Plans for expansion

12-01-2016

Plans for expansion

Working with a Japanese parent means there is a great emphasis placed on trust, and Sompo has put its trust in industry veteran Canopius’s Michael Watson to deliver in the global reinsurance markets, as Bermuda:Re+ILS discovers.

Global specialty re/insurer Canopius’s name is derived from Nathaniel Canopius, a Cretan scholar studying at Oxford University who is reputed to have brewed the first cup of coffee in England in 1637. But it was Japanese insurance giant NKSJ that woke up, smelled the coffee and promptly paid £594 million ($902 million at October 2015 rates), through its Sompo Japan subsidiary, to buy the Lloyd’s managing agency in 2013.

Sompo had provided trade capital to Canopius for several years so there was already an established working relationship when the takeover approach was first made to Canopius in 2013, and the deal was sealed very quickly.

The purchase meant a windfall for private equity outfit Bregal Capital, whose funds controlled just over 95 percent of the company, the remaining 4.6 per cent being owned by 93 members of Canopius staff, including chairman Michael Watson.

It’s been quite a journey for Watson as he has navigated Canopius to the point where its premiums under management now exceed £1 billion ($1.5 billion). It has achieved significant growth over the last 12 years through a mix of organic expansion and acquisition and is one of the top 10 insurers in the Lloyd’s insurance market.

Along the way Watson has steered Canopius into acquiring fellow Lloyd’s agency Creechurch and forming Arista Insurance, which was sold to Towergate last year.

Multi-tasking

Canopius has not had a separate chief executive since Inga Beale left the company in December 2013 to become CEO of Lloyd’s, with Watson handling the dual role until August of this year when Stuart Davies took over. It might be thought that a man who enjoyed having his hand so firmly on the tiller might balk at having to take something of a back seat when plotting the future direction of the firm.

"Sompo and Canopius coming together can find ways to bring to market something that is bigger and better.”

In fact the move has re-energised Watson as he oversees the transformation of the business into a speciality insurance and reinsurance operation backed by the financial might of Sompo—one that has very definite expansion plans.

Sompo has committed itself to an international growth strategy due to the limited opportunities available in its mature domestic market, and has earmarked significant financial resources to building out its non-Japanese business.

The US is an attractive investment destination for Japanese insurers, both from the point of geographical diversification and also because many US insurers are open to exploring a sale after years of record low interest rates have weighed on their margins and hurt their profits.

Watson confirms that it is targeting the North American market and as a result is “looking to bring new people on board for a new class of business”.

“We want to increase scale there. Over the next 12 months two new underwriting teams will be coming on board and later this year there will be a new branch opening in the US. We are actively looking to develop the franchise,” he adds.

The company wants to “ramp up accident and healthcare, which has good potential for growth”.

It will also be looking to increase its specie business, where historically it has been a modest player. Now it will seek a “more prominent” position.
A big help on this quest is the appointment of Philip Turner as head of specie. Turner has led the Marsh specie practice for the past 20 years and has more than 40 years’ experience working in the sector.

His recruitment is a big coup for Canopius. His detailed knowledge of the sector and long-standing relationships will bring valuable expertise to the existing team and help develop its leadership credentials in the specie market.

“There is more of that business in the more mature markets of the US and Europe,” Watson says. “Forty percent of our business already comes out of the US, but could it be more? Sure, because our market share in the US is small and we want to increase scale there.

“Sompo’s financial strength will help us grow the business, although there is no pressure to go out and do it today. They are patient and take a long-term view.”

Watson might say that patience is the order of the day, but the new group has already hit the ground running through the formation of a new unit to jointly manage assumed reinsurance business.

Announced in September, the new Sompo Canopius Re will use two underwriting platforms: Canopius at Lloyd’s and a Zurich-based reinsurance company, Sompo Japan Canopius Reinsurance, and is expected to start underwriting on January 1, 2016.

The firm wants to found branch offices in Asia, Bermuda and the US, but this year is mostly one of consolidation where the businesses and people and underwriting philosophies will be brought together and unified.

Boosting Bermuda

The decision from Canopius to bolster its Bermuda operation is welcome news following the announcement in August that the holding company for two Bermuda firms was to leave Bermuda and base itself in Switzerland as part of an overall restructuring programme across Canopius Group in the wake of the group’s buyout by the Japanese insurance giant.

According to Watson, Japanese sensibilities came into play when deciding on the move.

“Switzerland was considered a better global hub for the Japanese,” he says.

“The Japanese like to do things properly. They are respectful of the established order and they don’t like to cut corners and are comfortable operating in the background.”

It was for these reasons that Bermuda with its low tax regime was believed to have had too many implications for the Japanese management team.

However, Watson did promise that the new company would maintain an underwriting presence on the Island and would probably even look to increase the head count.

Operating under Japanese management also brings some new ways of operating for Canopius. For example, it is subject, as a Sompo affiliate, to oversight from the Japanese financial services authority.

As might be expected there was something of a culture clash when the two firms came together a couple of years ago. Watson was happy to endorse the “good clash” interpretation that was put on this by Sompo CEO Kengo Sakurada.

“Their culture is more reserved than our more confrontational culture. We have had to interpret what their thinking is but I think they understand what we are doing today and the way we work, and we are getting to know them,” says Watson.

The vast reserves of the Japanese insurance giant brings opportunities that the standalone Canopius could have only dreamed of.
“There is no doubt that the move has been massively beneficial,” says Watson. “We have huge advantages through ownership. Sompo and Canopius coming together can find ways to bring to market something that is bigger and better.”

Europe poses a more difficult proposition for growth and development, but plans are afoot for a new renewable energy team to be in position in the New Year in Amsterdam, where the operation is conducted through Sompo Japan Nipponkoa Nederland, a wholly-owned Canopius subsidiary.
Canopius is keen, however, to lead in the cat market and to that end has its own team of experts who concentrate on cat modelling: it has developed its “own view of risk”.

“We think that is a competitive advantage,” says Watson. “We plough resources into our own research to be able to challenge the scientific basis, which sometimes leads to different conclusions from those of others. Certainly risk management generally was a significant attraction in doing the deal.”

Watson suggests that Sompo’s existing global licensing deals will help it mine new business in areas where Lloyd’s currently has no presence. There are also plans afoot for an enterprise risk management (ERM) centre in London. In fact, Canopius’ ERM expertise and capability was one of the things that was attractive to Sompo.

It’s just another reason for Watson to be “upbeat in a downbeat market”. 

Canopius, Michael Watson, Bermuda, Europe

Bermuda Re