Interview: Michael Watson

With more than a hint of pride, Canopius Group chairman and historian Michael Watson says the oldest part of the insurer began selling home insurance in the UK a century ago. The household underwriters of the early 1900s would surely be amazed if they could see the business today. The Lloyd's insurer, located high up in one of the shiny Lloyd’s towers, covers a diverse range, from classic motors to energy storage facilities.

Walk through into the brightly decorated reception, and you’ll see large glass jars of coffee beans in recognition of the company’s namesake, Nathaniel Canopius, an Oxford scholar reputed to have brewed England’s first cup of coffee in 1637. On the outdoor terraces, there’s a beehive to celebrate the international year of biodiversity. Canopius’s nod to history and culture is charming.

Yet anyone thinking Lloyd’s largest managing agent is a soft touch would be wrong. In just six years since the management buy-out from Trenwick Group, backed by the firepower of private equity, Watson has taken the business from £1.1m profits to £49.6m. Gross written premium rose during this period from £216.3m to £591.6m.

Driving change for KGM

Watson’s latest acquisition to the expanding empire is Lloyd’s syndicate KGM, bought off Gibraltar-based Perseverance in July. KGM has been a Lloyd’s syndicate in specialist motor since 1957, insuring classic cars and commercial vehicles. But it has suffered something of a crash in recent years; KGM was owned by Perseverance subsidary Optimas, which posted a £3.5m loss in 2008. Undeterred by these figures, Watson says he can get the motor insurer back on the road to profitability.

“First of all, the market as a whole is now driving through rating increases,” he says. “So you could describe our philosophy as ‘it’s a rising tide – all the boats lift off the bottom together’. Secondly, there is a very significant re-underwriting of the portfolio taking place. In 2010, total premiums written will be around 30% less than they were in 2009.”

Watson says KGM will continue to retract itself from aggregators, resulting in a sacrifice of premium for profitability. “The total premium of KGM last year was £80m. That’s not enormous, but it’s not trivial within the context of Canopius Group, which last year wrote around £600m-£650m of business. So, on an ongoing basis, it will represent less than 10% of the premium and, to be honest, I’d far rather have 5% profitable than 10% unprofitable. So we are focused on bringing it back to basics.”

Watson says the KGM acquisition will add a balance of personal lines to the commercial lines portfolio in the UK. Canopius’s main commercial UK interest is as a capacity provider to Arista. Canopius, along with Equity, backed a management buy-out of Arista in 2007. Chief executive Charles Earle says the managing general agency is aiming to make a modest profit this year of up to £300,000.

Watson stresses that there's no need to hasten Arista's progress. “I don’t think there’s any doubt that Arista could write more business if it wanted to, but both Equity and ourselves are focused on bottom-line profitability of the underwriting,” he says. “Like us, they have stringent underwriting standards, which probably constrain the amount of business they can write.

“But I think an underwriting agency like Arista only has value if it is not only making money for itself but also making money for its carriers. We’re confident of producing profits for all stakeholders in 2010. Therefore, if the time is right for further growth, certainly we will look to support that.”

Watson, an experienced London market and Lloyd’s man, emanates confidence. Yet on personal matters and his professional background, he holds back, briefly summarising that he was “previously a chief executive of a number of Lloyd’s and companies market insurers”. And his interests? He’s a skilled bridge player and enjoys jogging.

It’s hard to get a sense of the man – he prefers to talk business. Watson arrived at Trenwick Group in 2001. He led a management buy-out of the struggling company in December 2003, backed by US private equity house Bregal Capital, which owns 83% of the business. The rest is history.

Watson and his team have no doubt taken pride in building up Canopius, but they’re also keenly aware of the vast rewards a successful sale or flotation would bring. It’s a powerful motivator for success.

“The day that Deepwater Horizon rig sank to the bottom of the ocean, I knew what my personal line on that was,” Watson says. “That’s not to say I keep score every single day on how we’re doing. But I only get value out of my shares if the company makes a profit and, conversely, if we suffer losses my shares diminish in value.”

Get dressed for success

Typically, private equity wants to exit within five years, putting a serious pressure on management and staff to successfully expand. But Watson says Bregal is relaxed and there’s no timescale. He explains: “We’re not that old, but as a private equity-owned company, you could argue that we are quite long in the tooth. Normally, that might be a sign of trouble. Our feeling is that it is quite the reverse and we have the full support of our shareholders. We continue to talk to them on a regular basis about plans to develop the business.

“But there will come time when Bregal will want to divest itself of Canopius. My goal is to make sure that over the next three to five years we make Canopius as attractive and valuable as we can to the greatest number of potential owners. Right now is clearly not the time to be trying to do an IPO; in general, insurance valuations are extremely low.”

If Watson is to continue maximising the company’s worth, he’ll have to steer the business through a tricky 2010. The Chile and Haiti earthquakes, the BP oil spill and Windstorm Xynthia will pillage profits from many Lloyd’s businesses in 2010. Watson says Canopius is behind where it expected to be for H1, but “no single loss has exceeded our expectations for the particular event”.

Despite these setbacks, Watson is sanguine about the future. “Canopius has yet to establish a presence in the USA – that is something we would be interested in,” he muses. “Equally, we would echo the broader sentiment that Lloyd’s has never done as much in continental Europe as it might.”

If next stages of growth are as remarkable as the last, Canopius could be making profits of £100m in time for a flotation or sale. The rewards for Watson and his team are vast. Canopius may go back 100 years, but it is Watson who will be writing the defining chapter in this company's story. IT