Before embarking on a career in insurance, Matthew Fosh, CEO of Novae Group, the listed Lloyd’s insurer, successfully built Seagray Fosh Futures Limited into one of the largest derivatives brokers in London. In 2002, he took over at the troubled insurer, then known as SVB Holdings, and has since led the business back to profitability. Excerpts from an interview:
How do you view the changes that reinsurance is undergoing in terms of the new capital that has entered the sector and how it is accessing reinsurance business?
What has effectively happened over the last five to 10 years is an accelerated process of convergence, breaking down the silos and barriers surrounding insurance. Outsiders have worked out the ‘mysteries’ of insurance, so that insurance and reinsurance have become asset classes just like any other, and clever people have worked out how to access the potential returns.
That means that the pockets of high return that historically were largely the preserve of the insurance industry have been attacked and will continue to be attacked. Until an equilibrium has been reached whereby insurance and reinsurance becomes just another asset class, the returns from which are broadly equal to rather than superior to others, those attacks will continue.
The convergence of other financial services with insurance has been driven by the insurance industry’s attractive returns during the past decade. Consequently, those within the industry have had to focus ever more closely on identifying and re-defining their competitive advantage. This is one of the main things which has led the industry to divide into the very, very big and the very, very niche and Novae is very much at the niche end of the market.
The industry is going through a wave of M&A. Would Novae consider growing through an acquisition?
We are a niche specialty player, seeking to deliver consistently within our stated risk appetite, while managing our capital dynamically on the way through. If we can identify an acquisition that enhances that strategy, we will consider it. But at a time when the tectonic plates of the industry are shifting, we are enjoying plenty of organic growth opportunities.
Where are those opportunities for organic growth at present?
At Novae, we think in terms of invest classes, being those we have identified as having real growth opportunities. We have pockets where we believe we have a strong competitive position and we want to build out those classes. In that category, I would put classes like Marine Liability, Credit and Political insurance, Cyber, and UK & European Homeowners. In the latter, for example, we have a niche position in ‘non-standard’ areas, such as multiple occupancy, multiple tenancy and unoccupied buildings, which require specialist underwriting.
Which lines of business are giving you most cause for concern at present? Is Novae considering reducing its participation or even withdrawing from any lines?
As the market changes, one must constantly assess and reassess one’s competitive position. Where we see our competitive position receding, we take action. For example, UK Professional Indemnity is a very competitive market. We identified this some time ago, and over time we moved to decrease our exposures. This process is under way constantly, increasing and decreasing our exposures as markets change – ‘dynamic capital management’.
Another example is Credit & Surety re-insurance, where we transferred our team recently to a third party. We are seeking to focus more closely on our direct Credit and Political insurance book, one of our leading classes, where we have identified some particularly strong opportunities.
In the past, you have spoken about turning Novae from a troubled business to a good business and eventually into an exceptional business. At what point are you in the process? And what remains to be achieved?
We compete with some very fine businesses and what will mark us out as an outstanding business, rather than just an excellent business, will be the ability to deliver consistently. That’s what marks out the super-class businesses. That’s what marks out companies like Beazley or Hiscox, the ability to deliver year in and year out.
What were the key stages of the company’s turnaround?
There were a few key points. Firstly in 2007 when we were finally able to demonstrate that the reserves from our 2002 and prior underwriting had stopped moving. It took a few more years before people actually believed us but nevertheless thereafter we could point back to that date.
Secondly, in December 2009 we decided to close our Novae Insurance Company Limited (NICL) subsidiary. We drove up the returns of the business by closing down NICL, returning surplus capital to shareholders, cutting out underperforming longer tail lines and moving us towards a different business mix of more short-tail and more property. Our returns have begun steadily to improve ever since that point.
What attracted you to take taking on a challenge in the insurance sector?
It was really simply a function of timing. When I was previously running a business in the capital markets, I observed the extraordinary growth and increased debt in the markets and economy generally. I became concerned that this was ultimately unsustainable, and that it would one day end badly…I didn’t know when but an unhappy outcome was, I thought, inevitable.
For this and other reasons, I sold my business, and I believed that the one industry that might prosper in a post crash era would be an industry that, in effect, is lending its balance sheet to protect others – insurance. I was only half right because in 2002, I was five years early. It was also just after 9/11 and so when the opportunity emerged to help restore Novae (then called SVB), I believed the company had a chance to recover more quickly than people thought. The company was in rather more difficulty than I realised and so it took 10 years to turn it round rather than five but we made it in the end.
What were the most valuable lessons you brought to insurance from your earlier career?
What I learned from my earlier career in running a business, and it was a mantra I would say to colleagues every time they showed signs of losing faith, was namely that ‘if you do the basics well enough, for long enough, you will get your day in the sun’. I would remind our staff of that every quarter when we announced results. The determination, tenacity and persistence of those same colleagues have been critical to our success.