An instinct to flourish

Thirty years after forming what is now Lloyd’s largest player, Stephen Catlin is showing no sign of slowing down as he spearheads the company’s global expansion plans. Here, he tells Intelligent Insurer about his willingness to follow his instincts, his irritation with some brokers and how he defines the term entrepreneur.

At a time when many chief executives talk of unprecedented change in the structure of the market and challenging pricing conditions thanks to more competition, Stephen Catlin, chief executive of Catlin, remains unconcerned. His company recent posted record results and the firm continues to enjoy growth in most business lines.

Catlin is irritated, however, at the suggestion by some in the market that competition is tougher and pricing softer than it really is. One broker recently described the market as the worst in a generation. Catlin is ardent and exacting in dismantling this statement. After all, he points out, his 40 years in the market means his perspective transcends a lot more than just one generation.

He acknowledges that rates are softer in some lines—unsurprisingly mainly property-catastrophe reinsurance, and mainly in the London Market and Bermuda. But rates are falling from what was a very high point, he says. Single digit decreases from such a level do not a soft market make.

Casualty rates, on the other hand, are actually increasing in some areas as is pricing on some insurance lines. In some large markets such as Europe and the US, rates are reasonably stable across all lines.

In the company’s presentation in relation to its first half results, Catlin went into great detail around how premiums are shifting. The worst performing markets are on the reinsurance side in London and Bermuda where rates have declined by 7.7 percent and 7.5 percent, respectively.

But this is following almost constant rate increases between 1999 and 2013, especially on the catastrophe side, with Catlin’s book of insurance and reinsurance catastrophe business combined more than 100 percent up during that period.

In some regions, rate declines are minimal. Its US reinsurance book is only 1 percent down and its international book just 1.7 percent down. On the insurance side of the business, its Bermuda and US books have enjoyed rate increases of 8.7 percent and 2.3 percent, respectively, with the other regions seeing only small declines of around 2 percent on average.

All this, combined with low levels of losses, made for some record results in the first half of 2014.

The company made a pre-tax profit of $318 million in the first half compared with $145 million in the same period a year earlier—an increase of 118 percent. The company’s net underwriting contribution of $536 million hit an all-time high and its gross written premiums increased by 11 percent to $3.7 billion, compared with $3.3 billion in the same period of the year prior.

Exaggerated claims

The influence of the influx of alternative capital on pricing in the market has been exaggerated, Catlin believes. He largely blames brokers for this.

“The idea that this is the worst market in a generation is simply incorrect,” Catlin says. “London and Bermuda are off but they are mainly wholesale catastrophe markets and you would expect that. Yes, rates are down but from what was arguably a historic high. In other areas, rates are down but not by that much.

“A broker will say that after having just achieved a big rate reduction on one policy they have placed. Alternatively, they will be referring to the all-in renewal price on a portfolio including the parts placed with alternative capital such as insurance-linked securities (ILS). But neither of those things is an accurate reflection of rates in the traditional market.”

Catlin says he has made this point to several brokers, ones he accuses of “talking down” the market. “You have to be careful or you get what you wish for,” he says. “Such statements need context otherwise the danger is that clients will come to the negotiation table with expectations that are unrealistic.”

He is not removed from the trials and tribulations facing other companies. He accepts that the market is “challenging” as is any business scenario where pricing is under pressure. But his view on the entry of so much so-called alternative capital in recent years is pragmatic.

Competition is a reality in the market, regardless of the form that takes, he notes. “There have been many new waves of capital over the years and although some of it takes a slightly different form to what we have seen before, fundamentally, the challenges remain the same,” he says. “For us, in such an environment, it becomes more about the value and long-term stability we can add for clients. We compete on that basis as we always have.

“The new competition is really in areas where the nature of risk can effectively be commoditised. In that sense, the ILS deals are no different from the industry loss warranties traditional players have offered for a long time.

“Where risk is commoditised is this way, of course people will just go for the best price. But the wider industry remains very relationship-driven and based on choosing partners willing to be there and support you through thick and thin.

“A certain amount of business will always go to the cheapest provider of capital—that has been true on the retrocessional side for years. But when it comes back to the main lines of business, clients want to work with companies they know and trust.”

Catlin also believes that the influence that different forms of alternative capital are having on the market will eventually wane. He splits the funds entering from the capital markets into two types. He believes the money invested by the likes of pension funds is long-term—it represents only a small percentage of their overall portfolio and makes perfect sense in terms of diversification.

In contrast, much of the capital arriving from hedge funds and private equity will be short-term in its interest in the markets, he says. “Once interest rates rise and better returns become available elsewhere once more, this will start to dissipate,” he says.

Cash, capital or consolidation

Where surplus and excess capital does exist, Catlin believes this is not necessarily a bad thing given some potential reserving issues in the market and the rate at which the demand for re/insurance products could potentially grow.

“First, I am not sure the industry is as overcapitalised as people think—I suspect there could be some reserving issues out there,” Catlin says. “Second, as the world economy grows and economic values increase people naturally buy more coverage and you have some markets that look likely to get very big in the future.

“If you look at China, there are at least 10 cities which, in 10 years’ time, will each have an economy of a similar size to Florida’s and are prone to both wind and earthquake risk. These will need re/insurance support and the reality is that extra capital will be needed to cover such emerging risks.”

While Catlin remains in a strong position in the industry, he admits it is a time of mixed fortunes for some other players. Echoing comments made by other prominent industry leaders in recent months, including SCOR boss Denis Kessler, Catlin believes that a period of consolidation in the industry is likely. A combination of increased competition, lower prices and higher costs will mean some smaller players will find it increasingly difficult to survive.

As a leader on more than 50 percent of the policies it writes, Catlin is insulated from this. He says the company will maintain market share by constantly adding value for clients. Not all companies are so lucky, however. He believes that some businesses blaming shrinking portfolios on their own underwriting discipline would not choose to lose it if they had a choice.

“Companies more focused on cat and big accounts operating out of mainly London and Bermuda could find it tough,” he says. “The cost of regulation and compliance is also increasing and the critical mass in terms of size below which it becomes impractical to try and run a business is clearly increasing also.

“In this context, yes, consolidation will make sense for some companies. If they can’t achieve that certain size, they will either simply fall out of the tree or consider M&A to gain that critical mass.”

Catlin has the potential to benefit from such a dynamic, he admits, but stresses that it is not part of the company’s core strategy. “It is a possibility but the prices being mentioned at the moment are more than we would pay,” Catlin says. “Our plan is based purely on organic growth.

“We have the ability to make an acquisition,” he says referring to its 2006 deal with Wellington. “We are one of very few UK re/insurers to have made a successful acquisition in recent years. That was a success for us; we know how to integrate a business and I am sure we could make it work again. On that basis, we keep our eyes and ears open but it would have to be the right opportunity at the right price. Our main focus is just on organic growth.”

Catlin has a good track record when it comes to following his instincts in terms of how the market will change. The company’s remarkable growth pivots around a couple of key decisions he took that have been proved correct and which have defined its future strategic direction.

The first was in 1999 when along with chief underwriting officer Paul Brand, Catlin decided to that company’s global footprint must grow. He foresaw that the London Market would increasingly become a hub for reinsurance and wholesale business only. To access local retail business, a local presence on the ground would be needed.

“It was a decision mainly taken on instinct; I felt that with the exception of property-cat local markets would eventually want to retain their own business and that has been proven correct,” Catlin says.

That decision was also taken at one of the toughest times for the market with rates floundering in very soft conditions. Things had started to change in 2000 but the terrorist attacks of September 11, 2001, changed everything.

Catlin describes this event as the accelerator rather than the catalyst for change in the market but losses and uncertainty from that event also meant a deficit of capital in the industry as a whole despite hardening rates and opportunities. In 2002, Catlin raised $482 million from private equity funds and also launched Catlin Bermuda.

“Suddenly, while everyone else was scrapping to survive, we had surplus capital,” Catlin says. “Within two years, we doubled in size and we could compete with the bigger players.” An IPO in 2004 allowed the private equity players to exit but the explosion of growth in that period of time—driven by the instincts of its founder—largely created Catlin as it is known today.

The expansion of its global footprint is such that as of its recent results covering the first half of 2014, business from its non-London hubs represented almost half its business. “Our vision around London came to fruition but by expanding globally we have created choice for ourselves,” Catlin says. “We have increased our distribution and we have much greater flexibility now.”

Growth based on people

The company has been growing steadily since those heady years but in terms of where future growth will come from—in the context of greater competition in many lines—Catlin says that it is likely to come from where its market share is smaller. Given its substantial presence in London and Bermuda, further growth is tougher while remaining selective about business, he admits. “We are close to the ceiling in those markets.”

The US and European markets are a different story, however. Catlin is established yet its market share is tiny in comparison. “We have bags of head room in these,” the CEO says. “We are established and we anticipate high levels of growth over the next two to three years.”

In 2005 in the US, for example, it had it had $25 million and 25 staff; now it writes $1.5 billion and has 500 staff.

“It is about finding the right people and increasing distribution,” he says, in relation to the US market. “In fact, we get very little from the three big brokers in the US market—it is all from smaller players. That is why it takes time to grow—it takes time to establish these relationships.”

In terms of emerging markets, Catlin is playing a longer game. The likes of China, India and Latin America will grow their GDPs at a faster rate than the global GDP in the future, offering clear opportunities. Catlin is establishing a presence but is in no rush. The company has also recently launched offices in Singapore and Dubai, boosting its presence in that part of the world.

“Opportunities in some emerging markets will not be so immediate,” he says. “I have been visiting China for 25 years now. I am glad of that because I have seen its transformation and growth with my own eyes. People forget that it has four times as many people as the US and many very competent people there.

“But we make money from underwriting profit and that can be tough in emerging markets. They are less sophisticated and you will get other companies going in and simply buying market share—often losing a lot of money in the process. That is not for us. We will take a more balanced and long-term approach.”

Catlin adds that this sense of balance also applies to its split between insurance and reinsurance. The company’s portfolio is roughly one third reinsurance to two thirds insurance, a balance he says it will maintain. The reinsurance book could grow faster, he says, but that would unbalance the portfolio.

“Reinsurance business can be easier to gain but easier to lose; insurance is harder to secure, but once you do it is easier to keep it,” he says.

This measured strategic view is reflective of Catlin’s view of the world and therefore the company’s corporate culture. It is extremely rare to find a company of Catlin’s size still being run by the person who founded it 30 years ago.

Many describe Catlin the man as an entrepreneur—indeed he was  named the EY UK Entrepreneur of the Year 2011—and he certainly has many entrepreneurial attributes. But few entrepreneurs also have the skills to steadily grow a company as he has done for three decades.

To achieve that, good people skills are needed. And when asked about how he has succeeded in creating a unified identifiable corporate culture and a set of values for the company, it is people he talks about: who he hires, how he hires and the types of people he wants working in Catlin. It has also had a great bearing on the way the company’s strategy has evolved.

“Our growth has never been pre-planned in the sense of sticking pins in a map; instead, we have based our strategic thinking on finding the right people who share our values,” he says. “When we find the right person or team who we think will fit in well, we are flexible enough to change our strategy to take those opportunities.”

Catlin’s five core values are transparency, accountability, teamwork, integrity and dignity. He says Catlin’s entry into the European market came about in this way in 2004 when it hired three staff from Gerling.

Another good example of this opportunism is uncovered when you explore why Catlin has a small operation in Norway. It arose because it had the opportunity to hire Geir Myre, an aquaculture specialist who Catlin describes as the “best fish farm underwriter in the world”. It took the opportunity because Catlin felt Myre was the right fit for the company.

This ethos of hiring the right people when they become available applies equally across the company to this day and transcends both insurance and reinsurance. While Catlin personally involves himself in the selection of only the most senior people, everyone senior within the organisation knows the type of person they are seeking.

This growth ethos based on finding and working with the right people is perhaps understandable given the company’s roots. Catlin’s early days have been well documented (see box) and the company remains strongly influenced by the vision and drive of its founder.

It has already made the transition from start-up to established Lloyd’s player to the biggest player in Lloyd’s by GWP. Now, it is establishing an international footprint that is starting to rival that of its much bigger peers—a strategy that is also bearing fruit in terms of its results as it gives the company diversification away from its core markets as competition increases.

The question now is whether the firm can achieve the next level again with Catlin at the helm. Based on his track record so far, combined with his people skills and entrepreneurial qualities, it would be difficult to bet against it.

“I never considered myself an entrepreneur until I was persuaded to apply for the EY entrepreneur award,” Catlin says. “That process forced me to consider what being an entrepreneur was. I concluded it was a mixture of character traits including vision, the ability to execute, a willingness to take risks, the courage of convictions and determination.”

If the character traits of Catlin’s staff even partly mirror those of its founder, the company should enjoy a bright future.