Interview with Stephen Catlin: a man who speaks his mind

"The relationships we built during the Catlin era, prior to its sale to XL, have almost ignored what happened in between and come back to us as if nothing had happened."

· The hole in the industry’s balance sheet is far bigger than post-9/11
· Decreasing interest rates present a huge challenge for the asset side
· New capital entering the industry could dampen rates hardening
· As the market hardens “now is the perfect time to be launching a new carrier”

In an exclusive interview with Intelligent Insurer, Stephen Catlin discusses the challenges and opportunities he sees in the current market, and beyond, as well as his stella career.

When Stephen Catlin talks, people tend to listen. Those who do not, perhaps should. It was almost a year ago that the chief executive officer and founder of specialty re/insurer Convex Group warned in a speech that the industry could be facing a reserving hole in casualty business of between $100 billion and $200 billion.

Although there had been mutterings about a potential crisis in casualty business for some time, it was the first time anyone—anyone with a high profile, anyway—had dared put his head above the parapet and attempt to put a figure on such a number.

But Catlin, as he has done so often, did just that. Few in the industry openly agreed; many described the prediction as rubbish.
Yet a year on and a hole of that size is now being discussed as the norm. Now however, its impact on the industry is cumulative—losses from COVID-19 and dwindling investment returns due to ever-decreasing interest rates are both adding to the industry’s problems.

Catlin describes the industry as having a hole in its collective balance sheet far bigger than anything it has experienced before in its history, including post-9/11, which could reach some $500 billion.

As we know, he has believed for some time that the hole in the industry’s casualty reserves is between $100 and $200 billion. He thinks claims stemming from COVID-19 could reach a similar range on a global basis, although he admits estimates remain difficult at this stage. Finally, the industry also faces a huge challenge on the asset side of the balance sheet due to decreasing interest rates.

“All in all, we are looking at a situation where the bottom of the range is maybe $250 billion—but the ceiling is closer to $500 billion. That is significantly greater, on a pro rata basis, than anything we experienced after 9/11,” Catlin said.

“Back then, I would say, the range was between $50 billion and $60 billion split across World Trade Center claims and another casualty hole. But that was enough to move the market for some time.

“On that basis, it is hard to make a rational debate that suggests the duration of this hard market will be any less than that. We are in a completely different league today.”

He suggested that, while new capital will enter the industry and potentially dampen rates hardening, the amount of new money entering the industry on a pro rata basis is actually less than after 9/11.

“On a relative basis, what we are seeing is lower. That is partly because it is much harder to set up a new entity now than it was then. The challenges of getting through regulation and securing ratings are harder.

“If someone were to embark on that process today, I would be surprised if they were able to start writing business much before 2022.”

While some of this new money will flow in from the insurance-linked securities (ILS) sector, Catlin notes that some ILS investors are reassessing their view of some risks.

“It is clear to me that some investors did not appreciate that while it might be a short-tail coverage, it is a medium to long-tail outcome after a big event and the result can be trapped capital.

“Things can take time to unwind. There is still plenty of capital out there but it is more discerning. I expect something of a rebirth in the sector as investors learn from what has been,” he said.

A double-edged sword

Catlin was speaking in an interview broadcast on Intelligent Insurer’s Re/insurance Lounge, an online platform where interviews and panel discussions are held live on a weekly basis and content is available on demand at any time to members (see link below).

This $500 billion challenge facing the industry is a double-edged sword—as rates harden, now is the perfect time to be launching a new carrier. Catlin himself uses the word “luck” liberally when describing the fortuitous market conditions that Convex now finds itself writing business in. Yet given his message last November, an element of judgement must also be attributed to the industry veteran.

Against the backdrop of these extraordinary market conditions, he describes the timing of the launch of Convex a year ago as “lucky” and suggests that market conditions, combined with the startup gaining traction much more quickly than he had dared hope, mean that the business could be looking at delivering business goals originally pencilled in for 2024, three years early.

He says the new carrier will write north of $1 billion of premiums by the end of the year, split 50:50 between direct insurance and reinsurance, and be employing some 300 people. One of the most remarkable things since he started Convex has been the number of quality people, many of whom previously worked for Catlin, who have contacted the business wanting to work there.

“So many people have contacted us, we have been very blessed,” he said.

“And it has been pleasing to have been able to pick up so many relationships with clients again so quickly. The relationships we built during the Catlin era, prior to its sale to XL, have almost ignored what happened in between and come back to us as if nothing had happened.

“Frankly to our pleasant surprise, we’ve been able to pick those up more quickly than expected.
“We have been able to pick up almost where we left off, even in places like Japan where relationships usually take much longer to form and it can take several years to get on to a renewal.”

People first

Catlin attributes the attractiveness of Convex partly to its culture, which builds on the strong culture that permeated the Catlin companies before the XL sale. But he stresses that he wants to build on what has gone before, rather than replicate it.

“We’re keen to make certain that we learn from the Catlin culture as opposed to being the Catlin culture. Convex has the opportunity to do things slightly differently,” said Catlin.

“The minute one runs away from embracing change, therein lies a problem.

“Developing a strong and positive culture is not about expense but determination and willpower. Catlin had that strong culture: people didn’t always like what we had to say but we were known as fair and trustworthy.

“People liked working for us, as has been demonstrated by the number who want to come back now. People say they feel they are coming home; they can’t wait to work for us.”

He says that the biggest thing he has learned in 45 years of working in the industry is the importance of people.

“How you treat people, both internally and externally, is so important,” he said.

“We live or die on our reputation, as people and as a company, and that is created by how we behave. People can have long memories and will form an impression that will be remembered for a long time.

“There are two things you cannot buy from a supermarket shelf: experience and trust. Both you can earn only personally and corporately. All of us fall short sometimes, but the closer you can get to those principles the more you can build a durable and great business.”

What is luck?

It is worth pausing for a moment to reflect on Catlin’s career and the nature of his so-called luck.

Alongside fellow industry veteran Paul Brand, Catlin launched Convex Group in April last year, with an initial capital commitment of $1.8 billion. The launch came out of the blue for many: after a stellar career in the industry, lasting some 45 years, many would have assumed he would instead be enjoying retirement.

Catlin’s career started in 1973 when he joined BL Evens & Others on Syndicate 264 at Lloyd’s. In 1982 he became deputy underwriter, specialising in excess of loss and energy accounts.

Reflecting on the market back then, Catlin says that while it is impossible to form a startup as easily as he did now, that does not mean entrepreneurial spirit is not possible in the business.

But the bigger hurdles are a good thing, keeping the industry in check and protecting customers.

“You could not start today the way I did, but looking back I must have been barking mad. I had just turned 30 and on my first day of trading at Lloyd’s I had some blotting paper an underwing stamp and an inkwell,” he recalled.

“It was a case of picking the crumbs off the rich man’s table. You could not do that now—and that is good—but do not buy the notion there is no room for entrepreneurs in the market. You just have to do things differently now.”

While much has changed, he stresses that there is much that has not. He recalls dealing with claims from Hurricane Betsy, which occurred in 1965, many years later, proving that the idea of large cat losses having a tail and a legacy is not a new notion.

“Large and complex losses have always taken time to unwind. What we have seen recently with trapped capital should not have been a surprise,” he said.

A lot has changed for the better, he argues.

“The competence of the market is much better, as is the quality of the data, the transparency and our much more technical approach to underwriting. Equally, regulation is tighter and the rating agencies have become more important.

“Meanwhile the relationship between carriers and brokers and policyholders has evolved—for the better all the way through.

“Are we perfect? No. Are there lessons to learn? Absolutely. But the industry is in a much better shape now than it has ever been.”

He founded Catlin Underwriting Agencies in 1984 and guided it through many years of steady growth. He launched in the Bermuda market in 2002 and completed an IPO in 2004. The business was sold to XL in 2015 and then absorbed into AXA XL in 2018.

Then, almost exactly a year ago, Catlin and Brand launched Convex in London and Bermuda with $1.8 billion of committed capital.

There are a few key moments in that career which point to more than luck—perhaps the ability to take opportunities when they arise.

Building up Catlin to become the largest syndicate in Lloyd’s, by far, was a combination of hard work and that good company culture he describes. But there was another key moment for the business when he clearly saw an opportunity and was able to deliver.

That was in the aftermath of 9/11. With rates soaring and capital circling, Catlin saw the opportunity to launch on Bermuda. He became the only London business after that event to raise capital, some $500 million, never mind leverage Bermuda’s infrastructure to put it to work quickly.

“That does not seem a lot now but it enabled us to make a grab for blue chip business, especially on the facultative side, which we had not done before,” Catlin recalled.

He argues that the current market conditions present a similarly lucrative opportunity.

“It is only the second time in 20 years such an opportunity has arisen—the opportunity for Convex is massive.

“We have a blank sheet of paper, a lot of capital, and no legacy issues—it is a unique opportunity and not one we could have foreseen. Paul and I and wake up and pinch ourselves each morning.

“When we took the decision to launch Convex, we felt we had read the cycle right for casualty—maybe we would overstep the market by one year.

But no-one could have foreseen COVID-19. With hindsight, how did no-one realise that one consequence of a global pandemic would be a global financial shut down? It is obvious now.

“From adversity comes opportunity. Things are moving very fast. We are now contemplating delivering our business plan for 2024 in 2021—that is just amazing.

“Convex has had a good deal of luck and is now in a unique position to be part of this new change,” he said.

The train has left the station

Relationships and culture are not the only things pushing Convex forward—the company’s investment in technology is well publicised.
“To do things right with technology is hard work and expensive. Do I think we are where we need to get to? No—that might take at least two-and-a-half years, realistically.

“But the industry has to go digital, the train has left the station. If you don’t do that you’re missing out. The marketplace needs to take advantage of artificial intelligence (AI), algorithms et al to analyse risk better and price risk better,” said Catlin.

In July last year, Convex signed a long-term contract with WNS Holdings to build what it describes as a first-of-its-kind, integrated Platform + BPM (business process management) as-a-service proposition across industry horizontals.

That same month, Convex partnered with UK-based insurtech Cytora to develop AI-powered solutions for the commercial insurance industry.

Then, in September 2019, Convex selected Clearwater as a provider of cloud-based solutions and services for investment accounting, reporting and other data services.

This isn’t just a Convex journey, said Catlin, it’s a journey the industry must take.

“I am convinced that those that embrace technology will be winners and those that don’t will be losers,” he added.

Speaking his mind

Catlin is known for being outspoken—an attribute he attributes to the fact he has been an owner of a business and in charge of his own destiny for so much of his career.

“I tend to speak my mind, get it on the table and talk about it—I have always been like that. I suppose I do think like an entrepreneur and have a different outlook from a manager of an existing business,” he said.

“I am always seeking growth and change, and I do not accept received wisdom. I always ask people why they have done something in a certain way—and not just because that is how it was done last year.

“I don’t like following a well-trodden path. It is a state of mind: there are people who welcome blank sheets of paper, welcome thinking outside the box, without feeling exposed. They think differently and that is me.”

With this in mind, it is pertinent that the industry veteran has warned that the global re/insurance industry lacks leadership. Because of this, Catlin has taken the lead on an industry initiative to bring the risk transfer sector and government together to explore potential ways of dealing with the repercussions and economic fallout of a pandemic better in the future.

In April, it was announced that UK insurance industry leaders had come together to form a steering group, which will work with government-backed mutual reinsurer Pool Re, to propose a collective pandemic response. Catlin is chairing the group.

“I stood up to be counted on issues surrounding pandemics and the need for industry to look prospectively at what might happen next,” he said.

He’s been an outspoken member of the industry during this time, advocating for one voice from the industry and defending its reputation.

Catlin revealed: “I spoke up, partly out of desperation and partly because I couldn’t help myself. I couldn’t sit by and watch the industry’s reputation be pulled down.

“I fully expected somebody within the UK industry, who had a big balance sheet, to take the lead.”

According to Catlin, it’s not difficult to get on the front foot and change the relationship between industry and government, provided you are proactive. The challenge lies in ensuring the industry can speak with one voice.

“I have huge respect for some of these bigger companies and I do not wish to tread on their toes, but I would like to see the industry get on the front foot,” he concluded.

He says the challenge of devising an insurance-led solution to pandemic risks is increasingly difficult as the risks are so complex.
“I believe we can make progress and this can also raise the wider discussion around what the industry can and cannot do. It cannot ever pay for a whole pandemic, just as it cannot manage all cyber risk.

“Our capital base is limited and these are de facto government problems, but we can we help mitigate the cost.

“It is high time the industry got on the front foot and said: ‘look, this is what we can do and this is how we can help’,” he explained.

Turning his thoughts to the future of the industry, Catlin says that one of the key challenges the industry must address is bringing down the cost of doing business.

“We all know that the distribution costs are disproportionate to the premium received by the underwriter. We are moving to a digital future and this will help, as will other forms of data capture and analytics.

“On this basis, we will see a marked difference emerge between an insurance product that is a commodity and a bespoke product. The question will be: at what level can you afford to offer a bespoke solution?”

To find out more about how the industry has changed since Catlin began his career in 1973 at Lloyd’s, and market predictions in the wake of COVID-19, sign up to the Re/insurance Lounge and watch his interview here.