‘Surge capital’ is the key to success for new company Paraline, says chief executive Jack Graham. The Bermuda-based reinsurer says that Lloyd’s structure is perfect for a counter-cyclical company looking to scale up or down according to market conditions

“We have started a new business at what is arguably the worst possible time,” admitted Jack Graham, chief executive of new Bermuda-based (re)insurance holding company Paraline Group, at a press conference marking his company’s official launch in late October.

It is difficult to argue with Graham: most (re)insurance start-ups are formed when the market hardens suddenly after a large loss or series of events. Paraline is setting out when, globally, rates in almost all commercial insurance and reinsurance lines are softening, indicating that there are already too many competitors in the market.

However, Graham added that, while the timing may look bad, Paraline’s approach, capital backing and cycle management will allow it to thrive. “We are committed to being a disciplined underwriter in a softening market,” he said. “We are in a very competitive soft marketplace today. It is a dangerous marketplace. Knowing how to operate in this marketplace is critical.”

While Paraline is seeking opportunities to expand now and is looking to be a “meaningful participant in the insurance and reinsurance marketplace”, Graham adds that the expansion “will be done at the right time, under the proper market conditions and with the right people”.

He is adamant that the company will not be flooding the market with fresh capacity while rates are already soft. “We are not going to add fuel to a burning market,” he said. “We are building capabilities. We are not going to be jumping into the marketplace to capture market share. Lloyd’s doesn’t need us doing that. Nobody needs more capital in the marketplace right now.”

Paraline’s operations focus around an existing business, ICAT, which is reducing its capacity. Graham said that Syndicate 4242 is one of three syndicates so far that have announced their intention to reduce underwriting capacity at Lloyd’s for the 2011 underwriting year.

Highly cyclical, volatile markets

However, when opportunities do arise, Graham says that Paraline will be able to jump into the market at a time when the rest of the market is cash-strapped and pulling back. He argues that the backing from ICAT management, Wand Partners and Elliott Management Corporation gives Paraline access to “surge capital” – the ability to put a large amount of capital to work when market conditions are good and withdraw it when they are less favourable. One of the reasons for this ability is Elliott’s attitude to investment. Graham said the $17bn hedge fund specialises in the insurance and reinsurance markets and has a particular appetite for investing in highly cyclical, volatile markets. It understands the need to deploy capital in good times and preserve it when the market is soft, so it can then be used in better times.

He also argues that the unique annual venture structure of Lloyd’s, where syndicates are closed at the end of each underwriting year and then recapitalised and rejuvenated for the next year, is the ideal framework for a venture such as Paraline. “The Lloyd’s system is the best system in the world for capital management – if you choose to use it in the way it is intended to work,” he says. “Each year we can scale up or scale down our business based on market conditions and the opportunities that are being presented to us. In the context of our desire as Paraline Group to be counter-cyclical, opportunistic underwriters and disciplined in soft markets, the Lloyd’s structure is the perfect environment in which to operate. That is why we founded ICAT Syndicate 4242 back in 2006.”

Alarm bells

Underpinning Paraline’s opportunistic strategy is ICAT’s core small commercial property business. ICAT has two main divisions: small commercial property and mid-sized commercial property. The mid-sized book has suffered the effects of the soft market but Graham says that small risks rates, although they flattened out during soft markets, have never dropped to unprofitable levels. “Those businesses are few and far between. We have one today and will work hard at finding more,” says Graham.

While Paraline’s decision to launch now may be explained by its strategy, its use of private equity backing could ring alarm bells for some observers. Private equity firms typically have a specific exit time, typically three to seven years. However, Paraline chairman Bruce Schnitzer, also the founder of Wand Partners, insists that there are no such restrictions on Paraline. “We are fortunate that all of the funding is not tied to a specific fund,” he says. “It is not connected to a timeline so we really can say, with not just intention but structure, that we don’t need a specific exit strategy timeline.”

Graham adds that the company could happily continue with its current backers and private structure, and has no firm plans to go public, although it is always a possibility. GR