restrained and careful manner.

At the firms recent first-half earnings presentation, Stephen Catlin said that Catlin had proven its ability to manage third-party capital and notes that it gives the firm an additional level of flexibility in its operations. He also said that Catlin acknowlegde that not all third-party capital will stay in reinsurance but that some definitely will.

The influx of third-party capital, from institutional investors such as pension funds and deployed through insurance-linked security funds, collateralized reinsurance and catastrophe bonds, does increase competition in the market said Catlin, but he said that if that reduces volatility then its not a bad thing. Catlin also noted what he called a hidden benefit of third-party capital, the fact that as Catlin itself buys reinsurance its costs have gone down as well.

On managing third-party reinsurance capital, Stephen Catlin said; “Third-party capital has some benefits for our common stock holders, of which I’m one, which is that we are actually earning fees and profit commission risk free effectively, and the fees that we earn broadly cover their share of expenses.”

He also noted that with third-party capital you can increase or decrease this type of capital more easily year-on-year, allowing Catlin to use it strategically rather than permanently.

Catlin said that third-party capital will feature in the firms 2014 business plan, which it is currently defining, if profitable growth opportunities are available. He said; “We may well decide we want some more third party capital. It helps us manage the economic buffer.”

Echoing comments he made recently in an interview, where he said that Catlin may launch a third-party capital vehicle but that it would be done carefully to ensure that the inherent conflicts of interest that can come up were avoided, Catlin said that you need to spend time putting consideration into how much capital you take on to manage.

He said that Catlin would need to consider how much third-party capital it too on, as it would not want it to be dilutive to common stock holders. But, he continued, if you can earn fees and profit from third-party capital without it being dilutive to other forms of capital then that’s a good thing.

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