Risk & Reward: An Inside View of the PropertyCasualty Insurance Business by Stephen Catlin & James Burcke

Author:Stephen Catlin & James Burcke [Catlin, Stephen]
Language: eng
Format: azw3
Publisher: Iskaboo Publishing
Published: 2017-07-01T04:00:00+00:00

14. ACQUIRING AND BEING ACQUIRED

One deal made Catlin a major player; another ended the story

The capital that Catlin raised during the years immediately following 9/11, plus our growing international footprint, put Catlin in a much better position than some of our London peers. We had raised about $700 million in capital in less than two years, and we no longer had to run our business solely as an annual venture because we were no longer tied to capital supplied by individual Lloyd’s Names.

No Lloyd’s-based underwriter, other than Catlin, was able to raise a substantial amount of capital during the 18 months following 9/11, largely because of the lingering doubts regarding the stability of Lloyd’s (see Chapter 17). So, there was now a real difference between Catlin and competitors such as Wellington and Hiscox, two much older and well-respected brands at Lloyd’s.

In 2001, we were about half the size of those two businesses in terms of premium volume; two years later, we had caught up. The reason was not necessarily because we were great underwriters (although I would like to think we were), but because we were able to attract new capital. I had learned that you cannot progress in the insurance business unless you can raise capital.

Following the IPO, Catlin continued to grow in a robust insurance/reinsurance market in the wake of the 9/11 tragedy. However, the hard market did not last for very long, and by 2005 we chose to decrease our gross premiums written by 3 per cent, keeping our focus on bottom-line profit rather than top-line growth.

Premium rates increased sharply later in 2005 after Hurricane Katrina smashed through New Orleans in August. Katrina was followed later that autumn by Hurricanes Rita and Wilma, both of which also made landfall in the US. Combined, the three windstorms caused more than $100 billion in insured damage, an unprecedented total at the time.

The losses certainly had an impact on Catlin’s 2005 results. Our net exposure to these three historic storms, net of reinstatement premiums, amounted to nearly $400 million, substantially greater than our 9/11 losses (although it must be remembered that our 2005 gross premium volume was more than three times our 2001 volume). Still, we managed to make nearly $28 million in profit before tax, thanks to a good underwriting performance in other portions of our portfolio and a robust reinsurance program.

* * *

Others were not so fortunate, especially Wellington Underwriting plc, one of the most venerable managing agencies at Lloyd’s. Simply put, Wellington had got its aggregates wrong, and its 2005 hurricane losses blew through its reinsurance program. In other words, Wellington ran out of reinsurance when other underwriters – including Catlin – did not.

Wellington had a bigger problem in the eyes of investors. It could not accurately estimate its share of the hurricane losses, and it was forced to issue a series of profit warnings throughout the autumn of 2005. Shockingly, it issued a sharply increased hurricane loss estimate a little more than a week after an earlier announcement.

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