Interview with Stephen Catlin on his dramatic return

The list of re/insurance executives who might be considered to have shaped the very fabric and structure of the market they operate in is a select one, yet Stephen Catlin would indeed make such a list, certainly in the London Market.

Perhaps it is because for a long time he remained one of the few true entrepreneurs in modern times to have succeeded in retaining a large ownership stake in one of the market’s biggest syndicates. Catlin sat apart from those who had climbed the ladder of corporate life, in more ways than one he could always say what he wanted to say unencumbered by the politics and restraints of corporate speak. And people always listened.

When he sold Catlin Group to XL in 2015, he became a little more restrained for a while. But not that restrained he still made his thoughts on key issues such as rates and the soft market abundantly clear. And people listened then as well.

When AXA came along in 2018, releasing him from any remaining obligations with XL, many must have wondered what he might do next. After a career such as his, he might well have been forgiven for putting his feet up for a few years.

It appears not. “If I sat on a beach for more than about a week I would go stir crazy I am simply not built that way,” he says.

Catlin: the sequel

It would be fair to say that the launch of Convex, a new specialty re/insurer focused on complex risks with an initial capital commitment of $1.8 billion and offices in London and Bermuda, did not stun the market. Perhaps Catlin’s temperament is too widely known. But it certainly raised a few eyebrows.

He does offer some compromise on this being a full return. Although Catlin is chairman and chief executive officer of Convex, his partner in crime in the venture is Paul Brand, a colleague for more than three decades. The plan, Catlin says, is for Brand to take more of the spotlight in time.

The company also has a deep bench. Its management team will include Catlin as chairman and CEO, Brand as deputy CEO, Benjamin Meuli as chief financial officer, Robina Malik as general counsel, Adrian Spieler as chief operating officer, Doug Howat as chief underwriting officer insurance, Matt Paskin as chief underwriting officer reinsurance, and Mark van Zanden as head of portfolio optimisation.

“There is a clear path in place for Paul to become CEO but there are things I can offer at the moment that will get the company going that perhaps others cannot,” Catlin explains.

“Paul and I worked together for 32 years, we know each other well and we trust each other. We talked about how much fun it would be to do it all over again and here we are.”

He elaborates that the ball was set rolling some two years ago when he sat next to Stuart Britton, the senior managing director of corporate finance advisory group Evercore, at a dinner. Catlin reports that Britton extolled Catlin’s potential to raise money in the current financial environment. “I told him to stop blowing smoke up my arse,” Catlin says.

Unfettered, newly motivated

Despite his modesty, a couple of meetings followed. Catlin was, however, encumbered by his commitments to XL. But then the AXA deal happened, followed by a series of bad results from Lloyd’s and other London Market firms.

“The AXA deal meant I was relieved of my commitments, but the results coming out were extraordinary,” Catlin says.

“Only one Lloyd’s segment made money and that was a fluke. Then some of the big syndicates’ results came out and were just horrible. That got me thinking. I felt there was a lack of leadership in that market and it could be time to act.”

The result of that thought process was Convex, which has 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 strongly believes that the market is now well overdue a fundamental correction in pricing. He claims that losses in the industry have been so severe in recent years that they are on the verge of destroying capital something that should prompt a radical change.

The launch has been timed perfectly to take advantage of this potential change. His aim is to build 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 straits 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.

“Then you have severe losses across the board, including at Lloyd’s where the only sector that made money was energy, which was more by luck than judgement,” he says.

“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. Shareholders, regulators and rating agencies will 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 this group of people.”

On his terms

Catlin stresses that he agreed to spearhead the new venture initially only 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 that with this timeframe more money will enter the market 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 says 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 predicts that the business will write around 40 percent reinsurance business and 60 percent insurance business. It will have a completely global remit with nothing off limits. He suggests that although it is easier to build a reinsurance book, its relationships in London and Lloyd’s mean it will also quickly pick up a solid base of clients on the insurance side.

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 WNS, 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,” he says.

Setting itself apart

Catlin claims that Convex’s relationship with WNS, which has some 40,000 employees in India and a strong focus on insurance, will save the company 3 percent on its expense ratio and could add as much as 5 percent to its return on investment.

He stresses that no decisions or customer-facing work will be conducted in India only back office-related systems and administration.

“We will be doing the underwriting and actuarial work and reserving in-house but there are so many opportunities around the use of technology and big data, we want to ensure we are at the cutting edge of that as well. We will look to partner with external partners where we feel that is the best solution for us,” he explains, adding that it is crucial the industry looks at ways of reducing the cost of business, and this is part of the solution.

“Clients are beginning to cotton on to just how inefficient this industry can be and how little premium is making it through to the carrier,” he says.

“Often, the underwriter is getting only 50 or 60 cents in the dollar and that is not acceptable. Outsourcing is only part of the solution but if you cannot do it better in-house it is more efficient to outsource things to experts.

“But the whole value chain needs looking at the entire industry needs to address this challenge.”

The company will have offices in Bermuda and London but has not indicated that it plans to launch in Lloyd’s yet. Catlin stresses that while Lloyd’s is very much “in his veins” he adds that he finds it hard to see how Lloyd’s could accept Convex into the market while it has so many other problems to solve first.

“I am very supportive of Lloyd’s CEO John Neal 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.

Catlin describes Bermuda as the best possible place from which to write global risks, and he is a permanent resident of the Island.

“The Bermuda regulatory regime is excellent as pragmatic and strong as anywhere. I have been part of the Bermuda market for a long time and it is a natural home for this company,” he says.

“We have not imposed any limitations on the product lines we will write, or the geographies we will target. We are a global specialty insurer and reinsurer focused on complex risks.

“Our job is to allow clients to use their capital more efficiently. It is not just about buying insurance coverage, it is about being innovative with risk and capital,” he says.

“Part of this solution may include leveraging the insurance-linked securities market, even if it is just to hedge our own risks as part of our outwards reinsurance programme,” he concludes.