Proof Positive: Chris Gallagher
How a pragmatic, insightful approach to risk selection helped Sompo International weather the COVID-19 tsunami – and is elevating its profile in a market searching for answers.
Chris Gallagher, Executive Director of Sompo International Holdings Ltd. (Sompo International) and CEO of Sompo International Commercial P&C, could perhaps best be described as an insightful pragmatist – and his organisation’s futures are brighter for it.
In February, just weeks before the COVID-19 pandemic wreaked havoc on the world economy (and, by extension, re/insurers’ investment results), Gallagher spoke with Reactions about how capacity across the board had already been shrinking – how the all-out, high-limits strategy in gaining market share was no longer an option for most P&C insurers.
“Particularly in the large corporate solutions business, carriers thought they could go 100% or control accounts with very big limits – but those markets are now starting to disintegrate, and capacity’s being withdrawn or restricted,” he said.
Increased prudence in the limits offered and addressing the price of risk were becoming far more common, he added.
Then the coronavirus began to spread across the globe. Now, reconvening in a much different world, Gallagher reflects on how the underwriting and investment choices made at Sompo International pre-pandemic have proven fortuitous in protecting the company’s interests – and given it an advantage in a market where the margin for error is perhaps smaller than ever.
“When we spoke last time, I was talking very much about management teams looking in the rear view mirror about contraction and stress on balance sheets, and all COVID-19 has done is just magnify that in a more accelerated fashion,” he says.
“And we’re fortunate enough to say that we don’t have those issues.”
A global specialty provider of P&C insurance and reinsurance, Sompo International was established three years ago after the acquisition of Endurance Specialty Holdings Ltd. by Sompo Holdings Inc.
All commercial property, casualty and specialty insurance and reinsurance outside of Japan has been brought together under Sompo International’s Commercial P&C platform.
Sompo International’s mindful investment approach helped it weather the financial storm, Gallagher notes, while many other insurers weren’t as fortunate.
The company’s investment portfolio is heavily fixed-income and high-credit-quality oriented, without excessive focus on equities or alternatives.
“We were conservative in our investment philosophy, our asset allocations,” he says. “When the markets are going up, we don’t see that accretion from the investment side. Because we are positioned to take risk we actively do think about tail risk correlations, and we aren’t willing to bet the asset portfolio just to make up for lack of return on the underwriting side.
“And so we were conservative,” he continues. “Our book value change in Q1 was muted and I can fortunately say the same for Sompo Group as well. It’s a relatively modest change in our solvency positions, and I know that’s not the case for others.”
Prescience pays off
It wouldn’t be accurate to call Sompo International’s approach to insuring risks “conservative,” however, as that term implies that the company is risk-adverse – which isn’t the case.
“It can appear conservative, but – as we’ve seen it proven, it’s just sensible,” says Gallagher.
The “really poor pricing environment” over the last three to five years, he adds, created a market in which many risks “to some extent or another” just were not being priced properly.
And there’s only so long you can do that, so you inherently get very selective in what you write.
“You can still grow and make the best of navigating that, because the market is the market and there will be inevitable swings – but particularly in reinsurance there’s a flight to quality to those cedants that have navigated this market better than others, and that’s what the industry will figure out over the next few years,” he continues.
“What might appear conservative, I would say, is rather us just being selective and respectful in our exposure management, and building out a portfolio in a balanced way.”
Decisions made around its risk portfolio proved prescient as well, once the pandemic hit and some key lines of business – event cancellation, for example – saw mounting claims.
“There’s nothing wrong with event cancellation,” he says. “It’s just the aggregations and the tail-risk potential that are out there and the pricing for that risk just weren’t attractive to us, so we didn’t have that in any material way. We also didn’t really have the SME affirmative coverage grants that you’re seeing play out, whether it’s in Canada, in the UK or in certain parts of the U.S.”
Although they are currently paying off, Gallagher acknowledges that the decisions not to write certain lines of business could have seemed too careful at the time. New talent joining Sompo International, he explains, “have to buy into what we’re doing here: the peer review, the governance, the oversight, the construction of underwriting portfolios, the involvement of senior leadership on a day-today basis on the underwriting side.
While it can sometimes seem frustrating to people when they come into the organisation, it’s by design – and it’s kept us away from a lot of the areas that you’re seeing clients suffer very badly in terms of COVID-19 losses.
“We’re exposed to … let’s call it the economic uncertainty of just how product lines react in a volatile economic downturn,” he adds, “but other than that I would say we’re in very good shape. I’m not trying to say we have zero losses. Of course we will have losses, but certainly not that first wave headline-type exposure that you’ve seen from others.”
Sompo International, Gallagher notes, started from a strong capital position “because we understand the volatility of commercial (re)insurance business and where we were in the cycle. We were building patiently for the long term, not trying to manufacture short term ROE through buybacks and the like, certainly not from a commercial P&C perspective. So we did have a conservative balance sheet position for growth, and that’s played out. That’s why we’re able to take an unchanged appetite – if not, even expand that appetite going forward – in response to the market environment we face and continue to look forward, not backward.”
Appetite for reconstruction
Sompo International enjoys the advantage of having first-hand perspective on both primary side and reinsurance business, as it writes both. As such, Gallagher understands well how the two exist in symbiosis.
The appetite for reinsurance has been on the rise of late, as primary-side companies look to shore up their balance sheets and transfer increasing amounts of risk – creating opportunities for Sompo’s International’s global reinsurance business.
“There has definitely been an increased demand for traditional reinsurance products,” he says, “particularly from some of the very big global insurers – which, you can imagine, if they put even a small percentage of their portfolios into the reinsurance market those are big individual contracts in themselves. Our submission count is up quite considerably, which tells you where the market is in some respects. But our ability to respond to that, from an operational perspective, to actually clear those submissions, and then ultimately for underwriters to quote on them, has been stellar.
“A lot of the players that chose to try and retain more risk as margins were falling was a strategy that’s proven tough for some people to live through,” he adds.
“So we are seeing an increased demand for us. I would say we’ve been at the front face of quoting, of structuring, and to meet that increased demand; we have participated in a lot of that new business coming into the reinsurance market.”
As long as Sompo International sees the ability to make a fair return, Gallagher adds, “we’re prepared to take a leading role in meeting clients’ needs. And we haven’t changed our appetite in reinsurance, whereas as you see this increased demand you’re seeing a restriction in capacity and supply, because not all the reinsurers are reacting. Some have concerns on individual segments of the market, and for others it’s just a general retreat while they become internally focused and possibly figure out what their next steps are.
“The motivations are different for each,” he continues. “I don’t want to try and characterise everyone in the same way. But I think for our team, it’s allowed us to be completely stable, and if anything, be willing to consider enhanced positions within some of these individual treaties that are coming to the market. And I would say we are very much displaying the characteristics and behaviours of a top-tier reinsurer.”
Gallagher believes that “flight to quality” has allowed Sompo International to differentiate itself in some very uncertain times – an advantage the organisation intends to leverage going forward, especially as a “one-stop” provider of both primary cover and reinsurance.
“We think there’s room for us,” he says, flatly. “I very much think that the insurance and reinsurance markets both are something that we can continue to penetrate and deliver solutions to clients that provide an alternative to what’s already there.”
Much of that is about responding to claims, and Gallagher is particularly proud of Sompo’s efforts in that front as its talent continues to operate remotely.
“On the claims side, everything we’ve been asked to do in the midst of a pandemic takes more time because of remote working, and we’ve gotten through that, but there’s a different question being asked of our people,” he says.
“It’s not just a repeat of what we’ve all seen before. We’re having to think a lot harder, to clarify policy language, to think about terms and conditions, and to implement pricing in a much more meaningful way, and both our front and back office have responded well.
“I do think that positions us very, very well, as Sompo International will continue to invest to meet those demands, but in a responsible way,” Gallagher adds. “And I think that’s a theme that you’re going to continue to see. We’ll figure things out, and people will fight fires in 2020 – but I truly expect not everyone’s going to make it. I think balance sheets were overleveraged. There isn’t a lot of headroom in there to weather the storm, so you’re going to see capital raising continue. They’ll face rating downgrades, or they’ll contract, so they won’t look the same as they are, but a few will emerge stronger and more relevant going forward. I think you’ll see, as we go into 2021 and ‘22, just quite how things emerge – and I think it will be different.”
This article was first published in Reactions.