23 October 2017Re/insurance

Not the biggest, just the best

While many reinsurers increasingly seek size and scale, XL Catlin instead wants to be the best. That is the view of Charles Cooper, president and chief underwriting officer of XL Catlin, noting that the integration of XL and Catlin is now complete.

“Our plans have been fairly consistent over the last few years in that we are focusing on building out a world-class reinsurance platform,” he said. “The strategic combination of XL and Catlin created a top 10 global P&C reinsurer and we have market-leading capabilities in all four of the largest reinsurance markets: Bermuda, the US, London and Europe.”

Cooper says the company also has a presence in the emerging regional wholesale hubs—Singapore and Dubai—along with Miami and Zurich. In addition, XL Catlin has local offices in smaller regional markets such as Australia, Canada and Italy.

According to Cooper, the company sees a broad spread of reinsurance business with that kind of platform and it’s starting to realise the strategic value of having those very deep but broad relationships with big reinsurance buyers.

The merger of XL and Catlin is now complete. Cooper says the IT teams did a remarkable job in terms of the merger, adding that the day after the two companies came together employees were able to go into work and discover that everything worked in terms of computers and records, enabling a seamless transition.

“Integration is behind us, we are now fully integrated with the last piece being data integration, which takes the longest time. We ran two reinsurance platforms in parallel while we took the time to integrate the data—there was an inefficiency in it, but we wanted to err on the side of making sure we didn’t try to pack everything into one system immediately and have errors, but now we have everything on one platform.”

Asked if he was aiming for any particular position in the top 10 global reinsurers Cooper stresses that he did not have any particular goal in mind.

“I don’t say: ‘listen, we need to be number five or number six’, or anything like that. We have a significant insurance platform, we have a $10 billion insurance business, and we are rather unique in the reinsurance market if you think about that top 10 peer group in that a lot of players in that group are busy building out insurance platforms,” he says.

“We’re not doing that. We have an established insurance business which allows us to focus from a timing standpoint to build it at the right time with a focus on profitability, rather than on any kind of market position.

“I’m more focused on being the most respected reinsurer. I’m not sure it matters in terms of being the largest reinsurer, I would rather be the reinsurer of choice for our clients.”

A significant cat year

Looking at the current state of the market and whether the recent hurricanes will change it, Cooper replies with two words: ‘it depends’.

“It depends on the size of Irma,” he clarifies. “Harvey alone will institute some changes to the market—certainly it was a pretty significant loss. Put Irma on top of that—plus there are all sorts of other, smaller, events that are happening around the world—when you add it all up, plus whatever Irma’s final bill is, it could be a pretty significant cat year for reinsurance.

“What does that mean going forward? We will see more capital come in to this business, and probably more quickly than in the past.

“The emergence of alternative capital doesn’t fundamentally change our business. In 2005 a lot of capital was destroyed. Capital did come back into the business, but it came back primarily via startup reinsurance companies that were private equity-backed. We started a sidecar, Cyrus Re, most of which was backed by hedge fund money.”

Cooper thinks the sources of this capital will be a little bit different this time and the speed with which the money will come into the market will be higher. This is because it’s a lot faster for alternate capital to come in behind a reinsurer than it is for startup capital to come in, build up a management team, a platform and get access to that business.

He adds that the capital that comes in will be from two sources. One will be existing investors who will take a loss, say if there’s a big event, but they’ll be willing to put more capital in, although it’s very likely that they’ll require higher returns than they previously had.

The other source of capital will be investors who have been sitting on the sidelines because they understand the market and they have been waiting for the right time—but again they’re going to have higher return expectations than is currently available in the market.

“Both of those things will put upwards pressure on the market,” Cooper says “The other thing that will put upwards pressure on it, irrespective of how big Irma is, is the Harvey loss. Harvey was a somewhat unusual event.

“Every cat is an unusual event, in that they have slightly different characteristics, but when you really boil it down Harvey was the third one-in-500-year event since 1978.”

In addition, Cooper points out, the market went 12 years without a significant category 3 landfalling hurricane in the US. Because of that unusual dynamic—the absence of large catastrophes—reinsurers had been able to make decent returns.

“Once catastrophes get more significant then people will start to focusing on the underwriting profitability of all the other classes of business—and many of those are in great need of further attention as well, beyond the cat business.

“We’ve seen stress in some classes and a bit of pushback—then you have a massive event and that heightens management’s ability to push through and say ‘we need to push these rates, because we can’t rely on the absence of cat’,” Cooper concludes.