01 Dec A blueprint for entrepreneurship around the world
Marc Grandisson, CEO, Arch Capital Group Ltd., declares the company’s availability for business in the COVID-19 aftermath
Could you please provide your analysis on the dynamism of Bermuda’s financial services industry to date?
Over the last 40 years in Bermuda there has been consistent growth in terms of insurance and financial service companies coming here to establish themselves and create roots, not only as local companies, but as providers of international capital to the world. It started in the 1970s, and with a captive market in the 1980s, you had XL and ACE, which were formed because of the casualty crisis in the US. After Hurricane Andrew you had the property CAT providers that opened up in 1993 and 1994, and then you fast forward to after 9/11 in 2001, and after Katrina, Rita, and Wilma in 2005. Lately we have less of an emergence of new players, although that’s certainly part of it, but I would argue that more capital has found its way onto existing balance sheets, such as our own.
As a parallel to this, not as a result of a major event around the world, Insurance-linked securities, CAT bonds or alternative ways to deploy capital (specifically in a property CAT market) have also been key developments for Bermuda. It got started early in 2001 and has grown ever since. It is probably one of the largest markets for that kind of capital.
Bermuda has been ever-growing. Every time there is a crisis or some sort of global scale challenge, Bermuda has risen to the occasion to fill the void and provide solutions to the world. It has been tremendous in terms of ingenuity, innovation, capability, willingness, and entrepreneurial spirit. We are probably top of mind when people think about creating a new enterprise. From an insurance perspective, Bermuda has also clearly been a go-to, or a first call, for anyone who wants to create something new or wants to think about something differently. It is a blueprint for entrepreneurship around the world.
As CEO, how do you plan to steer the company towards growth this year after such a challenging 2020 in the industry?
Arch’s inception rests within the tragic event of 9/11. A bunch of people wanted to create something different, a bit more flexible, trying to provide capacity that was much needed after 2001. This was led in Bermuda at the end of 2001 into 2002 and progressed, both on the reinsurance side and on the insurance side. Then after Katrina, Rita, and Wilma we were able to attract third party capital, establish a USD 1 billion sidecar, the biggest at the time. A sidecar is when someone comes along, recognizes you as capable underwriters, and gives you funds to deploy in the marketplace. We ran with that for 10 years, getting paid fees and compensation for our expertise.
Then the global financial crisis of 2007-2008 occurred, which was not such a big event to us as an industry. This speaks to the solidity and the capital strength of the Bermuda companies, and broadly the property and casualty (P&C) industry around the world. When that happened, the mortgage insurance companies around the world went through a tough time, especially those in the U.S. Out of the eight of them, three went bankrupt. So, in classic Bermuda thinking, there was a void to be filled that needed to be thought through differently. It was a good chance for us at Arch to start sniffing around, looking for a way to get in the market, perhaps providing some support to the U.S. specifically. We found our way to buying the bankrupt mortgage insurer PMI in California, whose assets we bought out of receivership, and with an injection of capital we created a vibrant and key provider of mortgage insurance in the U.S. We grew our market share to about 10 percent at the time. In 2016 another company in New York, AIG, had some issues and pressure from the board of directors to part ways with its own MI company (United Guaranty). We acquired that company from them at a good price, and that sprung us forward to getting as much as 30 percent market share, which essentially carried us through.
If you look at the way the overall market goes, there are many cycles in this business on the property casualty side. Things were good for obvious reasons. After 9/11, people were paying more premium capacity. Capital was scarce, and we could charge more, making good returns. Katrina, Rita, and Wilma also lifted the market further for about three more years. Entering 2009, 2010, and 2011, we were seeing a softening of the market conditions. As a provider of insurance throughout the world, Arch has the tendency to react to those conditions by being more defensive, purposely not doing as much as we used to and not risking our capital more than we needed, because the returns were just not up to our desire. At the same time, the P&C market was going down while mortgage insurance was optimal, so it allowed us to shift the balancing of the capital, and sort of play a different team on the pitch. We pivoted to more of an MI focus while carrying on being defensive on the P&C side, but investing heavily, knowing that at some point the market would revert itself, creating an improvement in market conditions on the P&C side.
Data analytics was clearly one of our focuses. We are heavily involved in massive IT upgrades, education, training, and reinforcing to our people not to worry about the P&C. The MI side is providing our results, and we have this nice cushion to help us through it.
There is a significant amount of emerging risk in the world with the events of the last two years, on the heels of more property CAT losses around the world, COVID-19, the social unrest (specifically in the U.S.) and cyber risks. Because of that, our competitors in the broad market had been probably not as careful with their capital, which gives us an advantage. The MI market in late 2019 to early 2020, as we headed into COVID-19, was actually getting softer. It was starting to show signs of not the same kind of return, so we were pulling back a bit, but now the P&C side was getting better. Then COVID-19 really threw everything out for a spin.
If you look at us now, we are on a growth path. We had been almost sideways or slightly down on the P&C side for the last five or six years. For the first time in 2020 we had over 30 percent on the P&C, having grown about a third in 2020, so we are reengaging in a much more major way on the P&C. This is a bit of an echo of 2001 and 2002, where crisis also created opportunities for us.
How do you plan to drive the company towards growth this year after such a challenge in 2020 in the industry?
For Arch, it is all about sustainable growth at this point in time. There is an opportunity for us to establish ourselves as being a first call for our clients and brokers. We have solid capital, and we have an appetite to take on risk where some of our competitors are not as forthcoming. ‘We are open for business’, is what we like to say, trying to be as thoughtful and as supportive of the market as possible.
Probably most important is that we have been very proactive in supporting our people in so many ways. Our people are our number one asset in this company. This company does not exist without its people. Insurance is an idea, a promise. We do not create widgets, nor is there anything awfully specific about the IP we create. It is the people that make it every day and our game plan has always been to support them through the ups and downs of the market, and now of working from home, the social unrest, the uncertainty, and everything else that is out there. My job is becoming the big cheerleader for our team, which has incidentally done exceptionally well over the last 12 months. I could not be prouder of what they have accomplished. When COVID-19 hit we did not skip a beat, which was tremendously surprising and positive. It is our time to shine as we head into 2021. Both the property casualty market and the MI market are doing well. There is amazing growth opportunity out in front of us throughout our platform, and our ability to deploy it is there. We raised a billion dollars of more capital last June, so we have the capital, the expertise, the backing from the shareholders, the Board, and the executive management team. Our number one task is to make sure our people realize that, appreciate it, and seize the moment.
What can you tell us about the significance of the recent acquisition of Watford Holdings and is it indicative of further future acquisitions by the group?
Our acquisition focus, apart from the MI opportunity from AIG, which was incredibly unique and extraordinary market timing for us, focuses on smaller acquisitions in the USD 300 to 400 million range. We are not an M&A machine, mainly because we have a culture that is really special, and when you do broad M&A you lose that culture. The culture is like a spice that either makes the meal bland or it makes it a Michelin two-star winner. We do not want to dilute this particularly important element that is so hard to protect. We are always looking for value with underappreciated assets at a good price to which we can do a couple of adjustments, where the cultural fit works, it is easy to absorb and we can bring along a small, manageable number of people.
Watford is very strategic in that sense. Watford was created back in 2014 with a mission of focusing on third party capital, while flexing our underwriting skills and having a bigger presence in the marketplace, without risking as much of the capital for the shareholder. As a public company, Watford ran into a tough spot. An insurance company being a public company is not easy, as you may know. People expect growth at top line and at bottom line, and the market is just not like that. On the P&C side it goes up and down, and it is a really difficult thing to work with. It became a bit orphaned out there, and at risk of being picked apart. We knew it had good value for us and potentially a third party, but it was probably better as a private company. So, we return to the idea of providing an attractive premium and certainty to those invested in the public company, and then bringing it in as a private company, which is a lot easier to manage. It has been both a defensive and an offensive move because it also provides stability and sustainability for the platform.
As Chairman of the Association of Bermuda’s Insurers and Reinsurers (ABIR), can you tell us about the planned initiatives you have and your thoughts on how your professional experience will bolster your role?
ABIR has done exceptionally well for almost 30 years now. It is an exceptional forum to discuss things among industry leaders, as well as a very capable advisor to the government and other entities around the world who are thinking about financing risk.
One of my biggest goals for Bermuda, within the industry and externally, is to represent the interests of Bermuda and explain what Bermuda is. There is so much misunderstanding if you think about, for example, the whole tax situation. My role is to be a sort of scientific explainer to make sure that Bermuda is accurately represented.
Bermuda has so much going for it. It provides a lot of support to the world in ways that people may not appreciate, not only investors but politicians and organizations. We provide over 35 percent of property CAT exposure worldwide; we pay the claims; and we have a very solid regulatory environment, one of the best in the world without sacrificing entrepreneurship and innovation. It is a unique position and place to be, and that is often overlooked. There is also a level of knowledge and expertise on the island that is hard to replicate.
Much like Lloyd’s in London, which has been there for almost 350 years now, it has become part of the fabric of what or who you are as a city. It is the same with Bermuda. We have Bermudians who have been working here for 20 years with us who have an amazing amount of knowledge about the business and this ripples through the entire economy. There is really sound knowledge here about insurance and risk management that should be known and celebrated. I sincerely believe that anybody who wants to put a company together, new capital, or a new idea will always find someone that can help them here in Bermuda to make their dreams come.
We have recently learned about your multi-year partnership with Coalition. Can you please expand more on this topic and give us an insight into how Arch Capital is taking advantage and enabling this innovation?
Coalition is a bit like Ventus, and a few more in the works that are not public yet, but our game plan is to engage with Insurtech. We have things to learn from them and they in turn have things to learn from us, and we owe it to ourselves and our client base to tap into that knowledge and see how we can partner up. This is very much a collaboration.
On the business side, I would argue that what Coalition – or Ventus, for that matter – provides us is a little more creative in the sense that the risks that they would target are not the ones that we initially would look into. Therefore, it is a positive way for us to open up a whole new market distribution-wise that we otherwise would not really be focusing on.
We are also very data driven. Coalition and Arch are led by actuaries. Do not hold it against us, but we have a lot of technical knowledge and data aspirations. Data analytics is something that we have invested in for the last five years, and it is growing every year, so Coalition fits perfectly in terms of pushing ourselves and the world forward in risk analysis – without losing the humanity, obviously. We have found that Coalition is one of the best out there. They are incredibly sharp, and they think about things differently, which is what we like to hear.
Will this help with your arm of risk associated insurance with the global climate emergency?
We are still exploring the climate side of things, in fact, we have a meteorologist on staff who teaches us about the nuances and details of those aspects. Our focus at the moment is more specifically with some clients on agribusiness. We have a crop insurance team in Zurich who provides information, knowledge, and support to many insurance providers around the world who probably would not otherwise have access to that data, the knowledge, or technical abilities that we have. You might see our people talking to an Indian company or to a Chilean fish farm, helping them think through these issues. They collect information from all around the world as to the best practices, and they then share them with our various international clients. This knowledge sharing is going to be a useful thing for the future of our global community. Making our clients better at pricing risk and risk management helps them be insured, helps us, and helps everybody. We think of ourselves as being part of a solution, and however small or large a part we can play, we would like to fill the space.
On broader climate change, we are always looking at the various frequencies of events, and from the data it is not as clear as it might look. ABIR is also focusing on educating the world from a place of thinking and discussion with Renaissance and other people on the island who have a long history in catastrophic event coverage and who have an abundance of good knowledge and expertise to offer the world in this area.
What is Bermuda’s unique value proposition compared to other small island economies, and what is it really like to work here?
There are so many wonderful things about Bermuda. Number one, it is a skip and a jump to New York City, a major metropolis. London and Toronto are also accessible via direct flights. We have access to all the major airports in the world. Our geographic proximity permits accessibility to the major centers.
If you look at my experience, I landed here with my wife and one daughter, who was not even a year old, and we had two more children after that. Schooling in Bermuda is top notch, and it is an extremely safe place.
The commutes are extremely short. You can hop out of the office, go see your friends, your kids play a soccer game, or whatever else they do, and come back to the office.
The weather is ideal. You get a bit of cold during the wintertime, which helps you appreciate the summer. Bermuda is a very charming country, so you can enjoy quality restaurants and places to socialize. There is an extensive community filled with smart, dedicated, and accomplished professionals from here and all around the world who you might not otherwise have the opportunity to meet. Just recently we held an international lunch at our company and within the 120 employees there were 25 different nationalities. This cultural exchange is extremely enriching.
If you like golfing, sailing or tennis, there are many ways to get involved in those types of activities. There is also a solid and robust infrastructure with high-speed internet, international television, all the major streaming and entertainment platforms, etc. Whatever you want or need, Bermuda has it. It is surprisingly nice.
What would be your final message for our readers of Newsweek?
Bermuda is one of the best-kept secrets in the world. For anyone who has a chance when COVID restrictions lift, I would invite everyone to come and spend a week here, or at least a weekend, and see it for themselves. Those of you who are businesspeople, come and look around, set up several meetings to get to know who is here, what they do, and how they do things. Get to know the business and the marketplace and bring your family. It is a lovely, quaint location where you can do some work and stay a couple of extra days to enjoy yourself.
It may not be the first place you would think of to come, but once you discover Bermuda, it is somewhat of a healthy addiction. There is something extraordinarily special about it and the more people come, the more they repeat. Bermuda has been here since 1609 and it will still be here in another four hundred years.