25 September 2017Re/insurance

Lessons in risk that last a lifetime

The risk transfer industry does seem to lend itself towards creating what might be called ‘legends’. Its entrepreneurial nature, tendency to adapt and innovate in periods of boom and bust (also known as the hard and soft cycle) seem to deliver just the right mix of challenge and opportunity for certain individuals to rise above the rest and create companies, or a series of companies, that help define and shape the industry.

Some of the names naturally associated with such achievements would be Warren Buffett, Hank Greenberg, Ajit Jain and Brian Duperreault—and Don Kramer. Kramer in some ways keeps a lower profile than the others, perhaps because of the smaller size of the businesses he runs now, but a quick scan of his CV leaves you in little doubt you are in the presence of one of the true pioneers of risk transfer.

In a career that has now spanned 60 years, Kramer has seen the industry change, evolve and innovate—but he has remained at the heart of many of its most important transformations.

A rocky road to success

He started, 58 years ago, as a billing clerk typist at Oppenheimer Company. In those days, trades were calculated manually and his ambition at that time was to become a figuration clerk. His career had a rocky start when the initials he was using to sign off calculations—DK—were mistaken to mean ‘don’t know’ for a period of time, resulting in a number of trades being rejected.

Kramer left Oppenheimer to become a security analyst working at Moody’s before later returning to become a general partner at First Manhattan Company, and Oppenheimer Company. Throughout this period, he focused on the analysis of life insurance and property and casualty insurance stocks. He also acted as a leading investment banker in the field, concluding several major acquisitions by publicly traded insurance enterprises.

In 1973 he started what may have been the first Bermuda-based ‘hedge fund’ reinsurer: Oppenheimer Re, a subsidiary of Oppenheimer & Co, the very successful manager of Oppenheimer Fund.

He then made a mistake he would never repeat. The company gave its pen to brokers who cheaply underwrote business that would turn out to be loss-making for the company. Within 16 months Kramer and his partners had closed the business. It took a further 25 years for the company finally to be fully liquidated.

Despite his remarkable CV of subsequent successes, Kramer is as keen to speak about this low episode in his career as he is of the highs. The experience taught him far more about life and business than the successes ever have, he says. To remind him of this fact, posted on the wall of his Bermuda office is the last stock certificate of Oppenheimer Re. He recalls with some seriousness the fact that his 1974 experience earned him a “Doctorate in Failure”.

“I have learned a lot more from my mistakes than I have from the successes,” he says. “Having a problem like that early in your career, can really make you in some ways. It makes you appreciate that not everything will go to plan and also the most important lesson of all—never give away your underwriting pen.”

Kramer moved on, wiser and undeterred. In 1975 he formed Kramer Capital Consultants (KCC), a management consulting practice which specialised in dealing with troubled insurance companies. During his years at KCC (1975 to 1984), he dealt with nearly all the high-profile receiverships in the US, most often representing state insurance departments.

The first in what was to become a series of insurance company startups took place in 1984 when Kramer acquired North American Company for Property and Casualty Insurance, commonly known as NACPAC. He started as the chief executive officer and then turned over the reins to an experienced management team he had recruited.

The company was initially purchased for $26 million and following several years of growth and financial development was sold to XL Capital for more than $1.2 billion.

By then, Kramer had moved on to other things. In 1993 he raised $500 million to form Tempest Reinsurance Company in Bermuda. Tempest, in turn, was merged into ACE and Kramer became vice chairman under Duperreault.

ACE itself was created as a result of several very successful acquisitions that Duperreault and Kramer initiated in addition to the acquisition of Tempest. Kramer also served ACE internationally through its two Lloyd’s syndicate acquisitions, its China acquisition, the Huatai Insurance Company, and the opening of offices in Russia and Vietnam.

Following his retirement from ACE in 2005, Kramer started Ariel Holdings (Ariel Re) with a total of $1 billion in funds raised privately. Ariel Re was sold on April 1, 2012 to Goldman Sachs and Atrium, its syndicate at Lloyd’s, was acquired by Argo.

Riding the ILS boom

Age and ‘retirement’ have not slowed him in the slightest. Most recently, Kramer has started yet another venture, this time targeting the fast-growing world of insurance-linked securities (ILS). ILS Capital Management was launched in July 2011 and harnesses long-term market relationships with underwriting and investment management expertise utilising state-of-the-art analytics.

It is worth noting that during the whole of Kramer’s insurance career he has never been hired by anyone at an existing insurance operating company—instead he has always started his own companies from a blank sheet of paper.

The same model was used to form ILS Capital, which is managed by Kramer and his two partners Paul Nealon and Tom Libassi, with an additional team of four in London, five in Bermuda and six in the US. As with his previous ventures, Kramer has surrounded himself with the top industry talent and is keen to stress the quality of his small but very skilled team. “Some of them have been with me a long time; others are quite young. But they are all very smart people,” he says.

ILS Capital has over $250 million in capital under management. “Measured growth is key in the current market conditions and has allowed our team to find attractive opportunities without sacrificing return or increasing risk,” Kramer says, stressing that the company has delivered double-digit returns on average even through an El Niño year and events in Florida.

“That makes us attractive to investors,” he says. “I would never want to be too big; I would prefer to have happy investors, which is what we have right now.”

At present the company is writing a fair bit of property-cat risk but also increasingly marine, aviation and weather risks, while not ruling out writing other books of business in various geographical locations and business lines in the future.

He stresses that taking ILS-esque solutions to the marine and aviation markets is a new approach and a new use of this form of risk management. “But these are interesting markets and if you can get the analytics right you can generate strong rates of return while also adding diversification to your book,” he says.

The company, perhaps in contrast to some of its rivals, likes and embraces volatility. Kramer likes to cherry-pick his risks. He and his experienced team are able to execute on this approach not only in property but also in lines such as marine, aviation and other speciality niche risks.

“I want volatility, I want high-risk business because that is where I get my return,” he says, stressing that this is in contrast with hedge funds that want low-risk business so they can make money managing the assets—a strategy that has not worked for some in recent years.

“Hedge funds have failed to perform in recent years—they have failed to perform on either side of the business,” he says.

The company’s services are also increasingly in demand, he says, in part driven by its expertise and willingness to take on large risks but also by the concentration of risk being created on some cedants’ books by the spate of mergers & acquisitions the industry has endured of late.

“Consolidation has helped companies like ours tremendously,” he says. “We continue to use our expertise to expand our opportunity set and look to create attractive areas for our investors.”

Belief in the future

Like most CEOs working in risk transfer, he admits the industry is challenging at the moment due to the soft market and rates being difficult on many lines of business. But he believes the biggest game-changer for the industry as a whole, which will reshape the industry long term, is low interest rates.

“That has been the biggest change for the industry. People used to get a 7 percent return on their investments and that allowed them to take a lower return on the underwriting side. But that is no longer possible.

“You now have a market of declining returns on both sides of the business and regulatory costs are also going higher. If you operate like you used to in today’s environment, there is no question that you are losing money,” he says.

This challenge has combined with an increase in the size of the risks the industry is attempting to bear, plus the explosion in analytics, which has offered a better understanding of risks but also opened the industry up to capital market investors, which have found relatively easy entry points working with companies such as Kramer’s.

Despite having very real skin in the game, Kramer has that enviable ability to consider the industry with the benefit of a long career and the perspective of one who has done it all and has little to lose. He has experienced the very best and worst that the risk transfer industry can throw at him—and not just in a business sense. His long and remarkable career has seen him rub shoulders with the now highest echelons of business—from playing tennis with a young Donald Trump (who did not like to lose, says Kramer) to sailing on the America’s Cup yacht sailed by the US in New Zealand with 40 US firemen in the aftermath of September 11, 2001.

Bermuda’s hosting the 2017 America’s Cup was a wonderful experience and one that will have helped sell the Island’s attributes to millions as a result, Kramer believes. He concedes that Bermuda has not had a smooth ride in recent years, with several of the Island’s biggest players having redomiciled to Dublin or Zurich.

Solvency II equivalence is helping boost the Island again but he places his trust in the future not in the business world or corporate events but in the young people of Bermuda. Through all the highs and lows of his career he has remained passionate about one thing: the importance for the insurance industry of attracting and nurturing young talent—just like him when he entered the industry 58 years ago.

Kramer says the insurance industry has been good to him and he recommends it as a career for young people, especially given the retraction of other industries on Bermuda.

“The industry can offer young people a fantastic career, just as I have had,” he says. “Especially on Bermuda, where some other industries have declined in recent years, the risk transfer industry offers fantastic opportunities for young people.

“Unlike some other professions, which can be outsourced anywhere, key executives such as underwriters cannot. That benefits Bermuda in every way if we can develop and nurture our young talent.

“We need young people to understand and buy into the career opportunities the industry can offer,” he says. “We need mathematicians, underwriters, actuaries and experts in weather and natural catastrophes—there has been a drain of talent and we need more people coming through the front door.”