Stephen Catlin and Paul Brand co-founded Convex in 2019 with $1.7 billion of initial committed capital to underwrite insurance and reinsurance for complex specialty risks. Since then, they've raised another $1.5 billion, and today have $3.2 billion in total committed capital, and have built a business of more than 400 people. Catlin, CEO, and Brand, deputy CEO, spoke with Insider Engage about their journey. The following is an edited transcript.
Q: So between the two of you, you've got 81 years of experience in the insurance industry. Can you tell us about Convex and the company culture there?
Stephen Catlin: Paul and I have worked together for about 35 years now — so we kind of know each other. We went through a very interesting and challenging journey at Catlin. To some extent, Convex is an evolution from Catlin as well. But as Paul says, it's important that we have a Convex culture. In some ways, we disassociate ourselves with Catlin as it was, but at the same time take the benefits of what we learnt there. One of the things we learnt is that culture isn't for sale. In terms of building a new culture, it's been I think much easier because we've got a good foundation from the past.
Paul Brand: The key things that we're trying to bring to Convex are all about behaviors, and how you create an environment that's supportive and trusting — particularly as you look at risk taking. Very often, things are going to go wrong. If you're building a company from nothing, you're going to get bumps. And so it's really about how you create an environment where people can discuss things — where they can communicate and actually solve problems together, as opposed to not talking to each other or an environment where if things go bump, everybody gets fired. We are completely alien from that.
Catlin: It's been a challenge. Between employing 250 people virtually, which was over 60% of the workforce, and building a culture at the same time - it’s hard work. Although we seem to have had some successes, and I think everybody is so pleased to be back in the office, and joining and learning from each other. Particularly those of us who learn by osmosis from their elders and betters. So it's a lot easier now back at the office together.
Brand: One of the takeaways from COVID-19 is that you can get too certain, so we've had to all adjust to much higher levels of uncertainty, which is probably not a bad lesson, particularly for an insurer.
One of the key Convex events that we did when we could get everybody together, because as Stephen said it’s slightly unusual to employ 250 people without being able to meet them face to face, was an event called Convex United. It was essentially sponsored by a company called Harrison Thompson. It was fantastic that we got everybody in the company together. Lots of very interesting, and quite stretching, topics really started to get people talking and communicating and brought people together.
Catlin: Some of the presenters came up to me and said, “Gosh, you've got a really collegiate company. It’s fantastic to see.” So I said, “thank you — so what would you say if I told you that two-thirds of the people here hadn't met each other before?” He just looked to me and said that can’t be possible. I said — I promise you it is.
Q: How would you describe the company culture?
Catlin: We want people who work here to want to come to work and to regard it as fun and enjoyable. It's equally important that the brokers that come and see us in the office also have a user friendly and enjoyable experience themselves. And considering we are just over two and a half years old, I think we have made remarkable strides on this. There's a lot more work to do. We're not perfect, but it's a good start.
People do their best work when they're happy. So you need to create an environment where people are happy.
Brand: People do their best work when they're happy. So you need to create an environment where people are happy. If you look around the industry, we tend to have difficult markets, with a lot of acquisitions and mergers, and people generally aren't that happy. And I think there's a real opportunity for Convex to really build a competitive advantage out of the culture that we've got.
Catlin: We noticed with our group executive meetings, which take place once a month, that during lockdown we had six months gaps between the times where we met each other face to face. And frankly, as each meeting went on, it became a little bit more difficult as we were doing it all virtually.
Then you have everyone back together again, and within an hour or so, everybody is laughing and joking. And we're working together. I think it's so much easier to think as a group if you're together, as opposed to thinking as a department, which is what tends to happen virtually. But under the circumstances, I think we've been very blessed.
Q: Tell us where you're seeing growth opportunities today?
Catlin: Risks around the world are changing and increasing. New risks are emerging. Cyber being a good example of that. We're trying desperately hard to be creative and innovative.
Brand: Convex has achieved a little over $2 billion as we finished our second full year. So far that has been built on traditional lines of business. We have built a very successful reinsurance business, and we have fantastic aviation, energy and marine and casualty businesses.
We've got traction there. We've moved from being a new addition to the market to being a part of the market, and we're starting to see our increasing influence and an ability to lead.
We're very interested in what digital underwriting could bring and what that transition might be. When I think about a business line that could be very significant for us in two years, three years or even four years time, I look at digital. We have a really interesting team working on something we are calling “enabling risks”. Those are risks where they enable a client to get something done. It's been run as a sort of extension of our political risk and credit risk insurance – but it's just slightly broader than that. It’s about really engaging with our clients and saying: where do you have problems that by transferring some risk or some structuring, we could actually help you do things that you're not currently able to do? Or make it easier to do things?
Catlin: This is a very different experience to setting up Catlin where we started with two people. If we make our estimate with target of premium volumes this year, which is just over $3 billion, to put that into context, that is half the size of Catlin when we sold to XL after 30 years. It’s chalk and cheese now. I think what we've brought to the table this time around is the network, the experience and the relationships with brokers and clients. A lot of policyholders are used to us leading their business. Yes, this is a new start, but it’s a start with a lot more experience than we ever had at Catlin at the get go.
Q: Could you give us an example of that enabling risk business? Is this a new type of coverage or something that was a gap before?
Brand: Most of insurance is focused on providing coverage for physical assets or the liabilities associated with them. Whereas a lot of the actual risks that companies are worried about are surrounding intellectual property, reputation, credit risks and efficacy on products. To do some of those risks is incredibly difficult because you can quickly transfer into areas where effectively you're being asked to take equity risk. And it's okay to take an equity risk if you know what you're doing, but only if you're going get some return, which is approaching an equity return. But the key to what we're looking at is how we engage a bit more closely and in a different way and start to build up potential solutions.
The structure of balance sheets has changed so much since I started. In those days, typically, a balance sheet would be 80% property... Nowadays, many balance sheets are even less than 10% property.
Catlin: The structure of balance sheets has changed so much since I started. In those days, typically, a balance sheet would be 80% property. The rest would be all the other good things in life. Nowadays, many balance sheets are even less than 10% property. So the needs of our clients have evolved over the years.
Has industry kept up with these changes? I think some will say no, others would say, well, not a bad effort. But this is a continual evolution. The challenges that come through from the type of things that Paul's been talking about, it tends to increase some moral hazards — you can't touch it and feel it like you can with property. Therefore, trying to make certain that the coverage is what you intended to sell, and indeed what the policyholder intended to buy, and it actually operating smoothly under those two intentions, is the most difficult thing to achieve.
Q: Could we talk about systemic risk? What keeps you up at night these days?
Catlin: How long have you got? I got locked down in Bermuda during the first lockdown and spent 15 weeks out there, and I became involved in two things at that stage. One was the second capital raise and the second was chairing this steering group to look at COVID-19 and its implications. COVID-19 made the market, as well as governments, realize just what systemic risk is. The size of COVID-19, in terms of its total economic loss, is way ahead of the size of the world’s P&C industry, and the idea that we will ever be able to manage that type of risk is frankly insane. We would never have that amount of capital and even if we did, we wouldn't be able to service a return to our shareholders. So I think there's a open debate going on about whether there's a covenant risk - and this is a global question, not just for an individual country. An insurable risk for me is [when it’s] within the ability of the insurer to pay the claim.
We sell a promissory note, so we have a duty of care to make certain that we have sufficient capital to pay the claims that come towards us. And for the most part it's very clear when we can do it. It's less clear when it becomes potentially systemic. I think the two largest systemic risks we could think of today is probably a pandemic and cyber. I would maintain cyber is probably bigger than pandemic.
If you think about 9/11, and the damage done by that loss, think about what some hackers could do to damage a country or an economy. So these are the types of losses that are systemic, which the industry just cannot respond to. We can be a service provider. We can be a paying agent, but there is a time when government steps in — and I think the good thing about the pandemic is that it has demonstrated that governments will step in and will have to step in.
Brand: This is not necessarily a systemic risk, but it is a risk for the industry — there is the risk of relevance. Is insurance the most popular product for somebody to go out and spend money on? The answer is no. And have we done anything about that recently? The answer, unfortunately, is still pretty much no.
Some things are getting easier, but a lot of things are getting harder, I think particularly as you think about London and Bermuda and those face-to-face markets, where we're largely dealing with complex risks really well. The more commoditized business — maybe less so. The progress that we need to make to remain relevant in all those markets is under threat.
And as you think about the UK's position in financial services — well, will it always have the position that it’s currently got? I think this is a question that's starting to get slightly more amplitude than it might have had a few years back. But the key thing is that we're going to see a ton of change, as people start to come back to work, through hybrid working, or face to face, or as we become more digitalized etc. With all of these questions, it’s a very uncertain and tangled path that you have to weave through as a management team to make sure that you come out of it on the other side.
Catlin: I think both of us are absolutely convinced that if we don't retain our relevance, why would the policyholder buy from us? And that means that we're going to have to work, indeed the industry is going to have to work, increasingly hard, and we will, at making certain that we remain relevant to the needs of our client, with the balance for ability to pay.
Q: Could you share your outlook for the industry for 2022?
Catlin: I think the outlook for us is very exciting. Everything is beginning to rev up now. When you set up a new company, people don't always realize this, but it is just that, a new company. That means everything you've done in the past stays behind. So you’ve got to start from scratch with everything, whether it be process systems etc. There's a lot of work that's gone on in the last two and a half years or so. We're not through all of it, but we've broken the back of it, and it's a little bit easier to look forward now.
The marketplace is changing. In our view, there's quite a lot of the residual liability exposure that hasn't been reserved for those arising from the casualty book, for example, and those from COVID-19. And that's going to unwind over the next two, three, four years.
Risk is increasing around the world. The product is under more demand and I think for a company like ours, the real advantage for us is that we can spend 90% of our time looking forward. At the moment, for many CEOs — by force of circumstance, not their fault — they're spending ages looking back and only 20% of the time looking forward. If you think about it that just gives us, what you might say is an unfair, but also a huge competitive advantage.
Brand: The good news is we have seen sustained price increases through multiple lines in recent periods. The bad news is that still, nobody is making any money, particularly across a lot of the more E&S profile reinsurance businesses. There's a temptation at the bottom of soft markets for people to [say] well, the rate increases are going to come along and save us. Well, I'm not certain whether there's been enough yet to do that. So yes, my outlook is the market is still going up, maybe not particularly quickly, but at some point in time the market will bring about change
