Catlin grows third-party reinsurance capital managed to $350m

by Artemis on February 10, 2015

Catlin, the global specialty property casualty insurance and reinsurance firm currently going through a merger with XL Group, has continued to grow its third-party reinsurance capital programme to almost $350m of investor capital for 2015.

Catlin has a number of third-party reinsurance capital initiatives currently, which it has been running for around three years now. These provide it with collateralised reinsurance, while giving investors a way to access the Catlin books returns and Catlin has been steadily growing investor contributions, reaching $300m for 2014 and now increasing that again to $350m for the 2015 underwriting year.

The vehicles include Special Purpose Syndicates (SPS) at Lloyd’s of London, which offer a way for investors to access a whole-account quota share of Catlin’s syndicate at Lloyd’s while providing the syndicate with collateralised reinsurance.

Catlin also has its Portfolio Participation Vehicle (PPV), which provides it with collateralised reinsurance protection for its non-Lloyd’s underwriting entities, while giving the investors a way to access the returns of that business.

These vehicles provide a similar service to Catlin as a reinsurance sidecar would, but also offer investors access to different business to that which is more typical in the insurance-linked securities (ILS) and reinsurance linked investments space.

The third-party capital programme at Catlin is paying dividends as well, growing its contribution significantly in 2014. Catlin reports that it received commissions and fees amounting to $66 million in 2014, up from $28 million in 2013, from these third-party capital arrangements.

This is all part of Catlin’s approach to leveraging lower-cost capital from third-party investors within its business, as part of its capital management strategy.

The $350m of third-party capital managed within the SPS’ and PPV, are joined by third-party and non-traditional reinsurance capacity that participates in Catlin’s risk transfer program. Catlin said that the risk transfer program includes traditional and non-traditional reinsurers as well as its catastrophe bond issuances.

The firm recently closed its latest catastrophe bond, the $300m Galileo Re Ltd. (Series 2015-1), meaning that cat bonds now contribute $600m of its risk transfer including the also $300m the $300m Galileo Re Ltd. (Series 2013-1) .

The use of third-party capital has resulted in Catlin increasing the amount of reinsurance it cedes, up to $1.62 billion in 2014, reflecting increased amounts ceded during 2014 to third-party capital providers, including through the SPS’ and PPV.

Catlin says that the use of third-party capital is benefiting it in a number of ways. Firstly by the addition of fees from management expenses and commissions to its bottom line. Secondly, by providing the firm with the flexibility to respond quickly to changing market circumstances. Thirdly, by reducing the total volatility of its earnings from first-party capital relative to its business volumes. Finally, by enabling more efficient capital provision, particularly through an adverse development cover that the firm has in place which also taps third-party capital.

All of the third-party capital arrangements give Catlin increased flexibility of its capital structure and enhance the firm’s strategic options for taking on more third-party capital when market conditions allow.

As a result, Catlin says that it continues to “search proactively for lower-cost sources of capital”, including other potential third-party capital structures which might benefit it.

Overall Catlin’s results were in line with analysts expectations, although it reported a 13% before tax profits increase to $488m which is impressive in the current market.

The focus will now move to its takeover by XL Group, which is expected to come into effect in the middle of 2015. The combined entity will have a large third-party capital management footprint, bringing New Ocean Capital Management Limited and Catlin’s activities together, as well as a broad use of alternative capital for its own risk transfer needs. It will be interesting to watch how the combined firm develops its activities in this area.

Also read:

Catlin’s Galileo Re 2015-1 cat bond closes at upsized $300m.

XL Catlin deal a sign of how bad the reinsurance market really is: KBW.

Combined XL – Catlin a “perfect partner” for third-party capital: McGavick.

Third-party capital could grow to 30% of Catlin business: Jardine.

Catlin doubles contribution from third-party reinsurance capital.

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