Richard Brindle doesn’t give many interviews, which is a minor tragedy.
With so much generic corporate verbiage permeating the press and so many commonplaces retailed as insight, Brindle presents a dramatic contrast.
He is a PR person’s nightmare and refuses to be flanked by one at our meeting.
The Fidelis CEO speaks his mind with complete conviction, challenging anything that is half-baked or half-hearted in the most direct way possible.
Talk about business becomes talk about politics. He threatens to leave the country if a no-deal Brexit is forced through. He swears constantly. He teases his business partner and explodes with laughter.
But more than any of that he dissects the market with a clear-sighted mind and keeps nothing to himself.
Speaking at a previous interview in 2014, he was one of the first senior executives in the space to acknowledge that the London specialty insurance market was heading for a period of sharp softening.
Calling market dynamics and knowing when to write and when to walk away has been a hallmark, and his judgement bears watching.
And right now he thinks the cat reinsurance market is one loss away from major market change.
“One decent-sized loss by the end of the year and we’re off to the races,” he says.
The agent for change is the ILS market, which has been the key driver of pricing since 2012.
“Because it’s just a load more trapped capital, a load more discredited ILS managers who told their investors some cock and bull story about 2019 – ‘Oh we’ve re-underwritten the book and you’re not going to respond to a medium-sized event’.”
He continues: “They’ll then get trapped capital from whatever it is and then it’s just another nail in the coffin of these unaligned ILS managers that have no skin in the game.”
Brindle says the received wisdom on post-event capital formation through the ILS market does not reflect the “jaundiced” views of the hedge funds and pension funds, and misses the point that money is bleeding away from activist managers.
“The traditional truism for a decade was that if you get a big event, some people get burnt and disappear, but there will be a wave of new capital looking to come in. Well, I don’t think that’s supported by the facts.”
He goes on: “The available universe of investors is shrinking. Catco has had a massive impact on the credibility of our industry in this space – and it’s really tough for anyone who wants to raise capital at all, regardless of track record.”
‘Get out of my office’
Brindle, an early exponent of third-party capital, is still in touch with the space due to Fidelis’ sidecar Socium.
And he notes that, right now, what he meets is extreme investor scepticism around the reinsurance sector.
“The ILS guys are horribly on the ropes,” he says.
Investors are unsettled by climate change and the industry has no answer at this point to the increased risk in the system, as wildfires in Brazil and Siberia follow the 2017/18 conflagrations.
“We’ve spoken to investors that said they had guys through saying California in 2017 was a one-in-100-year event and then it happens again the next year and they say, it’s a one-in-100 year event.
“Their response to that is: don’t insult my intelligence and get out of my office.”
Brindle adds that, until the models have been revised convincingly, firms that rely on model output to project returns for their fundraises will struggle to command any credibility. The Lancashire founder believes that even a $10bn loss event before year end would change the landscape given the amount of capital cedants would trap, and the near-impossibility of a third reload.
However, he stresses that there would be a delayed impact on reinsurance pricing from the locking up of the retro markets, which are 75 percent written by ILS money.
“It’s like the roadrunner running off the end of the cliff and continuing to run on thin air for a while. They’ll go through 1 January as if nothing has really changed but history suggests that it’s always at the end of Q1 that the roadrunner finally crashes to earth, and then you have the big corrections.
“Happened in 2002, happened in 2006, happened in 2012 and I think it will happen next year [if we get a loss].”
Brindle is adamant, though, that there needs to be some additional cat loss activity before year end.
If the rest of the year runs clean, even the weaker ILS funds will “get away with it” and the market may lose its backbone.
Some in the market have said they think rates in the excess-of-loss reinsurance market will be bid up by the transitioning US excess and surplus and London specialty markets.
Brindle says the argument is overdone, and believes the read-across from the primary to the reinsurance markets is exaggerated.
“I think each market has its own dynamics. People are siloed in most companies. I’m pretty sceptical [that primary will drive reinsurance pricing].”
Brindle argues that change comes from some authority imposing discipline on front-line underwriters. This can be senior management reducing available aggregate limits that can be deployed, or a move from Lloyd’s or AM Best.
“The ability of cat underwriters to self-regulate is minimal, in my experience.”
The Fidelis CEO made his reputation writing London market specialty lines like marine war, aviation, terrorism and energy as main underwriter at Lloyd’s business Tarquin in the 1990s before taking big positions in those classes at his class of 2005 start-up Lancashire.
But Fidelis has been notably underweight in most of these classes since it was founded, reflecting Brindle’s scepticism around rate adequacy.
And even now he remains something of a bear about the rating bounce, which looks set to see the Lloyd’s market report around a 5 percent average rate increase on its renewal book for 2019.
According to Brindle, executives at carriers are straining to make the most of an improving rating picture, which is highly uneven.
“It’s not a broad-based rating revival – it’s patchy,” he argues.
Areas that Brindle cites as evidence of uneven rating momentum include aviation, which is “uninteresting”, downstream energy which is a “disaster” even if rates are up 20 percent, and “run-of-the-mill” blue-water hull and cruise liners.
And even areas of renewed interest such as satellite business, where rates have spiked after $800mn of losses, are priced at a third to a half of historic levels.
Brindle also flags the war market as indicative of the worst of the specialty markets. He says that, regardless of your view of the breach premiums being charged – which he thinks are deficient, it makes no sense to charge this at the same level for British flag ships and, for example, Liberian flag ships.
“It’s quite a damning statement on the specialty markets.”
Brindle thinks it is “the critical cat areas” where “real movement” is likely.
The exception is areas where Lloyd’s has borne down, including the cargo and space markets.
For Brindle, the inability to drive rates higher reflects structural features of the specialty market.
“I think the ultimate reason for what I’m saying is that the lines of business I’m talking about are not critical cat, so if they’re not critical cat they are diversifying within people’s business models – it’s not moving the needle in terms of how much capital companies have to carry.
“So they can easily compete irresponsibly on price within those classes of business and the only inhibitor on them is self-discipline rather than capital controls.”
The Fidelis founder says his scepticism on pricing also reflects some of the new capital formation, and the changes taking place within distribution.
“Look at the way these aviation brokers are staffing up. You stick a whole load of very experienced brokers into the pot and then 10 percent new capacity via a major new entrant, and any broker worth their salt will use that to undermine pricing.”
Winners and losers
Questioned on the Future at Lloyd’s vision, Brindle notes that Lloyd’s first had to resolve some fundamental questions.
“Is it a unitary entity collaborating? Or is it a whole bunch of competitors scrabbling around and biting each other in a barrel? Until you decide that you can’t articulate this bold vision.”
Brindle says the idea of creating a virtual following market which would pay fees to leaders would make Lloyd’s more attractive to Fidelis.
“Do you actually anoint leaders, experts in given classes of business and the market lines up behind them and pay varying degrees of commissions? And they speak with one voice for all of that capacity?
“That would be awesome, but I can’t see it happening with all of the different capital bases, different shareholder bases.”
He continues: “At the moment, it’s the worst of all worlds because they have all this duplication of cost, but they don’t speak with one voice and they scratch
each other’s eyes out for every piece of business.”
Brindle goes on to state that Lloyd’s urgently needs to find a way to address the follow market problem.
“I’ve been saying for 20 years, forget these B, C-list syndicates – they add no value, they lead nothing. What is the point of these people?”
According to Brindle, Lloyd’s CEO John Neal and the Corporation faced a major problem implementing any vision which required significant market players to accept unpopular decisions.
“They can’t [impose the vision],” he says. “The fundamental problem is if they overreach – they can do it with perhaps smaller syndicates – but if they try it with Beazley or Hiscox, they’ll say ‘I’ll take it to my company market platform’.”
He also lighted on the winners and losers problem, with Neal thus far keen to avoid bringing into sharp focus who will lose as a result of the changes.
“Somebody has to decide who the winners and losers are. And who is above or below the line. Pick any company: which are above or below the line?”