Catlin to lead $1.8bn start-up
Insurance industry veteran Stephen Catlin is to lead a new Bermudian-based re/insurer with $1.8 billion of committed capital.
Convex Group Ltd will have underwriting operations in Bermuda and London, and the holding company will be based on the island.
In dollar value of capital it is the largest re/insurance start-up in the Bermuda market’s history.
Mr Catlin, Convex’s chairman and chief executive officer, will be teaming up with some of his former colleagues from Catlin Group, including Paul Brand, deputy CEO, Benjamin Meuli, chief financial officer and Adrian Spieler, chief operating officer.
In an interview with The Royal Gazette, Mr Catlin said the underwriting operation in Bermuda would be substantial, with “upwards of 50 people” once up to full staff by November.
The diversified insurance and reinsurance company will write diversified specialty business with a focus on complex risks. It has regulatory approvals in Bermuda and London and an A- rating from AM Best.
Convex will draw down on $1.6 billion to start out its business and will have access to further capital as the business expands.
The invested capital comes from the Convex management team and Onex Partners V, a fund of Toronto-based private-equity firm Onex Corporation, as well as Canadian-based pension investment manager PSP Investments, in addition to a consortium of co-investors.
Other members of the management team are Robina Malik, general counsel, Doug Howat, chief underwriting officer — insurance Matt Paskin, chief underwriting officer — reinsurance, and Mark van Zanden, head of portfolio optimisation.
Mr Catlin, a part-time Bermuda resident, launched Catlin in London in 1984. In 1999, the company redomiciled to London and in 2015, it was sold to XL Catlin for $4.1 billion.
He retired as executive deputy chairman of XL Catlin in April 2017.
One of the factors that lured him back into the business is the state of the market. He sees parallels between today’s market and that seen after the September 11, 2001 terrorist attacks, which caused a dislocation in the market and sparked a slew of start-ups.
“It helps if you’re starting with tailwinds,” Mr Catlin said. “In March last year, there were headwinds everywhere. I think the tailwinds will increase over time, because I don’t think the market is even close to recognising the underpricing of casualty business.
“That tail is beginning to wag the dog and with casualty business, once that tail starts to wag, then it keeps going for at least five years.”
While competitors would be struggling with the consequences of underpriced casualty business, Convex, unencumbered by legacy, would be able to focus on the future, Mr Catlin said.
“For Paul and I, this is the second time in our lives that the stars have aligned and we can hardly believe it,” he added.
“It happened after 9/11 and we [Catlin] were the only London business to raise significant capital. We raised $500 million in 2002 and while others were trying to sort out their back year, we were able to push the thing forward.”
The company will focus on complex specialty risks and write a mix of about 40 per cent reinsurance and 60 per cent insurance, Mr Catlin said. The Bermudian underwriting platform, Convex Re, will write mainly reinsurance. Convex UK is the London-based underwriting entity.
The start-up is structured to keep down expenses in a way Mr Catlin believes may be unique in the industry.
“We will have an enormous amount of outsourcing on a horizontal basis, which means that we have one outsourcer for everything,” he said.
That business is WNS, a massive outsourcer based in India that has nearly 40,000 employees, 11,000 of whom work in insurance, and state-of-the-art technology.
“Lots of people outsource bits and pieces, but nobody in insurance does a horizontal outsource, as far as we’re aware,” Mr Catlin said. “It saves us about 3 per cent on expenses.”
The risk of relying so heavily on WNS has been considered. Mr Catlin said Convex has a very detailed “Plan B”, which regulators demanded to see.
The upshot of the outsourcing is an absence of back-office jobs in Bermuda, although the island gains many higher value roles.
“Employment costs here are as high as they are anywhere,” Mr Catlin said. “Any people you employ here, or in London, have got to be adding value to the balance sheet. Those servicing the balance sheet can do it from elsewhere.”
Mr Catlin made clear that Convex would be in no rush to deploy its capital or sacrifice underwriting discipline in the pursuit of market share. The investors were in it for the long term, which gave the company time to grow carefully over time, he said.
“We have ten-year money,” he said. “That means the earnings in the first two years are almost irrelevant. We need to get there in a five-year timeframe, obviously. But we don’t have to do it yesterday.
“This year we will write some business, but our primary objective is to fill the toolbox, so we have the right resources.
“One of the reasons we wanted to start by May 1 was that some of the people we are hiring have to give six months’ notice, as is the industry standard. People are resigning as we speak. Those people will then get on the payroll by November 1, so we will be fully kitted out for 2020, which is a far more important underwriting year for us than 2019.”
Mr Catlin said he had no second thoughts about basing the company in Bermuda after the island was put on the European Union’s list of noncooperative jurisdictions on tax matters last month.
Confident that the island will be removed from the list in May, he said: “The truth is that Bermuda is a much stronger offshore financial-services centre than any other.
“There are very few brass plates here and quite correctly, they are making that more difficult to do, whereas in the Cayman Islands there are thousands.”
He added: “It isn’t true to say that Bermuda is a tax haven. The tax take in Bermuda is something like 17 or 18 per cent of GDP — in the US it’s about 18 to 19 per cent. It’s just a question of how you’re taxed.
“I think Bermuda could do better at explaining at what it is and how transparent it is. The challenges here are more to do with social issues and the inefficiency of the Civil Service.”
Mr Catlin said he was urged to start a new company by Mr Brand, who first suggested it over a beer two years ago, and then by investment banker Stuart Britton, of Evercore, at a dinner.
Mr Catlin was initially unconvinced, but a phone call he received in March last year caused him to start thinking differently.
“One Sunday morning, Mike McGavick [the former CEO of XL Catlin] rang me to tell me about the Axa transaction,” he recalled. “It took me a few hours to realise that I’d just been freed.
“Whatever my contract said, I could not have brought myself to compete with XL Catlin. My name was on the door, it was a business I’d grown over 32 years, I just couldn’t do it.
“For moral reasons and emotional reasons, it wasn’t on the table. The Axa deal changed all that.”
In the week after Axa announced its $15 billion XL takeover offer, Lloyd’s posted huge losses. After that, Mr Catlin called Mr Brand to meet up and they decided the time was right.
“I called up Stuart Britton and said, you’re right, I’m wrong. He said, ‘what do you want?’ I said, ‘I want ten-year money and I want a lot of it’.”
The real work started in October last year, when a detailed business plan was drawn up. Mr Catlin decided to put in some calls to get his “ducks in a row”. Among those to hear of his plans were David Burt, the Premier, and Jeremy Cox, the CEO of the Bermuda Monetary Authority, who were both delighted. He also called Mark Carney, Governor of the Bank of England.
“It’s very difficult to do something like this if you haven’t got support from on high, realistically,” Mr Catlin said. “The truth is that for UK Ltd and Bermuda Ltd, there needs to be some good news. This was a breath of fresh air for them.”
The first meeting with UK regulator, the Prudential Regulation Authority, took place in early December. The rigorous preparation of Mr Catlin’s team — which included about 10,000 pages of compliance-related material — helped the process move along smoothly. Convex also got the green light from another UK regulator, the Financial Conduct Authority.
“We got the whole thing done in 4½ months,” Mr Catlin said. “In think it’s the first time in ten years that they managed to get through it in less than a year.”
Convex also received its BMA approval in principle before Christmas, he said.
Some of Convex’s clients are likely to be some of Catlin’s former customers, Mr Catlin believes.
“We led a lot of business in London — at Lloyd’s we led over half the business we wrote,” he said. “A lot of those people liked dealing with us over the years.
“They weren’t desperately happy about the transaction with XL and they were even less happy about Axa, because Axa’s not a London company.
“So we’ve kind of got a captive distribution and client base just by performance historically.”
In an annual Lloyd’s survey, Catlin was top on claims paid for ten years, Mr Catlin said. “Part of our pitch was we may not have the cheapest price in the world, but if you’ve got a fair claim, we pay it and pay it quickly. It took us about 20 years to build that reputation.”
In a statement, Mr Brand said: “Convex is designed for the evolving insurance industry, and combines years of experience, knowledge and history in this market.
“Stephen and I see a great opportunity; there is demand for an insurer to bring a refreshed and enhanced offering to market, one that puts fairness and honesty at the centre of its singularly client focused proposition.
“Convex will challenge the status quo to create value across the chain and provide a differentiated service in a personal way.”
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