Seeing a world of opportunity: Stephen Catlin

Stephen Catlin will celebrate his 50th anniversary in the insurance industry on October 1.

It’s been quite a ride for the underwriter, who formed an eponymous underwriting agency which grew into the largest underwriter at Lloyd’s before he sold it for $4.1 billion to what was then XL Capital. He then helped to lead XL until it was sold to AXA.

Catlin went on to raise $1.8 billion to form a new underwriter—Convex—which is on target to write $4 billion in gross written premiums this year having passed the $3 billion mark in 2022 and made an underwriting profit.

With a career like that, it would be reasonable to believe that Catlin had seen it all. Not so, he says. In fact, he has never seen as many opportunities as there are today.

Despite, or perhaps because of, the uncertainty surrounding the global economy, climate change, the war in Ukraine and more, well capitalised re/insurers have no excuse not to do well in the current hard market.

In a wide-ranging interview, Catlin told Bermuda:Re+ILS: “Frankly, in this market environment, if you’re not growing, you’re missing a trick. And if you are fortunate to have the capital to grow, you are on the winning side. If you have less capital and you have to have negative growth, you’re on the losing side. It’s as simple as that.”

So far, Convex seems to be on the winning side.

Catlin attributes that to good timing, and with some modesty, to luck.

He says he was effectively on gardening leave before XL was sold to AXA. Already somewhat ambivalent about what had happened to the “Catlin culture” when it was subsumed into the bigger re/insurer, he says the sale was a “get out of jail free” card.

Immediately after he found out about it, he called long-time colleague Paul Brand, now the chief executive officer of Convex, and within 48 hours they had agreed to launch a new company, which became Convex.

There were sound reasons for launching the business in 2019, Catlin says.

Catlin’s historic position leadership position at Lloyd’s and strong retention rate was one.

“We knew we had a strong potential client base out there that may well decide they wanted to look for a new home, so all right, we had better be there to provide that for them, otherwise, we will miss the boat.

“Second, we both were of the view that the casualty market at long last was on the turn, which was overdue by five to 10 years. And we just thought the timing was looking good.”

Convex’s capital raise was a stunning success: “We raised $3.2 billion over an 18-month period, which has never been done before in the industry anywhere.”

If these factors could be credited to Catlin and his team’s sense of timing and sterling reputation, the next opportunity was down to luck, although it could also be seen as the ability to see opportunity where most people would have only seen disaster. After all, who would start a new insurer with the world on the verge of a global pandemic?

“Where the luck came in for us, and there was luck, was with COVID-19,” he says. “When the pandemic happened, we had been writing direct business for only about two months. So we had de minimis exposure on the direct account and we were certainly underweight in the reinsurance account as well.

“So with the rest of the market hitting a black hole from casualty, having quite a quite a few challenges, you go into COVID-19, then there is another black hole. Most CEOs were spending 80 percent of their time looking backwards, whereas we spent all of our time looking forwards and the market was tightening.

“The other place where honestly we got lucky was in the second year. We had 250 jobs to fill. We had roughly 5.000 applicants from the marketplace. People were ringing up and asking for a job from all over the place.

“What it speaks to is the disconnect and distrust between the coalface—the underwriters—and management. I’ve never seen it at this level before.

“What was perhaps more surprising was we were getting significant interest from well-known names in the marketplace. And that wasn’t something we had expected. I think maybe the history of Paul and I having been at the coalface and the culture of Catlin helped. But I think the real driver was dissatisfaction.

“That allowed us to employ some very good people without having to buy them in. I don’t think either of us anticipated being able to build up a team as quickly as we did, and for that we’re extremely grateful,” he recalls.

A casualty hole

Those steps left Convex well positioned as the market finally began to turn and as 2022 turned into a year of multiple opportunities, Catlin says.

“The last time we got close to a hard market was post-9/11. But you need two factors: the unexpected—9/11—and the casualty hole.

“But that casualty hole was, say, $25 billion in 2001 whereas today it is at least $100 billion. That’s a lot. But you have not just those two problems, there’s Hurricane Ian, which is going to be problematical because of the flood exclusions and how that turns out, plus the Ukraine war and who knows what’s going to happen there, with the risk of inflation, and the risk of recession.

“That means that people with legacy balance sheets have a load of headaches. I’m sure you’re well aware, trying to raise money for a carrier is well-nigh impossible at the moment. The private equity market has dried up completely. Every now and again, you’ll see somebody doing something in the public markets such as Everest, or Beazley. But if you look at the impact of what they’ve done in terms of the overall capitalisation, it is a pebble on the beach,” he says.

“With a situation where there is no new capital coming in, inflation itself is capital consumptive and before we talk about anything else, you could be looking at a restriction in capital provision to meet the need over a two- to three-year period from today.”

This is no bad thing, says Catlin, now executive chairman of Convex.

“I don’t think that you’re going to get investors taking the industry seriously until we have results that justify the investment and, bluntly, in the last 10 years, promises have been made that haven’t been fulfilled. The investor community has lost confidence and you can understand why. I have sympathy with them.

“But when you have a situation where you know capital constraints most likely are going to increase, with very little opportunity to raise new capital that is meaningful for the industry for probably another two years, that does speak to pricing, which is probably more in the underwriters’ favour than it is in the brokers’ or buyers’ favour. And we haven’t been there like that for a very long time.”

Different rates

Despite that, Catlin says, not all segments of the market are rising at the same time or at the same rate.

He notes that directors & officers liability rates have jumped 1,000 percent.

“That’s quite a lot,” he deadpans. “That tells you what the state of the market was. Is it enough? Time will tell, but it’s a lot better than it was before. The market, if we suddenly find that we’re getting claims coming in arising from social inflation, or moral hazard, I suspect the market will react, rather more quickly than it did before.”

Catlin believes a key to Convex’s future success is its new technology and its ability to have virtually all of its data in one place.

When the company was launched, he admits he dreaded having to build its technology from scratch. The processes that had been developed for Catlin now belonged to AXA XL and could not be touched.

“But you know what, it’s probably the best thing that ever happened to us. Because we had a blank sheet of paper, we could think about a world in the future against modern technology, as opposed to historic technology.

“We are going to have at least 80 percent of our business on a single database by the end of this year. No other carrier has achieved that. And in fairness to all of them, it’s a lot more difficult to do when you have a legacy system,” he says.

“We said right, we have to get on and do this now because the longer we leave it, the more difficult and more expensive it is going to be. So almost by default, we were handed on a plate the opportunity to achieve just that. We have better technology on one hand, and on the other hand, we are at the bottom end of the expense ratio, because it’s efficient.”

Catlin is bullish on artificial intelligence (AI), counting himself more on the side of the optimists than the doomsayers.

“There is a lot of misunderstanding about what AI can and what it can’t do, and it definitely can be abused, and therefore, it’s a global risk, as well as being a global benefit, because in the wrong hands, used the wrong way, it could create huge social damage,” he adds.

“Having said that, though, we use a fair amount of it already. Because it goes back to if you’ve got good quality data, and a single database, then you can make much better use of AI, because you can use AI to interrogate the data. AI can do these things much more quickly than the human brain can.

“If used properly, understanding its strengths and its weaknesses—for there are both—it is without doubt a huge benefit to the risk taker.”

Strengths and weaknesses

Bermuda’s greatest asset in the insurance sector is the Bermuda Monetary Authority (BMA), which enjoys an enviable reputation, followed closely by the fact it is the only real insurance marketplace outside of the UK, says Stephen Catlin.

“It wasn’t when I was first there,” Catlin says of the BMA’s strong reputation. “Regulation was an accident waiting to happen. If you have inadequate regulation, all hell will break loose and the trouble with that is it flies everywhere, and sticks everywhere.

“If you want to be in the marketplace, you want to be in the marketplace where regulation is fit for purpose. Jeremy Cox did a magnificent job of putting the Bermuda regulator on the map on a global basis; starting from nowhere he gradually gained the respect of fellow regulators.

“If you speak to most of the CEOs on island, they will tell you that the BMA is fit for purpose.”

Catlin says the cost of employment in Bermuda, which he thinks is the highest in the world, is the biggest challenge for Bermuda, coupled with the risk the government will see it as the sole means of funding public expenditure.

He remains concerned that an increase in the payroll tax on top earners in the Budget, despite being “somewhat ameliorated” in the final version will “come back to bite” the government.

Bermuda’s strength lies in the fact that it is a genuine market, a situation many helped to create, but for which he gives special credit to Michael Butt, who recently died.

“He was very much a guiding light behind the scenes at ABIR, a man of wisdom. The government listened to him, the Ministry of Finance listened to him, in a way they didn’t to other people. He gently encouraged and drove Bermuda to being the strong marketplace it is today.”