A Five-Year Plan For Hamilton Underwriting
Hamilton’s Syndicate 3334, previously the Sportscover syndicate, is expanding into the marine liability sector for 2017.
Last year Hamilton Underwriting, the Lloyd’s platform of Bermuda-based Hamilton Insurance Group (“Hamilton”), obtained approval to expand into marine liability, and war & terror.
The other classes of business written by the Syndicate are Accident & Health (A&H), Contingency cover, Property D&F, Professional Indemnity, Space, Treaty reinsurance and Financial Institutions insurance.
Late in November 2016 the managing agency received approval from Lloyd’s to increase its gross written premium to £122.5m in 2017, from £69.5m last year.
To enable the marine business, Hamilton Underwriting CEO Dermot O’Donohoe recruited Mark Appleton from Navigators, who joined in September 2016.
O’Donohoe has led Hamilton Underwriting (whose brand name is Hamilton at Lloyd’s) following the announcement in November 2014 that Hamiltonhad entered into a Share Purchase Agreement with Australia-based Wild Goose Holdings to acquire Lloyd’s managing agent Sportscover and Lloyd’s operation Kinetic Insurance Brokers Ltd. That deal closed at the beginning of April 2015. O’Donohoe was previously CEO of Torus’ International Operations, taking over as Group CEO to oversee the transition of Torus Group’s book to Bermuda-based Enstar. From 1995 to 2009 O’Donohoe was at XL Group in various positions, including global head of specialty.
Hamiltonitself is a Bermuda-based private company. Industry veteran Brian Duperreault raised capital from backers to invest in the old SAC Re and rebranded it as Hamilton Re. Capital Z and Blackstone remain investors in Hamilton, while principals of Two Sigma manage Hamilton’sassets.. All of the capital is provided by the group, with only a small amount of inter-group reinsurance.
Late in December Insurance Marine News caught up with O’Donohoe and Appleton at their offices in St Helen’s, 1 Undershaft, and asked them about Hamilton Insurance Group, Syndicate 3334, and their plans for 2017.
Appleton joined just as Hamilton was finalizing the approval process with Lloyd’s. He has spent the past three months putting together processes and procedures, “speaking to brokers so that they know what Hamilton has to offer in the marine space”.
Appleton’s background includes the P&I sector, spending time at Shipowners’ P&I Club before joining Navigators. While at Navigators he was significantly involved in the P&I reinsurance sector. “Over the years I’ve led a number of the P&I non-pool reinsurances and we (Hamilton) would be looking very much to move into that space when they renew on January 1st and February 20th”, he told IMN.
Non-pool reinsurance the core
Non-pool reinsurance will form the core of the Syndicate 3334 marine book. Hamilton then plans to add some standalone energy liability business, predominantly in the offshore space. On the marine side the Syndicate will be looking to supplement the P&I Club business with Maritime Employers’ Liability (MEL), Ship Repairers’ Liability (SRL) and other associated lines, including pollution cover. “MEL is US Jones Act coverage for non-crew Maritime personnel; again, it’s a book of business in which I’ve been heavily involved in the past”, Appleton said.
IMN asked what it was like moving from an already-established business into what is effectively a start-up. Appleton replied: “There’s no doubt there’s a challenge there. The advantage we have is that there are no legacy issues. And what’s been refreshing is that, as a new entity, we have been able to devise processes and procedures that don’t have any of that drag from pre-existing arrangements”.
O’Donohoe noted that “across the board” the market was challenging. “We obviously think that you can build a sustainable book of profitable business. Our aim is to expand the lines in which we already operate up to a sufficient size for scale.” O’Donohoe noted that, to reduce the volatility inherent in a sub-scale book, the aim would be to grow each of the core lines of business carefully. “It would obviously be nice if the market were slightly better”, he said, but emphasized that “we still think that there is underwriting margin in the classes that we have selected – not as much maybe as we would hope – but with good underwriters you can pick your way through the current environment.”
He also noted that, if we were in a well-priced market, it would be much harder to begin a new operation, because people would be less willing to move from other companies.
On recruitment, O’Donohoe said: “We took our time. We spent most of last year really trying to find the right teams of people, and investing in the platform to underpin the syndicate. Again the advantage is not having any prior legacy to take over.” (The syndicate does have some prior years from the Sportscover days, but they are being administered to run-off and eventual extinction). He continued: “Everything is timing. If it was a hard market would we be able to get anybody to move? Probably not. A start up has its own challenges and some people like that, while some people don’t. If you can find the right profile of underwriter who is interested in that challenge of building something then you can put together a very good team and if you can take your time to do that, hopefully the results will reflect it”.
Hamilton Syndicate 3334’s marine division will be dealing solely through the broker market. Most of the clientele will be the clubs and marine insurers, rather than dealing directly with shipowners. Appleton said that “over the years many of those coverages have been bundled up into Club programmes, and the clubs have done a very good job of making themselves the primary sellers of those coverages. If the opportunity were to arise I’d be more than happy to deal with shipowners direct, but there are fewer of those opportunities around these days”.
For 2017, Appleton said that “it’s possible we will look at some of the reinsurances or consortium arrangements for the fixed premium providers.but the main business line will be reinsurance of the Clubs handled by the brokers, predominantly in respect of their non-poolable exposures.”
IMN asked what they saw as the key events for marine insurers in the past year. Appleton said that a number of the P&I clubs were looking to diversify into new products and new ways of writing business. On the 4th Gallery in Lloyd’s where Syndicate 3334’s Marine presence is based, the syndicates of Skuld and Standard are also in operation.
He also noted that everyone was talking about the implications of Brexit, but he felt that it was going to be some time before its impact would begin to be felt in the P&I space.
Appleton said that, had the merger between Britannia and UK Club succeeded, creating a “super club”, that would have had an impact on the competitive nature of that part of the business, but it failed.
On being asked whether he thought 13 was the right number of clubs, Appleton said that each of the clubs had a unique character. “I think that is healthy for the industry in which we operate. From our point of view it would be advantageous for the status quo to remain. However, I see the pressures that are on some of the smaller clubs to gain access to a larger organization and the benefits of scale that might give. “. Appleton also noted that “these deals are never simple. Aligning two management boards and two shipowner boards is always going to be an immense challenge. As I said earlier, most shipowners have chosen their club because of the characteristics of that particular club”.
Also working against a merger was the evidence of history. Appleton observed that “when you look at the history of the clubs, I’m not aware of any mergers that were not the outcome of a distressed club looking for a way out of a difficult financial situation. At the moment all of the P&I Clubs are well capitalized, so there’s no urgent financial imperative to go down the merger route.”
Risk Selection “essential”
On being asked what the Syndicate’s strategy was in these “challenging times”, O’Donohoe said that risk selection was essential, and good risk selection came from having good underwriters. “I don’t think that every class of business and every risk is the same. What we try to do is pick underwriters who can use the best of current technology to select the best risks – how we price them and how we select them”.
O’Donohoe emphasized that in all markets there was a considerable variation of performance. “You get people who do very well and people who don’t”. Syndicate 3334 obviously hopes to write below the market average loss ratio. The marine loss ratio from Lloyd’s in 2016 was in the high 70s, but O’Donohoe once again emphasized that this was just an average. “There will be some divisions in the 40s and some at more than 100”, he said.
The position, said O’Donohoe, was to identify classes of business that the Syndicate thinks are sustainable over a long period of time, and to build those up to become a Lloyd’s specialty carrier of more relevance. This year (2017) counts as year two of what Hamilton sees as a five-year plan to get its Lloyd’s platform to relevant size. A “fair wind” in the market would obviously help, he said, “but we are not assuming there will be and we aim to grow steadily, organically and profitably”.
O’Donohoe said that to get relevant scale at Lloyd’s you really needed to be writing more than £300m a year. “That’s not a magic figure – Lloyd’s might say £250m. But it’s that sort of scale to make enough to pay just the administrative costs of being a part of Lloyd’s, plus Solvency II compliance costs, actuarial finance costs, and all of the other things that you have to pay when you are a member of Lloyd’s”.
On a more granular level, Appleton said that in marine he would be looking at loss history, changes to exposure within a portfolio, and at the absolute details of the coverages provided – to make sure that the Syndicate was not being exposed to new or unusual risks that were not being rated. On the geographical side, Appleton said that no geographies will be ruled out. “We will take everything on its merits.
For Hamilton at Lloyd’s, a relatively new operation, the focus for the present is on the loss ratio rather than combined ratio, because the syndicate is still building up scale. In addition, for the players with a long history, the past few years have seen significant levels of reserve release, which have served to push down the combined ratio. Appleton noted that “it makes more sense to talk about loss ratio, because what we have seen in previous years is extensive reserve releases coming from a number of the established players. Looking at the loss ratio makes it more of a level playing field”.
He noted that, although there had been some catastrophe activity in 2016, “people have generally been able to release their cat loads; so I think that will play a big part in the results of other carriers”.
O’Donohoe observed that “across the market as a whole it’s evident that, when it comes to prior years, we’ve got about as far as we can go”. For the half-year Lloyd’s was a 99% combined ratio with a 41% contribution from costs and acquisition expenses. “That’s 58% of the premium to pay for claims in what’s been a benign cat year. You have to look at it and say that the market as a whole is shifting into a loss in 2017. Investment income has been pretty low, and Lloyd’s has probably just been looking at the foreign exchange rate (weakening of sterling relative to the dollar) to give it an investment return across the market as a whole”.
O’Donohoe said that Hamilton had invested a lot of money as a group and in the London market in particular in technology in terms of platforms. These were being used to bring efficiency to the business underwritten by Hamilton at Lloyd’s – how the information is accessed, how the information is brought into the underwriting process, how basic accounting is recorded and reconciled on a risk level and on an individual account level. “We have invested in our claims system and our policy administration system to efficiently run all of our business”.
Hamilton Group has a joint venture with AIG in the US, linking Hamilton USA, AIG and Two Sigma to leverage technology and the underwriting process. “We hope that if there are any long-term benefits from that we will be able to utilize the processes and bring them here”, O’Donohoe said.