Convex will benefit from 2020 hardening triggered by losses and Lloyd’s crisis: Catlin

The market is now well overdue a fundamental correction in pricing, something Stephen Catlin will look to capitalise on with his  new venture Convex Group, unveiled yesterday (Tuesday May 1). He claims that losses in the industry have been so severe in recent years they are on the verge of destroying capital – something that should prompt a radical change.

What is more, the market needs leadership. This set of circumstances combined with AXA’s acquisition of XL freeing Catlin from his obligations and relationship with XL have prompted him to launch the Convex with the aim of building a team and infrastructure this year, before starting to write business seriously in 2020 – just as the market will be turning, he predicts.

“The casualty market is in dire straights and will only get worse; cat losses have been consistently severe and have shown that the ILS sector is perhaps not as robust as people thought and then you have severe losses across the board, including at Lloyd’s where the only sector that made money was energy, which was more luck than judgement,” he told Intelligent Insurer.

“People talk about excess capital dampening any upturn in the market, but capital is a strange animal at the best of times. In the re/insurance space it is even stranger again because you are really talking about perceived capital.

“As the losses from casualty and other lines filter through, you will first start to see more companies operating at cashflow negative and then, over time, it will start destroying capital. And shareholders, regulators and rating agencies start to get nervous at that point. That is where I believe we will see a fundamental change in the market.

“But the market also needs direction and leadership; for me, this is an exciting time to be re-entering the market and I am delighted to be doing it with the people I am.”

The launch of Convex has been timed perfectly to take advantage of this potential change. Catlin has partnered with long-time colleague Paul Brand to launch the new specialty re/insurer, which will focus on complex risks. They have raised $1.8 billion to launch the venture from the management team, Onex Partners V, Onex Corporation’s large-cap private equity fund, PSP Investments and a consortium of co-investors.

Catlin stresses that he only agreed to spearhead the new venture initially because the capital it has raised is committed for 10 years. Anything less, would put too much pressure on the company to start underwriting too soon and grow too quickly. He believes more money with this timeframe will enter the money in future as it is more suited to the long-term nature of the re/insurance business.

With less pressure to do things quickly, Catlin said he will spend much of this year recruiting talent with a view to be ready to start writing some business by the end of the year. Come 2020, the company will be ready to capitalise on his predicted turn in rates in the market.

He said the business will likely write around 40 percent reinsurance business and 60 percent insurance business. It will have a completely global remit with nothing off limits. He claims the business will set itself apart by adopting a much more streamlined and efficient business model. It will outsource all non-core functions to a partner in India and reduce the number of parties in the risk chain where possible.

“The cost of business is far too high in the wholesale part of this industry – there are far too many snouts in the trough. There are too many people taking a cut of the premium yet adding very little value and that is not sustainable. Changing that can be difficult for larger brokers and carriers but we are unencumbered by the past and we want to be nimble and creative in how we approach things.”

The company will have offices in Bermuda and London but has not indicated it will look to launch in Lloyd’s - yet. Catlin stressed that while Lloyd’s is very much “in his veins” he added that he finds it hard to see how Lloyd’s could accept them into the market while it has so many other problems so solve first. “I am very supportive of John Neal [the CEO of Lloyd’s] but it is expensive to operate from Lloyd’s; we will see what plans he has for the market but it is not a priority for us right now,” he said.

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