Sea legs: 50 years aboard HMS Catlin

Crossing the 34th floor of 52 Lime Street in London isn’t for the faint-hearted, and not because the office of the most famous name in insurance is at the furthest point away from the lifts. Dubbed by the Financial Times as ‘The Scalpel’, owing to its distinctive angular design, the skyscraper appears to consist entirely of glass.

The floor-to-ceiling windows intentionally offer views across the City of London financial district and far beyond, but they inadvertently also spark the realisation that now is not a good time to discover you’re scared of heights. Fortunately, the voice of the man waiting for me, Stephen Catlin, could not have been calmer.

Apart from one analogy he asked me not to print, the chief executive and chairman of Convex is evidently an old-school gentleman. When I confessed that I’m new to insurance, he presented me with a copy of his book, Risk & Rewards. When I was halfway through my questions, he seemed genuinely thankful that I’d done my research. Above all, it was the patience with which he explained how a 19-year-old with only one suit and no university degree became a self-made millionaire by the age of 60.

Full of anecdotes and famous names, his story would have kept anyone on the edge of their seat, but it was his message for Bermuda, at the end of the interview, that was totally unexpected.

Sailing into insurance

Catlin applied for a job with BL Evens: “Thanks to a chap I knew from sailing off the East Coast” and was made deputy underwriter within eight years, which was “pretty quick”. That was at the time when insurance started changing into “meritocracy-based employment”, spurred by an Act of Parliament, in July 1982, that forced Lloyd’s of London to accept a separation between brokers and underwriters.

That wake-up call for Lloyd’s had occurred amid the discovery of unacceptable accounting practices at the Alexander Howden Group, the UK subsidiary of US insurance company Alexander & Alexander Services.

Catlin was headhunted by merchant bank Antony Gibbs & Sons, which he found was keeping its broking business going despite being unprofitable, although its underwriting unit was making money.

“I felt like a poor man in a rich man’s game, and I didn’t want to work for them,” he said.

While he was secretary of Lloyd’s Yacht Club, Catlin was approached by vice-commodore Hugh Jago who suggested that he start his own agency and offered to sponsor him. Jago owned 35 percent of Catlin Underwriting Agencies for two-and-a-half years until Catlin did a management buyout. Convex deputy chief executive officer and co-founder, Paul Brand, “was around at that time” and Catlin gave him shares in the refinanced company.

Big numbers

To establish his own firm, Catlin had to ask for a loan from Barclays. The bank manager warned he would have questions that Catlin, still in his 20s, probably wouldn’t be able to answer straight away.

“I went there with spreadsheets handwritten by me, on premiums, cashflows, claims—the whole nine yards—and I could answer every single question on the spot, which blew his mind. I went in at 11:30am, left at 1pm, and by 4pm I had a £250,000 overdraft for the company, unsecured and at two-and-a-half above base. And for two of my colleagues, with the mortgages on their houses as security, I arranged loans of £50,000 each, and I upped their salaries to cover the interest,” he recalled.

A few years later, Catlin raised £29 million over two years from the Pritzker family, who owned Bermuda-based Western General Insurance. Then in 2002, a year after the 9/11 terrorist attacks, he raised $500 million in private equity.

“We had surplus capital and within two years we increased our top line by two-and-a-half times and our bottom line by four times,” he said.

“Fundraising was a difficult experience, so much so that I realised we’d better do an initial public offering (IPO), and quickly. We did that within 21 months—I’d started working on the IPO even before we got the money from the private equity side.”

In 2006, Catlin bought smaller rival Wellington Underwriting in a merger that created the biggest underwriter in terms of capacity in the Lloyd’s insurance market.

In 2015, Catlin was sold to XL Group for more than $4 billion.

“We’d started with two people and £25,000 in paid-up capital at the end of 1984. When we sold to XL, we had 2,500 people and 57 offices in 22 countries, and $6 billion in top-line premium. That was a wonderful journey but frightening, particularly the first 10 years.”

Good relationships

The secret to his success was having a vision and the determination to achieve it, Catlin said. “There will be periods of doubt, there always are, but just make sure they don’t last too long,” he added.

The “softer” side of his success is the company’s culture, he said. Proof of this are the many employees at Convex who have worked with him for more than 20 years, and also his friendship and professional relationship with Brand, that has lasted 35 years.

“During a town hall meeting about a year ago, someone asked us if we ever disagree and before I could open my mouth, Paul replied: ‘Yes, all the time. Don’t you? You should!’.

“We are different personalities and we have different thought processes, but we’re normally within 5 percent of each other, which is actually the same price. If it was ever over 10 percent, then we’d break it down, go through our assumptions, correct the wrong assumptions, and then come back together again,” he said.

As to his succession plans, Catlin joked: “What’s retirement?” but he was actually keeping to himself the news announced the following day, that Brand had been promoted to CEO of Convex, effective July 1. In the press statement, Catlin said that when he and Brand launched Convex in 2019, the plan was that “Paul would become CEO in due course”.

What might he have done differently during his career? After a long pause Catlin said: “I would have learned more quickly the importance of relationships and networking. I was a bit slow to get that, but once I got it, I didn’t let go.”

Numbers have a shape

Lloyd’s a different place these days, Catlin said. “It has changed so much. When I joined, there was no such thing as an actuary in Lloyd’s; there was no such thing as a lawyer. The concepts for modelling weren’t yet understood—instead, there was common sense and gut instinct.

“That’s why my criticism of some of the younger underwriters is that they believe we should rely on a machine without first thinking through what they believe the outcome is going to be.

“I’m quite lucky because I can see shapes in numbers. I always say: ‘Take one step back and look at the shape’,” he went on.

Although he accepts that not everyone has that ability, he is intolerant when it comes to “perceived wisdom”, meaning the idea that things should always be done in a certain way.

“You should revalidate what you did last year, every single year. That’s how you stay ahead of the game,” he explained.

Being a leader is not about barking instructions, he added. “If you’re going to be a good CEO, first and foremost you must be a good listener because that means you are treating people properly, and that’s how you build a relationship.”

It isn’t accidental that Convex from the outset has had the stated ambition to engage with its clients “in a true partnership based on fairness, dignity and respect”.

Two main marketplaces

Catlin put his listening skills into practice in a roundtable discussion in June with other leaders from the Bermuda and Lloyd’s re/insurance markets.

“I viewed myself as part facilitator and part listener, and I didn’t speak until spoken to,” he said.

Catlin knows the chair of Lloyd’s, Bruce Carnegie-Brown, “very well”, since he was non-executive director of Catlin Group from 2010 to 2014. He is also “on first-name terms” with Bermuda’s Premier and Minister of Finance, David Burt, who was visiting the UK to stimulate additional growth in the Island’s financial services industry.

“It was a very successful meeting, but David asked me on what basis I was there, given that I’m no longer with Lloyd’s,” Catlin said. “I said that they know me very well and that I’d been hoping for this meeting for some time because there’s been a bit of a standoff between Lloyd’s and Bermuda.

“The truth of the matter is that, although there are plenty of carriers around the world and of all shapes and sizes, Bermuda and London remain the main two insurance marketplaces. More than 40 percent of Lloyd’s capital comes from Bermuda and it is a properly symbiotic relationship.

“Do the two markets compete? Yes, a bit, but a lot less than individual underwriters compete with each other. They are both pulling in the same direction and they benefit from each other, but that fact has got a bit lost in the last 10 years because of some fairly clumsy comments made by some people, which reached the Treasury and made it think that Bermuda is competition for the UK, and it’s not.”

However, Bermuda does have a clear advantage, he said, with “the most fit-for-purpose” insurance regulator in the world—the Bermuda Monetary Authority, which forms “an effective and efficient triumvirate” with the government and the industry. Lloyd’s, on the other hand, has two regulators—the UK Financial Conduct Authority and the Prudential Regulation Authority (PRA), “which don’t always agree”, he added.

“The UK government is saying that the insurance industry needs to be more competitive, but I’ve been saying that for 15 years. I remember a dinner when I was seated unexpectedly next to George Osborne, then chancellor of the exchequer, and I started talking about this lack of competition. He stopped me and said I couldn’t go on because there’s a Chinese wall between the industry and the Treasury.

“He told me to write him a letter instead, which I did. Three months later, I received a typical letter in reply with only one interesting sentence in it."

This lack of pulling together by all parties in the UK insurance space manifests as “indecision, uncertainty and timewasting”, he said.

Speed to market

Convex received a licence from the PRA within three-and-a-half months, thanks to what Catlin said was a “very good relationship” with its executive, “because they knew we would do the work required to be fast-tracked”. “In the last 10 years, nobody’s got that licence in less than a year,” he added.

Speed to market is a strength of the Bermuda market, however.

“Setting up a new insurance or reinsurance company in this day and age is pretty complex, with a lot more things to do and think about than when we launched Catlin in 1984, but we chose Bermuda in 1999 and have been there ever since,” he said.

“The BMA helped us and approved our licence for Convex within eight weeks, which was an amazing achievement. Other regulators around the world don’t necessarily see why it’s important to connect with the re/insurance industry. Exceptions to this are Luxembourg, Ireland, Singapore and Switzerland, but I don’t think there’s anywhere better than Bermuda where the industry has a relationship with the powers-that-be,” he said.

Social capital

Catlin recalled that he had broken the ice with Bermuda’s Premier during his time as chair of the Association of Bermuda Insurers and Reinsurers (ABIR), when Burt was deputy leader of the Progressive Labour Party (PLP).

Catlin had asked ABIR’s secretariat to arrange a meeting with Burt and the then leader of the PLP.

“It was like having the Tony Blair and Gordon Brown families together, since they were not especially comfortable bedfellows,” Catlin said.

“I could see David looking at me with a little disdain, so I asked him: ‘Would it be helpful if I told you about my background?’. When he found out that I didn’t go to public school, but to a co-ed comprehensive; that I didn’t go to university; that I’d had to borrow the money to set up my company and that I done it from scratch—within five minutes, we became friends.

“If you break down the preconceptions and barriers, and talk to people as a human being, and encourage them to see you as a human being, then you can get from A to B.”

Years later, at the end of an informal meeting as they were waiting for their respective drivers, Catlin turned to Burt, by now Bermuda’s Premier, and said: “You know, we’re not that far apart: You’re a socialist with capital awareness and I’m a capitalist with social awareness.” And Burt agreed, he said.

Value proposition

As well as stressing the value of relationships, Catlin is famous for underlining the value of the insurance industry.

In his book, he wrote that he was ready to quit his first job at Lloyd’s after just a few months because: “I wasn’t sure whether I was working in an insurance market or a big gambling casino.” It was when he realised there was true value in insurance and that the insurance industry was a crucial part of the international financial infrastructure, that he knew that he wasn’t “a croupier in training” after all, but had a job with social value. In addition, he wrote, insurance companies can provide risk management expertise.

He cited the Deepwater Horizon accident in 2010—the biggest oil spill ever recorded. Notably, its owner BP had not bought commercial insurance to cover its drilling risks.

“Insurance, if purchased, might have contributed about $10 billion at most,” Catlin wrote in his book, “but on the other hand the disaster might never have happened because insurers would have likely demanded better risk management from BP.”

There is perhaps no better example of the value of the industry than the Insurance Development Forum (IDF) which Catlin—then XL Catlin’s executive deputy chairman—steered for three years. Launched in 2015, at COP21 in Paris, the IDF was the response to former UN secretary general Ban Ki-moon’s call on the re/insurance industry to help tackle climate change-related challenges. The elephant in the room had been that more than 90 percent of natural disasters were uninsured.

“The protection gap is absolutely vast,” Catlin said. “Disadvantaged countries have 1 to 2 percent insurance for cat loss, whereas for example in Christchurch, New Zealand, it’s 60 to 70 percent. There is a mismatch between what the need is, what the buyer will buy and what the seller can sell.

“We’ve always been bad as an industry in selling our value proposition, which is that we take a risk off the insured’s balance sheet more cheaply than they could do that themselves.”

Systemic risk

In addition to the protection gap, Catlin said, re/insurers need to pay close attention to systemic risk, which he defined as when an event affects many different businesses, regionally and globally.

“COVID-19 has forced the world to understand systemic risk, but cyber is certainly another consideration. Neither of these two types of losses are losses that the industry can cope with. The re/insurance industry doesn’t have anything like the capital required to deal with these losses and we never will,” he said.

“What we can do though is work with governments to mitigate the losses. The pandemic has proved that when there is systemic loss, governments around the world step in and are often the last port of call. Our job as insurers is to mitigate their position.”

Catlin is the chair of the steering group formed in April 2020 to work in collaboration with Pool Re in an effort to strengthen its response to future pandemics, and he gave evidence to HM Treasury for its review of Pool Re, which was published in March this year.

From the start, Catlin advised against capping Pool Re’s government guarantee, arguing that setting it too low could potentially wipe out the global P&C market.

“They would have lost a valuable industry to the Treasury through some kind of ideology,” he said, “but they did agree eventually that they shouldn’t set a cap.”

On cyber risk and the war in Ukraine, he said Russia was “playing a very dangerous game” that could have global consequences.

Convex recently had a closed meeting on this topic with a senior member of the Armed Forces, who Catlin asked me not to name.

“He spoke to our board for an hour-and-a-half without pausing for breath and without any repetition. I don’t think I ever remember having such massive data dumped onto me; my brain was hurting afterwards. Every single member of the board was completely captivated by what he was talking about. He was making us think through the possible, maybe likely, outputs and how to resolve them. It was highly complex.”

Changing of the guard

To respond to such threats, Catlin said there was “a changing of the guard” taking place in the industry that was potentially very positive.

First, Baroness Nicky Morgan, a former MP, cabinet minister and chair of the House of Commons Treasury Committee, is now chair of the Association of British Insurers (ABI). The president of ABI is Barry O’Dwyer, the CEO of Royal London, “who grew up in the Treasury”, Catlin said.

Second, Angela Knight, a former Treasury minister, is the new chair of Pool Re. Her CEO there is Tom Clementi, the former CEO of MS Amlin Underwriting.

The third, and “most extraordinary one”, Catlin said, is the new governor of Bermuda—Rena Lalgie—who was head of the Office of Financial Sanctions Implementation, created within the UK Treasury.

“For the first time that I can recall, Bermuda has a governor who is really relevant to the challenge. I was over the moon about it and I told her so,” he said. “Rena also grew up in the Treasury so now we have people involved with the industry who understand how the Treasury works.

“I’m hoping that during the next five-year period, we can open up some sensible dialogue with government because Pool Re, in effect, is one of the most successful private-public relationships in the world.

“I can tell you that Chubb CEO Evan Greenberg, an industry leader in the US who I’ve known for 35 years, would give his back teeth to have a Pool Re, but he can’t because there are 54 states. Just for once, we’ve got one over the Americans, but we haven’t made full use of it in my view,” he added.

The situation isn’t helped by the fact that during the first COVID-19 lockdown some insurers said they would not pay out on pandemic-related claims.

“That didn’t earn us any favours from the government or the Treasury, and I can understand why. I mean, that goes against the fundamental purpose of what we do: We sell a promissory note, a promise to pay, which we represent with an unambiguous contract.

“If our contract is ambiguous, then be that on our own heads, because history shows that courts will favour policyholders because they couldn’t have known better, whereas we, the professionals, could.”

Climate commitment

Catlin is outspoken about the re/insurance industry’s responsibility regarding climate change. Conservation is something he “feels personally”, and he is a trustee of the UK Game & Wildlife Conservation Trust, the database of which is “revealing” about both good and bad practices in field sports.

The genesis of Catlin Group’s investment into research in the Arctic that started in 2009 was the man behind HSBC’s marketing campaign, he said. The brief from Catlin was to find something that was of social value that could be connected with re/insurance. The result was the Catlin Arctic Survey: a 1,200-kilometre expedition to gather data on the floating ice in the Arctic. The scientists discovered that Arctic ice is melting more quickly in summer than many computer models had predicted.

“What we found out was the minimum thickness of the ice that we had thought would be about 2.7m was actually down to 0.9m,” Catlin said, adding that the data was shared openly at no charge to the global scientific community.

This work was followed in 2011 with the Catlin Seaview Survey—a relationship between Underwater Earth, the University of Queensland and Catlin. The survey was developed from the recognition that the world’s reefs are in a dramatic state of decline, due to pollution, destructive fishing and climate change.

Catlin highlighted the survey’s partnership with Google, allowing coral reefs to be revealed across multiple platforms including Google Street View, Google Earth and Google Expeditions. This innovative approach meant hundreds of millions of people were able to explore and learn about these crucial ecosystems.

Last year, Convex Group announced a multimillion-dollar partnership with the Blue Marine Foundation and the University of Exeter, with the launch of the Convex Seascape Survey. This five-year global research programme is the biggest attempt yet to build a greater understanding of the properties and capabilities of the ocean and its continental shelves in the earth’s carbon cycle.

“Blue Marine has a hunch that maybe we’re not looking in the right place for carbon sequestration,” Catlin said. “If you think about the seashore globally and the continental shelf as a landmass, and you compare that to the Amazon, the Amazon becomes a pinprick.

The right ambition

On Bermuda’s ambition to become the climate risk capital of the world, Catlin said that weather risk and climate risk were not the same thing.

“I don’t think anyone is qualified for that role yet, but I do think Bermuda has a unique opportunity to achieve carbon-neutrality. It has tide, wind and sun and it’s only 24 miles long.

“I’ve told the Premier he should look into this because, instead of Bermuda being thought of as a tax haven—which it isn’t—it could be thought of as achieving net zero. The Premier, as a socialist with capital awareness, is ambitious for the Island.”

When Catlin first moved to Bermuda, the insurance industry accounted for 15 percent of its gross domestic product. That has grown to more than 50 percent and the Island has become tightly linked to the P&C market.

“Bermuda’s financial structure would allow it to finance climate risk, but that doesn’t mean it has the innate competence to do it. My message to Bermuda is: grab the opportunity to be carbon dioxide-neutral, be a shining light in the world.

“The spinoffs from that will be enormous. That’s something they can do easily, if they put their minds to it,” he concluded.