Finding a natural home

Bermuda remains the jurisdiction of choice for new reinsurance launches. In the past few months alone, Ryan Specialty Group and Nationwide launched Geneva Re on the Island and Markel announced the launch of Lodgepine Re, the vehicle that will sit alongside its new retrocessional insurance-linked securities (ILS) fund manager Lodgepine Capital Management.

Once closely associated with specialist catastrophe players, the Island is now attracting a wide spectrum of risk carriers, from specialist players targeting the life reinsurance space—such as 777 Re, which completed its first transaction in August this year—to a multitude of sidecars and ILS-related vehicles that increasingly see Bermuda as the preferred domicile to operate from. Most cite its robust and respected regulatory regime, Solvency II compliance and deep pool of talent as reasons for this.

When Stephen Catlin (on right of photograph) announced he was launching a new $1.8 billion re/insurer headquartered on Bermuda, this felt different. Convex was launched in April 2019 with an initial capital commitment of $1.8 billion. Its headquarters are in Bermuda but it will have substantial operations in London. It will underwrite insurance and reinsurance for complex specialty risks.

That such a seasoned veteran of the industry should again choose Bermuda as the home for his new venture felt like a significant endorsement for the Island, especially after a few tough years in some respects. It has been buffeted by growing competition from other jurisdictions and by some of the challenges it has faced this year grappling with overseas regulatory demands, notably the EU’s economic substance requirements.

Catlin, a part-time resident of Bermuda, says there was no doubt in his mind as to where to headquarter Convex.

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

Historic links

Catlin has long historic links with Bermuda and feels a close personal connection with the Island. After building his business in the London Market, in 1999 Catlin became the first of the Lloyd’s traditional managing general agents to establish a holding company in Bermuda after securing a private equity investment from a company based there. This paved the way for him to raise a substantial amount of capital in the wake of the 2001 World Trade Center terrorist attacks.

Now, along with Paul Brand (on left of photograph), a colleague for more than three decades, as deputy chief executive officer, he returns with his new venture, Convex. While its operations will be split between London and Bermuda, in favour of London, it should create a significant number of jobs (around 50 in the next 12 months, he says) on Bermuda and further enhance its profile and reputation as the go-to hub for large, specialist risks from around the globe.

Catlin describes Bermuda as the best possible place from which to write global risks, and stresses that the makeup of the portfolio will be determined over time.

“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.
The long game

It is early days for Convex, but it is steadily building an impressive bank of resources, infrastructure and expertise. As of August, across both offices, it had recruited 90 people including 20 product leaders and was starting to write business opportunistically, and it plans to hit the ground running from the start of 2020, Catlin says.

“We are writing some business where we see an opportunity, but our main focus is getting ready for 2020,” he says. “We are building our infrastructure, acquiring personnel and starting to form distribution relationships. This is not a short-term strategy, we have long-term capital. We want to build trust and respect from clients and build a sustainable business.”

The development of the business has taken on its own momentum since the launch, Catlin said. It has attracted talent largely by word of mouth, as opposed to using head-hunters.

“People are excited about what we are doing; lots of good people have wanted to talk to us,” he says.

“I am delighted with the calibre of people we have attracted so far—they have the qualities we want including entrepreneurial spirit, leadership capabilities and a deep knowledge within their fields.”

It has been relatively easy to attract good people—partly, he believes, because structural changes in the industry have left many quality executives disenfranchised.

“As companies get bigger, people at the coalface feel increasingly distant from senior management. People with drive and entrepreneurial spirit want to work in companies where they have access to senior management who understand their challenges and tribulations,” Catlin says.

“Paul and I have always been at the coalface. We are recruiting kindred spirits who we will trust to take responsibility and
make decisions.”

He estimates that the re/insurer will eventually write around 60 percent insurance and 40 percent reinsurance, although it will likely do more reinsurance initially, given the lower barriers to entry. Around 70 percent of staff will work on the “more labour-intensive” insurance side, and some 85 percent of business will be written out of London—with 15 percent from Bermuda.

Convex wrote some business in June this year, he says, and this is increasing. Clients he has previously worked with are keen to talk to Convex, he says, although he sees the following months as a precursor to 2020—as opposed to seeking business now.

“We have been very pleased with the interest we have seen from the distribution side and from potential clients,” he says.

“Catlin was the largest syndicate in Lloyd’s for a long time and led more than half of all the business it wrote. We had a reputation for being consistent and fair with clients and there is a gap in the market for that.”

He believes rates will continue to harden—and that there is less surplus capital to dampen this than people think.

“There are a number of tail winds moving rates upwards and all capital is being more discerning in terms of the risks investors are willing to take on.

“There is a long way to go on rates, but things are moving in the right direction. We are not offering a cycle play—we are in it for the long term.

“Equally, starting out in a rising market is better than doing so in a poor market,” he adds.

Global intentions

By launching in London and Bermuda, Convex has marked its ambitious intentions and international scope from the outset. But it is international and forward-thinking in another sense, and has signed a contract with an outsourcing company to deal with its back office needs.

The long-term strategic partnership is with India-based WNS, which will build what the company describes as a “platform + BPM [business process management]-as-a-service”, including support services relating to operations for insurance, reinsurance, claims, finance and human resources.

The deal will reduce the company’s expense ratio by around 3 percent. WNS has nearly 40,000 employees, 11,000 of whom work in insurance, working for 350 clients around the world, and uses state-of-the-art technology.

One downside of the outsourcing will be an absence of back office jobs in Bermuda, although Catlin has stressed that the Island instead gains higher value roles.

The timing of the launch could be important. Against a backdrop of a slowing hardening market, 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 start to see more companies operating at cashflow-negative. Then, over time, it will start destroying capital,” he explains.

“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.

“The market needs direction and leadership. This is an exciting time to be re-entering the market and I am delighted to be doing it with this group of people.”