The Not Unreasonable Podcast

Mike Sapnar, CEO of Trans Re: There's always a Buyer and a Seller

April 21, 2019 Season 1 Episode 34
The Not Unreasonable Podcast
Mike Sapnar, CEO of Trans Re: There's always a Buyer and a Seller
Chapters
The Not Unreasonable Podcast
Mike Sapnar, CEO of Trans Re: There's always a Buyer and a Seller
Apr 21, 2019 Season 1 Episode 34
David Wright
Mike Sapnar on Managing a Reinsurer
Show Notes Transcript

My guest for this episode is Mike Sapnar, CEO of Trans Re, a 4.5 bn premium reinsurer based in New York City. For many in my business Mike needs no introduction: we cover what the differences are between insurance and reinsurance, what makes for good negotiators and what Mike learned going through an agonizing year or so while his company was in the spotlight, subject to friendly and hostile takeovers alike a few years back. I've never been anywhere near the pilot's seat during an all-or-nothing M&A roller coaster and Mike takes us through what he learned in those harrowing few months. 

David Wright:       00:58:09       Tell me something you learned.

Mike Sapnar:        00:58:10       So, um, first of all, I learned there are no mergers of equals. It doesn't exist in Wall Street parlance. There's always a buyer and a seller.

David Wright:       00:58:19       Yup.

Mike Sapnar:        00:58:20       And even though we were a bigger company, we were getting a premium. We were doing a book for book swap, but we were getting a well let's come back to that. We were getting, it was a book for a book deal. We were going to have seven of the nine top positions, um, reinsurance was going to be a dominant part of the portfolio. And we felt we weren't the seller at the end of the day. Cause we were, we were the bigger company.

David Wright:       00:58:56       This is the Allied World transaction.

Mike Sapnar:        00:58:57       Yes. Yep. We were a bigger company. The issue was is we were getting a bigger premium in the book for book value based on the market price. And so Wall Street kind of said, well Transatlantic is the seller, they're getting the bigger premium. Is that a big enough premium? Is there something else out there? Hmm.

David Wright:       00:59:12       What does it matter?

Mike Sapnar:        00:59:14       Why does that matter if you're the, if you're the seller?

Listen for more! 

If you enjoy the show, see more of my stuff at notunreasonable.com!



David Wright:
1:46
My guest today is Mike Sapnar. Mike is President and chief executive of Trans Re a Reinsurer writing about $4.5 billion of premium worldwide. He joined the company in 1995 as a specialty casualty underwriter. Eventually rising to his current role in 2012 Mike has a bachelor's degree in economics from the College of William and Mary and an MBA in finance from New York University. Mike, Welcome to the show.:
Mike Sapnar:
2:04
Thank you for having me.:
David Wright:
2:04
So you did an MBA at NYU and I, I've, I think, and maybe you can disagree with me, this is somewhat of an uncommon thing to do to be an insurance world and jumped back in, they call the general business education the stream and then come back to the insurance world. Oftentimes MBAs are a excuse for a career change for people in other industries, but you did an MBA in return and I'm wondering what you thought was useful about that, whether you yourself send executives and MBA programs. How do you reflect on that experience?:
Mike Sapnar:
3:08
So, uh, in the interest of full disclosure, I did my MBA part time at night at NYU. So I did continue with working in the insurance industry while I was doing that. Now, uh, to your point, I went, I pursued my MBA because I wanted a career change at the time. Okay. And I thought I wanted it to be in banking and primarily that thought came to mind. Well, first of all, it started with, you know, my father was in, was in insurance. My grandfather was in insurance, two uncles and an aunt who were in:
David Wright:
3:41
my goodness.:
Mike Sapnar:
3:42
And I interned at an insurance company, high school and college:
David Wright:
3:46
family business.:
Mike Sapnar:
3:47
Right. So I swore, I swore that I would, um, uh, not get into the insurance business. So, ultimately I showed everyone I'm in the reinsurance business. But, uh, I did wind up in insurance after college because I wanted to be in Manhattan. And the only job I got in Manhattan was with an insurance company that was with continental insurance.:
David Wright:
4:10
Was that through a family connection?:
Mike Sapnar:
4:12
No, they interviewed on campus actually, and I just stuck my resume.:
David Wright:
4:16
And hold your nose.:
Mike Sapnar:
4:17
Yeah, yeah, exactly. The old days, you know, you had the manila envelopes on the wall, you dropped your resume in and they sent it off to the companies and they picked 10 resumes to interview.:
David Wright:
4:28
What did you think you wanted to do at the time?:
Mike Sapnar:
4:30
Well, I went to college to be a sports journalist and I picked the one more on the university in the country that didn't have journalism as a major. So, uh, I just majored in economics and kinda just thought things would happen. I didn't know. I didn't really have a goal. In terms of where:
David Wright:
4:49
did you do sports writing as a college student,:
Mike Sapnar:
4:51
I did it as a a in high school. I was editor sports editor of the paper and had a column and what have you. And then I want to get to college. I had too much fun.:
David Wright:
5:00
Okay. But you always had your eye on that?:
Mike Sapnar:
5:04
I did.:
David Wright:
5:05
What's your favorite sport? Favorite sports.:
Mike Sapnar:
5:07
Baseball.:
David Wright:
5:07
Okay.:
Mike Sapnar:
5:08
Uh, grew up playing baseball. Still Love Baseball team.:
David Wright:
5:12
Who's your team?:
Mike Sapnar:
5:12
Yankees.:
David Wright:
5:12
Yankees. Okay. And you're from Trenton, right? So Trenton being closer to Philadelphia.:
Mike Sapnar:
5:18
Exactly. I am a Philadelphia Eagles Fan.:
David Wright:
5:20
Okay.:
Mike Sapnar:
5:20
Well a long suffering one until two years ago. Uh, and but where I grew up, uh, we were on the television border of New York and Philadelphia, so we got both TV stations. So we got the full compliment of Yankees, Mets and Phillies. But first game I went to with my father was a Yankees game in 1973, uh, against the Texas Rangers in the old old stadium. So the original stadium. And I remember walking through the gates and the bright green flash that comes before you as a, as a seven year old, uh, that and the overwhelming size and fell in love with, with the Yankees and the stadium and the game. And that was it for me. Uh, we had eagle season tickets growing up, so I became a Philadelphia Eagles football fan and some, a little bit of schizophrenia when it comes to Philly in New York.:
David Wright:
6:09
Geographical affiliation.:
Mike Sapnar:
6:11
That's right.:
David Wright:
6:12
And your dad was a Yankees fan? He was a Yankees Fan. And if an eagles fan, yes.:
David Wright:
6:17
So your father told your father and the Yankees Eagles and insurance.:
Mike Sapnar:
6:19
That's right. Pretty much must be proud. We'll have to ask them.:
David Wright:
6:24
And what was your Dad, what was your dad's role in the insurance business?:
Mike Sapnar:
6:27
Uh, he eventually ran all commercial lines for New Jersey Manufacturers in New Jersey, Trenton, based and Trenton, and he wound up on the board of directors, served there for a while as an executive and 10 years after he retired, uh, and you know, it was three miles from our house, so he was home at 5:30 for dinner every night.:
David Wright:
6:46
Cool.:
Mike Sapnar:
6:46
And uh, you know, kind of the way it was back in the day.:
David Wright:
6:50
And one of the things that really interested me as I was researching for this is your, your surname is really unusual. You might be the only, Mike Sapnar on earth, which is probably pretty weird for Mike being a very common first name. What is the origin of that?:
Mike Sapnar:
7:03
So, um, my, the, the origin is Croatian.:
David Wright:
7:08
Okay.:
Mike Sapnar:
7:08
And my family was on a small island off of, near Brac in Croatia and there were a bunch of Kristovs in Christiansens on the, on the island. And there were too many, apparently they said at that time. But, so you had to change your last name to whatever your profession was. And my family were soap makers and it was changed to Sapunor, S-A-P-U-N-O-R, uh, when my great grandfather came through Ellis Island, the u was dropped and the o is changed to an a and that's the origin of the name. And my, my cousin has done a lot of research. He's been back there. Uh, and we've actually had a couple of family reunions. There are Sapnars on the west coast that we don't know that well, not a lot of them. And then, you know, a handful here on the east coast.:
David Wright:
7:54
Interesting.:
Mike Sapnar:
7:55
And Yeah.:
David Wright:
7:55
So your great grandfather came from Europe. Your grandfather was an insurance. And did, do you know anything about whether your grandfather got your father into insurance?:
Mike Sapnar:
8:04
Yeah, I don't think so. Um, so he was in life insurance. My grandfather and my, my father was an accountant, a major at Villanova and a baseball player actually. And kind of the same thing to him. He just kind of fell into the job because there was a local company, he grew up, um, about a half mile from New Jersey manufacturers right down the road.:
David Wright:
8:26
Wow.:
Mike Sapnar:
8:27
And, uh, he spent his entire career 38 years at the same company. Yeah.:
David Wright:
8:32
Interesting. One of the things you mentioned before we started recording was that you're not the only insurance executive from Trenton, New Jersey.:
Mike Sapnar:
8:38
Right.:
David Wright:
8:39
So maybe name some other names and what on Earth happened there?:
Mike Sapnar:
8:41
It's kind of weird too, uh... So Joe Plumeri, who was obviously the CEO of Willis for a long period of time, was not only grew up in Trenton, he played baseball, uh, with my father.:
David Wright:
8:55
Okay.:
Mike Sapnar:
8:56
And Plumeri is, uh, quite, um, uh, well known family in the area is I think his brother, his father was sheriff and the political realms. And so, uh, and coincidentally, uh, Joe went to Lawrenceville, um, which is where I went to high school, although he did not graduate from there. And then he went on to William and Mary where I went to college. So Joe and I have overlap quite a bit and I know him quite well and had a nice relationship with him. And then Brian Duperreault, although a Bermudian, uh, went to Trenton Catholic high school and spent some formative years in Trenton. So you know, you hear a cradle of coaches, I guess Trenton's a cradle for reinsurance executives.:
Speaker 4:
9:35
That sounds like a coincidence to me.:
Mike Sapnar:
9:37
It's total coincidence:
David Wright:
9:38
Not everybody goes to New Jersey manufacturers.:
Mike Sapnar:
9:39
It's not like that at all. No, it's total coincidence. Yeah. Kind of funny.:
David Wright:
9:44
And so coming out of university, joining an insurance company, picking the story back up again, you, you were thinking at the time, this is not going to last.:
Mike Sapnar:
9:54
So, you know, it's one of those things where, uh, sometimes the best lessons you learn are working at a bad company.:
David Wright:
10:00
Interesting:
Mike Sapnar:
10:01
Continental was a bad company.:
David Wright:
10:02
Okay.:
Mike Sapnar:
10:03
They ran near 40% expense ratio.:
David Wright:
10:05
Okay.:
Mike Sapnar:
10:05
Uh, they almost went out of business in 1992. Now people will say, Oh, Hurricane Andrew, actually it wasn't hurricane Andrew. Continental unknowingly had an 18% market share in Hawaii when hurricane Iniki hit. And they actually had a bigger loss from an Iniki than they did from Andrew. And this goes to show where the business was back then. Uh, they picked it up in Continental Insurance. They picked it up from First Hawaiian, which they owned a 50% share in, they've picked it up to a Continental Re. They picked it up through a Union America, which they owned at the time in London. And they had no idea what their market share was in, uh, in Hawaii until there was a hurricane.:
David Wright:
10:41
Right.:
Mike Sapnar:
10:42
So, uh, that put them in kind of a tail spin and that they never really recovered from and ultimately wound up, uh, selling themselves to CNA the, um, it was, it was a place that was run by a really nice gentleman named Jake Mascot who struggled with strategy, uh, in and out of life, uh, in and out of real estate transactions. Matter of fact, they built this beautiful building down here, 180 maiden lane that was their building a, they:
David Wright:
11:12
Where you were working:
Mike Sapnar:
11:13
Where I was working. They spend a ton of money on it and then, uh, sold it for about 60% of its value. Uh, when the real estate market kind of co.. you know, had a downturn in the, in the late eighties. And, you know, Jake kinda ran the company, uh, he was a very philanthropic person and we got way over-extended on those types of initiatives, uh, poor strategy, high expense ratio, and I just didn't like the culture and I thought it was kind of maybe endemic of, uh, the insurance industry.:
David Wright:
11:46
When did you figure that out? The part where... you didn't, you know, I don't like this place.:
Mike Sapnar:
11:50
You know, I probably figured that out. Um, around 1993. Okay, so you've been there for a few years. Yeah.:
David Wright:
11:58
How long was that... four..?:
Mike Sapnar:
11:59
I started in 1988.:
David Wright:
12:00
Okay.:
Mike Sapnar:
12:00
So I'm going to start, I might have thought about that a little earlier. Uh, that I didn't like it there because I started at NYU. Well, right around 1993. So that's, that's, I started in 93 from NYU and graduated in 96.:
David Wright:
12:14
Right.:
Mike Sapnar:
12:14
So, um, now you, you, you know, I'm sure we'll get into this, but you, you talk about fortuity and, and what happened? So when I was offered a job with continental, I was given two choices. I can go into the guarantee and credit department, which did, um, just what it says, but included a fidelity and surety at the time. Or I could go into the marine department. So, which kind of owned, uh, MOAC which was Marine Office of American Corporation was a the market leader. Uh, I th I spoke with my uncle who was in insurance and he recommended to go into the Surety and Fidelity. thought it would be more interested at that time when I joined in 88, continental decided to reenter the financial institutions D&O business. So I came out of the training program. I wanted to move to Philadelphia and do surety and I was assigned to New York to do D&O.:
David Wright:
13:07
Okay.:
Mike Sapnar:
13:07
And what was interesting, there was a true hard market and it was s and l crisis savings and loans crisis was going on. So I wound up really is, it's not knows 24 year old, literally honestly going into board rooms at banks around the country and presenting D&O options to the boards of directors and answering questions and selling to them. So why they buy it should buy their D&O from an a minus rated, um, uh, you know, insurance company.:
David Wright:
13:35
And the answer was because I couldn't get it anywhere else:
Mike Sapnar:
13:36
pretty much. That pretty much was the answer.:
David Wright:
13:39
Yeah.:
Mike Sapnar:
13:40
And it was just a tremendous experience because you know, you, you go in there and you got grilled pretty hard and people cared about D&O because it was their assets on the line.:
David Wright:
13:48
Yeah. So that portfolio must have done pretty well.:
Mike Sapnar:
13:51
It did really well.:
David Wright:
13:52
And there's a, I think there's a school of thought out there, which is, which I don't know how much or what percentage, I think this is true, but where, the market delivers your result actually. Right. And so if you very bad company and a good market, you're probably going to do okay.:
Mike Sapnar:
14:07
You can do okay. For sure. Um, you know, they say the stock market is 50% based on how.. or a stock's performance: 50% how the market does, 30% how the sector does and 20% how the, how the company does.:
David Wright:
14:20
Yeah.:
Mike Sapnar:
14:21
And you know, you can do okay, uh, for sure. But if you look at the, the range of, uh, of, um, loss ratios and performance in the insurance industry, it's pretty disparate, right? It's pretty spread. And um, you know, you can do really well but still not do as well as you might have.:
David Wright:
14:38
And how much did that in the moment... One of the things that fascinates me about market cycles in this business is looking back from the perspective of a soft market at a hard market, you think to boy before, you know, that was, that was easy, right? Making money. You just have to write all the business and then in a soft market.... this is the hard part, but I feel like when you're in a hard market, you're thinking, I don't know what to do here because I don't know what the price is. Right? So you're kind of always in the state of uncertainty. Right. And I'm wondering what it felt like as a, as a, you know, you're younger, you have less perspective, I suppose, general perspective on the business, but you're sitting there, you know, in retrospect, you're probably thinking, man, that was, that was making a lot of money for my company back then. What did you think at the time?:
Mike Sapnar:
15:21
So even back then I kind of knew it was, it was pretty good. Yeah, because you would, this is when you know you're in a hard market and it's just as you said, David, it's, you quote something and then you're like, oh no, I got it. I got it.:
David Wright:
15:35
Right.:
Mike Sapnar:
15:35
So, um, it's, it's, you know, people always say, they go back and say, well, I should have written more than a hard market, but if everybody said that it wouldn't be a hard market.:
David Wright:
15:47
Right.:
Mike Sapnar:
15:48
So, and I think that's lost on people and it's just what you said, there's fear, uncertainty. You just don't know what the, what the right answer is. And I've been through two hard markets two really, uh, really hard markets in my career. The one in the late eighties coming out of liability crisis and the one after 9/11, which was an extended hard market as well. And it's debatable which one was better, but they were both unbelievable. Good in retrospect. No. Incredibly good.:
David Wright:
16:14
Yup. And so Continental Casualty, you're started doing an MBA at night, you're thinking now finance not thinking sports writing.:
Mike Sapnar:
16:22
Exactly:
David Wright:
16:22
What, what so what, what made you think what prompted that thought?:
Mike Sapnar:
16:27
Um, well I thought if I was going to change careers, you kind of have to package yourself as an economics major. You know, you learn a lot of um, you know, 36,000 feet stuff, but they got a lot of specific skills, frankly, unless you're an accounting major, uh, you come out of college qualified to do nothing, right. You've proven you can learn.:
David Wright:
16:47
Absolutely.:
Mike Sapnar:
16:47
Uh, so I want it to go learn some deeper on finance NYU was, uh, you know, it still is one of the leading finance MBA you can get. And as a part time program, it was the most flexible. Uh, and matter of fact, it was downtown at the time. It was over here at a dilapidated building on, um, on Church street. And that's where I started until they, they built the new facilities. So, uh, and I was, again, I to Continental's credit and generosity and the reason were they ran at a 40% expense ratio, probably is they paid for the entire degree. As long as I got a B or better on my grades, which, you know, in graduate school if you show up pretty much you're doing it.:
David Wright:
17:31
Yeah. And so then, you know, back to the original question, that's one of your employees wanting to go get an MBA is maybe warning sign for you, given your own experience there enough. And, uh,:
Speaker 4:
17:40
and you know, to your point, we don't have many people who go get their MBAs around here.:
David Wright:
17:45
Yep.:
Mike Sapnar:
17:45
Now we did have somebody recently that, um, we asked to go get an MBA. We offer it to say, we'll put you in the executive MBA program. Okay. We'll pay for it. Yeah. And I think the NBA is, you know, not going to tell you how to, what the price would deal should be and how to do reinsurance or insurance. But the most valuable experience for me, it was being around people from other businesses and working collaboratively on case studies with people who have different perspectives who had come from banking, consulting, advertising, you name it. I mean he had the full gamut and you're in your study groups and that was where you kind of learn to think outside the box, bring disciplines and things that have worked for other industries back to what you're doing. And I, that's where it was interesting for me. I mean, yeah, you can learn, you know, capital markets theory and um, you know, I took courses on bankruptcy, which, you know, I'll never use, but were intensely interesting and it just develops your business thinking. And I think, but you can get that a lot of different ways doesn't have to be an MBA. That was the route route that I chose. Management, you know, I don't know if you can teach somebody to be an innovator. I don't know if you can teach somebody management. I mean you can teach basic tenants I guess, but I think it's more in the, in the personality and experiences then the than a purse per se education. Um, you know, I think you become a good manager by experiencing in a lot of different things with a lot of different people because a lot of different things come at you and you're managing. And uh, so, you know, if you go, if you go to MBA to get your MBA to become a manager, I, I'm not, I think you might be disappointed at the end of the day.:
David Wright:
19:49
Yeah. So you, you go do the MBA, you do make a switch. So that Continental had gone to CNA:
Mike Sapnar:
19:59
So.. independently. I started. Um, so what happened was, um, and it wound up overlapping, but Joe Toronto, CEO of Transatlantic, in November of 1994, it takes a job to take over Prudential Re changed its his name to Everest, taking public, spin it out and take some people with him from Trans Re. And the, and the people he took were some of the people we took, he didn't take a lot of people were in the professional liability facultative area. Okay. And I bought a lot of fact from Trans Re. So, um, I, I liked the, I liked the people I was dealing with. So I called up and said, are you looking for people because a bunch of your people just left. And they said, yes, we are. Why don't you come in and talk to us? So I showed for an interview and the woman I was supposed to to interview with was Lisa Beal who ran special casualty at the time, which we defined as D&O, E&O and medical malpractice. And she had forgotten that we had a scheduled appointment. The only people in the office who could see me were Bob Orlich the CEO and Andy Barnard, the chief underwriting officer. So again, a bit of fortuity right. I show up and next thing I know, I'm sitting with the number one and number two executives in the company. And I interviewed with them and, uh, we, we hit it off and they told Lisa that they thought it'd be worthwhile if she did arange something and meet me.:
David Wright:
21:24
Turn up next time:
Mike Sapnar:
21:25
Yep. And she did and we hit it off and, and, um, uh, she hired me and they hired me to do both Facultative and Treaty. Well actually they said, do you want to do fact or treaty? And I had a, um, uh, a relative, another relative through marriage who was, uh, in the business working for Aon. And I kind of asked her what do I want to do? And she'd say, you want to do treaty? So I said, I'll do treaty came into the treaty department, did fact for a while until they staffed it up and, and that was it.:
David Wright:
21:56
Yeah. Do you think that maybe a better way of putting this is, at what point do you feel like you became as good of a treaty underwriter as you were an insurance underwriter? Is there such a thing as a difference between those two things?:
Mike Sapnar:
22:08
There's certainly, there's a huge difference. I mean, I, um, it's a really good question. The first of all, and we'll probably get into this later. Insurance and reinsurance or different businesses, they share nine letters, but that's about it. Okay. So, well and I'm sure we'll get back to that. I didn't become, it took, it took me probably nine months, nine to 12 months before the light bulb went off on, on treaty because it was just different. There were different terminology and different way to price a business portfolio pricing. It's a, you know, swing rated deals, retro rated deals, cessions factors as:
David Wright:
22:46
You have much more insight into pricing as a reinsurance underwriter don't you.:
Mike Sapnar:
22:48
Totally. Yeah. And um, you know, I just didn't even know that terminology. Didn't know what they were. I mean, I did basically the only thing I knew was what an ILF was, you know, and so, uh, I sat right outside to two women's offices. One was Lisa Beal, who was my boss, who was one of the best underwriters I've ever met. And again, fortuity I learned from her and the person I learned the most from was Betsy Wellington, who was the chief pricing actuary for the professional liability area. And I would just darken their doorstep several times a day and come in and ask questions. And they were very patient and they were just great thinkers of the business. They were very analytical, very thoughtful and very patient and gave me their time. And I, uh, by asking questions and doing, I eventually eventually learned, you know, Betsy and I actually went on to write co-write a paper for the cas, um, on managed care, uh, D&O, E&O pricing and exposures. And you know, that was quite an intimidating thing. And she suggested it because at the time it was an emerging risk. And, uh, we worked on that paper and I wound to presentingi t to the cas, which was good. Imagine a, an underwriter going in front of 250 actuaries. It's just kind of an interesting time.:
David Wright:
24:08
I read the paper:
Mike Sapnar:
24:08
Oh, you did?:
David Wright:
24:08
Yep, very technical:
Mike Sapnar:
24:11
Good for you:
David Wright:
24:11
Very technical, right? And so it's, I mean, if I remember correctly, it's all about there's a specific way of segmenting the risk, right? And then you're saying, you know, this, this part where you have to look at a much more granular evaluation of this marketplace and you've priced and it was all the different pieces a little bit differently, you know, so I mean it's, I think it's a classic reinsurance pricing kind of analysis. Right? Let's break it down. Let's think about it from the, from the kind of the bottom up, but in a little bit of an re-aggregating in the ways we want to:
Mike Sapnar:
24:36
It's so interesting. And look, I think a lot of the theory still applies today because you're right... Uh, healthcare is developed, but you know, you, you cannot neatly fit medical exposures into D&O, E&O and medical malpractice because of vicarious liability, strict liability, credentialing, um, employment practices issues. And when, when costs, decisions drive medical decisions, is that a D&O, E&O issue or is that actually a malpractice? It shouldn't cost.:
David Wright:
25:04
What do you mean by costs there?:
Mike Sapnar:
25:05
In other words, the treatment I'm going to give you is based on a cost benefit analysis, not based on my professional opinion. Okay. So if, if that happens, sometimes people would say, well maybe that is based on the policies that were written by the healthcare institution, the, the HMO or the PPO or the IPA PPO preferred provider organization or individual practice, uh, association and therefore I'm just following cost protocol as opposed to medical protocol.:
Speaker 4:
25:32
But a bad outcome was the medical outcome.:
:
25:34
Yeah.:
Mike Sapnar:
25:35
So is that a medical malpractice claim or is that actually an E&O claim from how I've picked:
David Wright:
25:40
the wrong methodology,:
Mike Sapnar:
25:41
Exactly the wrong cost benefit analysis.:
David Wright:
25:45
So what's the answer?:
Mike Sapnar:
25:45
Well the answer was to... you can try to exclude personal injury, bodily injury from the, from the D&O, E&O contract. Market conditions will dictate that:
David Wright:
26:00
Because you want to push them into medical malpractice.:
Mike Sapnar:
26:02
Yeah, if it's BI, it should be bodily injury should be there. If it's, if it's a negligent management. It should be somewhere else. The problem was at the time, um, those were two different underwriting departments, two different policies to different types of people. You don't want to get in a situation where you get claims arguments. So the paper actually I think ultimately suggested there should be, you know, one policy, three sections and ah, and then price accordingly.:
David Wright:
26:29
I mean that, that maybe it's a good time to actually talk a bit about how insurance and reinsurance are different, right? Because classic reinsurance paper saying the way this industry is organized is let's call it out of date, right? So maybe once upon a time, you know, the, the thought of whatever percent medical inflation, which was a of the paper that talks about that and that's continued. I mean that was 25 years ago and, and where, you know, you have a single, low single digit medical inflation, you don't think too much about the cost increases. Cause I think that's what it comes down to is you want to isolate this kind of exposure being medical, medical related expenses from a policy which to isn't really designed to handle that, that, that kind of risk. Right? And, and now the industry is saying rather, you know, you're at your expert opinion on the reinsurance side of saying, you know, these things should be priced differently now and insurance companies and I imagine the insurance company responses as you said, well we're set up that way and it ain't that easy to change.:
Mike Sapnar:
27:20
Right.:
David Wright:
27:20
And so insurance being a business, which is about more than pricing and underwriting.:
Mike Sapnar:
27:25
Yeah, I mean look, you know, insurance is about a lot of things, but I look at as branding and um, ability to administer well to process to manufacture or however you want to put it. It is day to day hand to hand combat on thousands of of of policies. There's cross selling going on, there's all different things. It's more highly regulated than reinsurance. It's a, and you're trying to yeah. And you buy at your volatility, you're trying to produce a fairly predictable return because all you are at the end of the day basically is a big mutual bond fund, uh, where a reinsurance is much more of a portfolio macro view of the world. Um, that may get very technical on portfolio pricing. And low and try to drive down, um, on, on certain certain types of risks. But the regulatory, um, environment is completely different. Uh, you can change your portfolio in, in a heartbeat, right? There is no mandatory renewals. There is no six months notice or you have to offer a 12 month policy or runoff deal or anything like that. Right. You can, you know, I'm out.. And you can put caps on your aggregates, on caps, on your exposure where you know, insurance is essentially just you add up all the limits. So yeah, it's, it's a completely different, different game. And to your point on the pricing side and what, you know, I mean we would get our pricing guidelines from an actuarial department that probably sat on a different floor who was doing some analysis and said, here are your ILF here are your IBNR. I mean, we had no say on IBNR factors, we had no sort anything like that. Right? Yeah.:
Speaker 3:
29:15
That's where I came from. And you start digging and I find that a cultural feature of reinsurance and interacts with insurance and I'm being a reinsurance broker. I see that all the time. Right. And I'm kind of in the middle of that and a lot of instances. Is there a sense of exasperation I think amongst reinsurance people when thinking about certain insurance companies because they're saying you guys aren't doing it in the perfect way that would make this pricing to totally adequate. And I think that where there's a miscommunication is the insurance people tend to honestly undervalue a little bit that contribution because I think there's a sense amongst them that listen to the scope of what I have to worry about here is really big, really big. I mean the systems issues and then the regulatory interaction or the distribution itself communicating to distribution, you know, being the farthest point away from a reinsurer. It actually, the Insurance client.. Insurer, insurance insurered relationship is one that we don't see much.:
Mike Sapnar:
30:07
That's correct.:
David Wright:
30:08
Right. And that, and that, that introduces some complexities. It's very hard, I think for us to appreciate. And so coming back to a reinsurance underwriter, how much of that should a reinsurance underwriter understand?:
Mike Sapnar:
30:18
Well, if you ask us a lot of it.:
David Wright:
30:20
Yup.:
Mike Sapnar:
30:21
Uh, we, we prefer to this another interesting point. I mean, we prefer to hire people out of the insurance industry to the reinsurance side. Okay. Because, you know, we're a derivative, right? We're a derivative, an insurance product that rid of the day. So you should understand the distribution of the complexities around that. Um, you know, what's the difference between a retail book of business and a wholesale book of business? What's the difference between the admitted and non admitted and policy language and the exposures around that? Uh, and the, we, we've hired six since I've been back in New York, 2002, we've only hired six people out of college. You know, most of the people we're hiring are people who understand the original business. It helps a lot when you go in and do an audit or you're trying to really have a discussion around where the market's going, or you're looking at actuarial data or you're looking at limits profiles, or you're looking at mix of business to really understand what that means to some, to, to a certain degree.:
Speaker 4:
31:20
So we think it's important. Do you have to work in an insurance company to be successful in reinsurance? No you don't, I mean Gen Re, you know, they would take tons of people out of college, send them to jump school and teach them the basics of the business. But that was a different time and that was a time when reinsures controlled all the information. Reinsures control the bulk of the capital. They drove a lot of the pricing, they drove a lot of the information and data that was that the insurance companies just didn't have it because A), they were small, much smaller. B) Information Systems weren't, weren't as good and uh, and it wasn't captured and C) they tended to be much more locally and, and a Prokera we focused either specialty or regional as opposed to big nationals. So they didn't have the wide perspective that reinsurers had.:
Speaker 4:
32:10
The beauty that a reinsurer still brings to the table today is a much more, a much wider lens to look through the businesses, the trends, you know, as an insurance company can get too close to the business and not realize you have a concentration in, you know, REITS for D&O because you've been cheap. And not realize that you're, you know, you write too much primary tech business. And, and I think what we're starting to do, and this is getting a little off topic, but what we're starting to do is what we've been doing is we take that data and we can now map an insurance company's portfolio to the broader market and say, we don't know if this is part of your strategy or not. But you know, in the middle excess layers you tend to be cheaper than the benchmark or your portfolio has a skew mix that is more towards um, hedge fund managers. Um, then commercial, you know, is that an area you like or you, um, unknowingly cheap and you've wound up with that business? What is driving that? What, here's where you're, you're below market in terms of mix, where you're above, here's where you're below market terms of attachment point, here's where he above and here's where he below market on pricing. Here's where you're above, does that match with what you're trying to do? And I think that's where we can get really good feedback.:
David Wright:
33:29
So scope is pretty broad there of what reinsurers can do and tend to be typically pushed through the, the, the mind body of a, of an underwriter, right? And, uh, given that the scope is so broad and there's so many things that a reinsurance underwriter must do, how do you measure reinsurance, underwriter productivity,:
Mike Sapnar:
33:50
Well ultimately by profitability.:
David Wright:
33:52
Sure. But that takes a long time, right?:
Mike Sapnar:
33:54
It does. But you know, we have 40 years of data. You can have fairly accurate IBNR, you know, we do profitability studies every year with every con, you know, every lump by every line of business by office since 1986. So, uh, with projected numbers the um, and you'd have to decide whether, you know, when you look looking as or how does your relative performance versus absolute performance and all that. But all anyone I mean I think cares about is whether I wrote a profitable book of business and, and um, we're not measured on, on, on volume. The, the, again, it's a very good question. When I look at underwriters, what do you look for? Number one is you want to see all the business and a skill that is lost increasingly is, first of all, you can't be a pontificator. And one of the things that Lisa Beal who I talked about who hired me and I learned from her is she was the best I have ever seen at saying no and getting the next submission. And I think that is the, that is a key. You got to see it all to build the best portfolio that you can.:
David Wright:
35:18
What did she do? How did she do it?:
Mike Sapnar:
35:20
It was, it was mannerism. It was explaining why she was declining it and usually offering another suggestion as to how under what terms and conditions would she provide capacity. And I think that's all broker can ever ask for it. Right? A reason as to why you're saying no and an alternative they can present the client if they don't have anything else. Yeah. And if you do those two things and you do it respectfully and um, I think that that goes a long way to becoming a good underwriter. And you know, around here and uh, you know, our, our, obviously our brokers are our, our distribution, but underwriters are producers. You've got to get the broker to send you to the account. They're under no obligation. Um, you got to get to know the client to sell what you're bringing to the table as Transatlantic. Uh, and so you have to do that in a way that people want to trade with you.:
David Wright:
36:13
You know, you, you, you do have a little bit of direct business and I'm wondering what you think about the differences between the business model, from a reinsurance perspective or reinsurance manager's perspective. Is it, is it a different kind of person that does direct reinsurance versus broker marker reinsurance?:
Mike Sapnar:
36:31
Um, I don't know if it's a different kind of person necessarily. Uh, I think if you do one or the other, you strengthen certain traits that you might have.:
David Wright:
36:44
Sure. Okay.:
Mike Sapnar:
36:44
Um, but I think anybody can do either. Yup. Um,:
David Wright:
36:48
What traits?:
Mike Sapnar:
36:50
So you know, if you're in a, in a, um, in a direct mark in it, if you're direct reinsurance company, it costs you money to say no. Yeah. Right? So you have to be very efficient in your marketing and identifying what is, um, where you should spend your time and in terms of producing business. And then you've got to, you have to be in a position where you are confident in your convictions because one of the drawbacks of being a direct reinsurance writer is there is no market check. So you're out there quoting based on your view of the world insulary to the client.:
Mike Sapnar:
37:38
And when you're a broker market and new quote, unless you're quoting 100% of the deal, you're going to know if the market's filling it out. And whether you're at a price that the market now, the market is not always right, obviously, right? But we found oddly that our results are better on a syndicated basis than deals we wrote 100%. And part of the reason for that is, um, mistakes made when you do 100%, if you are going to do 100% of the deal, you better measure that downside. And reinsurance is always about the deal. You don't, right or the bad deal you do right. Not about the nine good deals you wrote because we're in an asymmetric trade. There's finite upside, which is your premium. And there's essentially infinite downside, obviously not, depends if it's captured or limits are out there. So the risk reward can be quite unbalanced. And so you've got to figure out the deal's not, not the right. And we are broker market, um, underwriter, you know, to some degree that you see a lot more business. It, it comes in and you're triaging. So it was indirect reinsurer. You're looking at what's out there, you're choosing where to spend your time and concentrate it and what companies you're going to go after. And as a, as a broker underwriter, you triage them what's coming in and you're kind of picking those submissions out and you kind of flow and this is what I'm going to spend time on and um, you got a market check and sometimes you don't get to something and someone says here's the price, you know, that speeds up your analysis. Um, and when you're in a brokered market you will write a deal one year and maybe come off at the next year. If you invested time to get a direct relationship and you go in and you write that deal very, very unlikely you're non renewing that, that you would not renew that to next year. You've invested so much in it.:
David Wright:
39:36
Yeah.:
Mike Sapnar:
39:37
And I, you know, part of it is the cost of that and part of is the emotional attachment to us and uh, just like, uh, you know, as a broker. Right. Yeah.:
David Wright:
39:46
I think that in some ways the one way of modeling what a broker does is your outsource in the emotional attachment to,:
Mike Sapnar:
39:53
I agree with that. There's two things, the emotional attachment and the tough message.:
David Wright:
39:57
Sure.:
Mike Sapnar:
39:58
Right. No one likes to deliver a tough message, but it's easy to tell it to somebody who, obviously it affects the broker, but it's not the broker's company. And the broker's got hopefully other accounts that, you know, and other markets. Um, it's hard to do. You know, I've seen it time and again, people don't like to deliver tough messages. Right.:
David Wright:
40:17
It's hard. It's painful.:
Mike Sapnar:
40:18
It's totally hard. And, and I think if there's one thing I hope that I am at least, um, developed a reputation for. It's for being candid and honest with, you know, what we're going to do, what we're going to think and, and standing by our, our, our word and, um, you know, we, we try, I try to instill that in, you know, through the culture. I think we do a pretty good job of it. I think we're consistent. But, you know, everybody's different.:
David Wright:
40:49
Has anything changed about what kind of a person is successful and reinsurance underwriting sense of beginning your career from an underwriting standpoint?:
Mike Sapnar:
40:58
Um, yes and no. This is a great question. Um, so look, I think that reinsurance underwriting is one of the best jobs in the world because you can be real.. it's, it's so creative, right? You can be super creative. Now the market forces are going to dictate as to what people will buy. But the reinsurance is the swiftest most flexible capital there is in the world, right? It's a one year deal is generally a standard contract and you can do a lot of different things within it. And it's a one year commitment. This isn't issuing equity, this isn't debt, which requires, you know, SEC registration and lawyers and is and is five years, 10 years or whatever, 30 years if you want capital credit. Um, so you're selling a very, uh, attractive product, uh, at the end of the day. And, and the one thing we think is important for, um, reinsurance underwriters is dealmaking and it's really hard to find good deal makers.:
David Wright:
42:04
What is that what is a dealmaker?:
Mike Sapnar:
42:05
So a dealmaker finds a way to close the deal or finds a way to get to yes. In terms of offering alternatives. And I think a key part of that is the ability to have empathy, the ability to sit in the buyer's seat and listen and look at your deal and say, if I'm on the other side of table, would I buy this deal where if I'm on the other side of the table, what problem am I solving and what's the best way to solve it? And too many times our underwriters in the market, um, we'll just say, here's the quote, or here's the terms and conditions are, here's what we want to do. And a lot of times they'll come up to come into my office and say, mmm, yeah, this is what I want to quote. And I'm like, who's going to buy that? You know? And you know, obviously relative to market conditions. And in the other extreme the, people will decline business and you know, we'll hear it didn't get placed or you know, um, maybe ultimately the terms were better than what we thought. And I'm like, well, why didn't we get creative around it? And so, you know, and it's the ability to operate within those extremes. Know where the market is, know where the client is and know what, how and what to sell.:
David Wright:
43:13
So when you were evaluating talent, right? Hiring an underwriter, be the, uh, new reinsurance underwriter or even just evaluating somebody who let's say doesn't have a really long track record, how do you, how do you assess that creativity in somebody without, without that track record? So is there any correlated to it, you know, like,:
Mike Sapnar:
43:29
Yeah, I think, I think first of all, you're going to ask them a lot of nonbusiness questions.:
David Wright:
43:34
Okay. What's your favorite one? What's your favorite non business question to ask somebody?:
Mike Sapnar:
43:36
Um, I usually ask him what is their favorite book. And why should I read that book?:
David Wright:
43:43
What's your favorite book and why should I read that book?:
Mike Sapnar:
43:45
Oh, I got to, I have a, uh, a few, a few favorite books. Um, I think for me, I always go back to Liar's Poker and so I'm a huge Michael Lewis Fan, so I read a lot of it. So I do like, I do like Michael, uh, I do like Money Ball. Well, yeah. But Liar's Poker, uh, is, is a story. And, um, it's about hubris. Uh, and it's, it's about creativity. And I, uh, I think there's just a lot of lessons to be learned through that book about hubris and about being creative.:
David Wright:
44:24
Yeah. Which, and what do you, what do we know about Hubris and creativity?:
Mike Sapnar:
44:27
Well, we know that creativity, uh, in my opinion builds great and Hubris.. hubris brings them down and we talk about hubris around here, hubris around you as a person, right? Yup. Everybody's equal and hubris around risk. You don't know everything and you better measure risk reward and, and know that you could get some something wrong.:
David Wright:
44:48
And what's a time in your career where you've been hubristic?:
Mike Sapnar:
44:54
Ooh, 1997 to 2000. I was in London and I, and it was a soft market and I was in, you know, dealing with Lloyd's syndicates in a really bad, uh, business environment. And I wrote a lot of bad business.:
David Wright:
45:08
I mean, why what happened?:
Mike Sapnar:
45:10
Well, uh, hubris you know, I thought you could put a price on anything. Okay. Um, you know, we wrote a deal that had a swing rate, 750,000 x 250,000 with a Max rate of 55% of the premium.:
David Wright:
45:22
Okay.:
Mike Sapnar:
45:23
And I'm like, how can this lose? Well, when the original business is running above 200%, if you loose, and you know what's worse, the loss ratio cap was driven on the Max rate. So you go to the Max, you multiply it times the loss ratio captain and get a huge number. I would have been better off way underpricing it with the 300% loss ratio, cap than getting a big swing up and, and I think, uh, and why did it happen? You know, I thought I was a D&O underwriter. This is was D&O business. I thought I knew it:
David Wright:
45:54
Because you weren't alone, right? There was a period, were, were a lot of people behave that way. So what causes like a whole market to, to just suddenly think,:
Mike Sapnar:
46:04
Well, you know, it's, it's, it's part of it's human nature. You know, we'd come in and you're coming off all these good results and you just don't, um, you're looking in the past and saying this is a good business. But back then, which I think is different from today, even though it's only 20 years later, is data. You just didn't have the data and you didn't have any:
David Wright:
46:24
it's different now, isn't it?:
Mike Sapnar:
46:25
It's way different.:
David Wright:
46:26
And if you look at some statistics, and I did this recently, where just just, let's assess kind of aggregate volatility for, I don't know, reserve strengthening or something in the last, since the SNL data dawn in 1997 big cutoff date for a lot of things I do like this and you know, kinda moving up and down hard market and then flattens out for the last 10, 12 years. Yeah. I mean, the volatility of the industry has dropped. It's different. Do you agree with that? Uh, I think that you're talking for all lines. Uh, yeah. I mean, I would say, yeah, most lines. So it depends on how we're measuring volatility.:
Mike Sapnar:
47:01
So frequency in my opinion is cyclical. Okay. And the, um, we had a cycle of low frequency and I think we're coming out of that cycle and cycle. We're seeing it. It was a, it was a very long cycle, but I think a big part of that cycle, I ironically again, and this is social, um, in in two ways, the two things I really believe in. One is the financial crisis drove a lot of the frequency and severity down. Yeah, sure. And the reason was you just couldn't get money. He couldn't get blood from stone, so people didn't bring lawsuits. There was no money to be had, especially in, in D&O and medical malpractice and certain, um, you know, uh, uh, uh, GL lines. Uh, the other people would point to is, you know, a social change and judges and a Republican administration. I'm a little less, I'm a little more circumspect about that. Sure. It's about whether that's valid or not.:
David Wright:
48:02
Yeah. Uh, one of those other story, let me just see what you think of this one is that we are better as an industry at measuring things. There's more data as a result. So when I think of like when you say what's the vault, what volatility, I mean, you're talking about kind of drivers of insurance claims costs, right? And I'm thinking, how about the output way on the other end of Insurance Company underwriting results. I think that those are more stable than they have been in a very long time. And you know, and I'm wonder, nothing's 100% right because there's going to be industry, economic, macroeconomic factors and everything, right? But for whatever reason, the ability of the insurance industry to navigate through this current macroeconomic environment over a pretty long period of time has been better than it has been in the past.:
Mike Sapnar:
48:43
Yeah. But, uh, I will,:
David Wright:
48:47
Because you're saying that the degree of difficulty went down.:
Mike Sapnar:
48:49
I, there's a, there's a few things in there. Um, so number one is the reserve releases, the casualty market was way better than expected. So the reserve releases that were there and then now the comp market has been way better than expected. Some reason has allowed people to, to smooth the results. And if you look at the results as to how much has and sorry, the second point is there was no cat activity from 2006 to 2016. So if you look at, if you take out x-cat x-favorable development, it's really not that great.:
David Wright:
49:22
And be breaking records though CAT record, I mean every year or whatever. Most cats ever.:
Mike Sapnar:
49:26
I mean, most of the last two years. Yeah. And the results have showed the strain of that, you know, um, you know, you look at the, the reinsurance market especially now, some of those losses have been outsourced to third party capital. Um, but the other thing that has helped is without, uh, a robust fixed income return because of where interest rates are, you have to price to a better underwriting profit because your two levers are, um, our investment income on leverage that you have, which was historically eight to 10%. That is now three to five. So when, when it, and your other is underwriting profit. So therefore, I think some of that, um, lost income on the investment side is translated to people being more disciplined on pricing and therefore the results look better. I'm not sure the ROEs are any better. Um, now when you have 10 years of no category three hurricanes making landfall in the United States and Japan going 14 years without a wind event, you're going to get additional margin that hasn't historically been there. I don't think you'll see a run. I was having a, a conversation with Kara Raguel who runs.. The CEO Gen Re. Um, and she made an interesting point, which is like, I don't think you ever got to see this kind of run again where you're coming out of a, uh, uh, incredibly hard casually market that extended far more than longer than people thought. There was probably extended even more by the financial crisis. Uh, and this created an incredible reserve releases, a recent period of very, very good comp results that haven't been, you know, really seen in a long time and no major catastrophes. It's like that is like the tail event on the other side.:
David Wright:
51:15
Sure.:
Mike Sapnar:
51:16
To the favorable. So remains to be seen. I think you're seeing pressure on people's results right now.:
David Wright:
51:20
Yup. Yup. What do you think about about? I want to talk about M&A.:
Mike Sapnar:
51:25
Yeah.:
David Wright:
51:26
So that's been another feature of the last 15 years. Right. And Trans Re went through an episode, at the beginning of your tenure:
Mike Sapnar:
51:34
Episode's a good word [laughs]:
David Wright:
51:36
Yeah. I mean, which was, you know, which was played, it was somewhat publicly, which is always a little:
Mike Sapnar:
51:41
incredibly publicly [laughs]:
David Wright:
51:42
What are your reflections on that, on that time of your life? What was your dominant emotion through that period? Were you angry? Were you, were you anxious? Were you,:
Mike Sapnar:
51:49
So the one thing, um, ah, those were incredible. Um, I guess for me, six months, um, I was never angry. Okay. Um, a couple of things. I was angry decisions I was angry about internally, but I was never angry. Cause you're a public company, it's fair game, right? It's business. Yup. And there's a lot of things we can talk around that. Um, so, uh, I wouldn't say it was, you know, the focus was, was um, you try, I think just to reset. So, so people know what happened.:
David Wright:
52:27
Yeah, definitely. Tell us the story. Aig sells down at stake, right. So right. Pulls the pin out of the dam.:
Mike Sapnar:
52:34
Well, basically, you know, we're, we're sitting at ground zero during, during September of 2008 when the world is imploding and AIG is in the middle of that. And they have, AIG owns 59% and Martin Sullivan's our chairman. And so AIG a, the government comes in and takes the desks and the pencils and basically takes over AIG and the person they're going to do was sell assets to get down to the debt. And, um, we're one of the assets that's unimpaired. So we're one of the first people to go and we'd go out and we market the company and we do a secondary offering and, and sell down AIG to 10% and then nine months later they go to sell the entire stake. And so that was my first experience of going on a road show and meeting with investors and, you know, getting people to buy the company. Um, which I think at the time Aig sold us we were, we were sold out at 62% of book value was the middle of the financial crisis.:
David Wright:
53:29
Wow, what a deal:
Mike Sapnar:
53:29
Yeah. Well let's go now. Spin forward, they buy Validus for 1.8 times book about it.:
David Wright:
53:34
Yeah.:
Mike Sapnar:
53:36
So not a great trade right. So that's, um, which is also completely ironic, right? That Validus is now owned by AIG. And so anyway, um, we're sitting there and we're like, you know, we're a publicly traded reinsurance company. Uh, all we do is reinsurance and, you know, we're out there kind of raw, vulnerable. What's our, what's our strategy? It's a difficult market. We're trading at 62% of book value is:
David Wright:
54:01
What does vulnerable mean in that context. I heard the word before. What is it?:
Mike Sapnar:
54:04
Well, I think anytime you trading at a deep discount, the book, you know, shareholders, they're unemotional, you get 20%, 25% gain tomorrow, they're gone. Right? And, uh, in most cases, so you're vulnerable to people being able to pick you up for a cheap price who have either cash or a highly valued, um, uh, equity, the currency that they can use to buy you with. Now, fortunately, financial crisis, a lot of people were impaired as well, especially in our industry. So no one's going to come in and do a stock deal probably. And um, we're like, well, the, the other major problem for us is we were onshore and so we're fighting with one hand tied behind our back. We're basically the only company with 35% tax rate and you've got to be a lot better to outperform your peers who are averaging an 8% tax rate. And we didn't think that that was necessarily possible over time, right? In the short run sure. Um, but over time, probably not. And what, and when interest rates really compressed the big value of being offshore, it's not the underwriting profit. The tax free is the investment income that's tax free because when I'm onshore paying 35%, I'm buying Muni bonds because of the tax break, whereas people offshore are buying corporate bonds at a higher yield and paying zero tax. So, and you're leveraged a lot right? In, in insurance and reinsurance, that was that. But with interest spreads so low at the time it wasn't as um, as manifest of an issue. Right? So we were very fortunate there. So nothing really happened. But we said, let's be proactive. So one), let's get bigger two) Let's get insurance and three), let's get off shore. So we get into talks with Allied World who would give us all three of those and you know, both born out of the AIG families, similar culture. So we decided to do a book for book merger, merger of equals, right. Um, so we put out our s one, which is basically how it comes about. This is the document and that's usually when you're, you know, people will look in and say, Hey, is there an opportunity here in Validus looked in and said, hey, let's, let's make a hostile bid and unsolicited bid. There's other history behind that. I won't go into there, but let's just say the Validus would've said they would have expected conversation before we did a transaction. There was not one, I think they felt a little miffed by that. Sure. And said, we're going to go and go hostile. The problem I had with Validus at the end of the day is it would just, um, disingenuous with some of the information put out there and reserve it and what have you. They said we're 500 million under reserved. It turns, it turns out we had a $2 billion, um, redundancy. But that's:
David Wright:
56:45
in retrospect now you can say:
Mike Sapnar:
56:47
right now, I can say it totally in retrospect, we didn't think we were deficient, but I did not know we were 2 billion redundant. Absolutely not. Yeah. But anyway, so we get into all that and that basically opens the gateway, um, into, um, uh, other part of the other parties looking.:
David Wright:
57:03
That's. What's the psychology of that? So you'll have more insight than me, but both of us were probably spectators to other people suddenly feeling like they can come in. It was like, almost like you opened the door to like, well, hey, let's, you know, there's, there's a, there's a fight going on here.:
Mike Sapnar:
57:16
You have a fiduciary duty once somebody else comes in, uh, uh, to open the process and, and Eh, for, for shareholders, right?:
David Wright:
57:25
Invite them in and you say, come, come, come and go.:
Mike Sapnar:
57:27
Basically we had to, yeah, we basically had to go out and get a market check. Yeah. Now. So lessons learned. So we'll just to spin forward. So we wound up then with five parties. Ultimately we had a bunch of people look, five parties ultimately make offers to buy the company including Berkshire Hathaway:
David Wright:
57:45
That's a lot of people.:
Mike Sapnar:
57:46
Yeah. Tell me about it. Right? Yeah, we were, we were in meetings and due diligence 24, seven. Gosh, I mean it was, it was three hour nights. It was three in the morning for three months. Right. It was, but one thing I will say right about the experience. Um, I'd never want to do it again, but I wouldn't change it for the world.:
David Wright:
58:04
Okay.:
Mike Sapnar:
58:04
Right. I learned a ton. I learned a ton and, but I wouldn't ever want to go through it again.:
David Wright:
58:09
Tell me something you learned.:
Mike Sapnar:
58:11
So, um, first of all, I learned there, uh, no mergers of equals it doesn't exist in Wall Street parlance. Right. There's always a buyer and a seller.:
David Wright:
58:20
Yup.:
Mike Sapnar:
58:20
And even though we were a bigger company, we were getting a premium. We were doing a book for book swap, but we were getting um, uh, a um, well let's come back to that. We were getting, it was a book for a book deal. We were going to have seven of the nine top positions, um, reinsurance was going to be a dominant uh, uh, part of the portfolio. And we felt we weren't the seller at the end of the day.:
David Wright:
58:54
Yeah.:
Mike Sapnar:
58:54
Cause we were, we were the bigger company.:
David Wright:
58:56
This is the Allied World transaction.:
Mike Sapnar:
58:57
Yes. Yep. We were a bigger company. The issue was is we were getting a bigger premium in the book for book value based on the market price. And so Wall Street kind of said, well Transatlantic is the seller, they're getting the bigger premium. Is that a big enough premium? Is there something else out there? Hmm.:
David Wright:
59:13
What does it matter?:
Mike Sapnar:
59:15
Why does that matter if you're the, if you're the seller?:
David Wright:
59:17
Wall Street's opinion. Yeah. Yeah.:
Mike Sapnar:
59:19
Well you're basically putting yourself in play, you're saying, you know,:
David Wright:
59:23
So they're going after you instead of Allied World.:
Mike Sapnar:
59:23
Exactly. Exactly. Um, and Allied World's.. Scott (Allied World CEO) was going to be the CEO. So they kind of took that as a signal that, um, Allied World is the acquiring company,:
David Wright:
59:35
They were a buyer, not a seller.:
Mike Sapnar:
59:36
And we were going to have, but we were going to have the chairman, I was going to run the reinsurance and we're going to have, you know, chief actuary, we going to have Chief, um, uh, claims counsel, you know, all this stuff that we were going to be running. But this is, you know, and then we did, did all that and the interest in doing a deal because we thought the parties will be better off. So number one was no such thing as a merger of equals number two was, um, you get a lot of advice, but it's advice and at the end of the day, it's your company. It's your decision. So consider the advice, but trust your gut. We had a situation where we had a 22% shareholder in the company of the Davis Funds, the Davis Funds were a great owner because they were relatively easy to work with. They were, they did not look to control anything. They were, they were, uh, cooperative, collaborative, listened as you know, owning 22% of the company. And when we did the deal, we decided, you know, there's a question about bringing somebody over the wall. I, you tell them about the deal before it happens to get their approval, but they are then restricted from trading in the stock.:
David Wright:
60:43
Okay.:
Mike Sapnar:
60:45
The advice from counsel and from Goldman was do not bring them over the wall. They don't want to be restricted. Yup. So we go out, I don't know, it's a Friday. We know we're announcing the deal Monday morning. We try to call them over the weekend to give them a heads up. We don't get ahold of anybody. That's a cultural thing at Davis we can talk about no one had their phones on or anything that they just shut off on the weekends. They woke up to the news on Monday morning and they weren't happy. And so now I've got an upset 22% shareholder that if they endorse the deal, I'm done basically. And if they don't endorse the deal, then it's kind of like what's out there. Right. The major shareholder doesn't, isn't endorsing the deal. And um, now my belief is somebody got in their ear before we did, before we talked to them and said, hey, this deal came out. Don't do anything. Let me see what we can put together. You've got time. And that really started everything unraveling. And our gut internally was to make sure we didn't announce anything before Davis knew. And advice was not to do that, I think because bankers just always want to move forward.:
David Wright:
61:52
Sure.:
Mike Sapnar:
61:53
And it was a bad mistake.:
David Wright:
61:55
So is it your choice to bring them over the wall?:
Mike Sapnar:
61:57
Yeah, it's our choice ultimately 100% a hundred percent it was just their advice.:
David Wright:
62:03
Wow. Interesting. It's interesting as like from a shareholder perspective, if you're a fund that any of your call it, larger holdings could just bring you over the wall as any point and you're like, oh my gosh, now I'm in this. And then some of them over.:
Mike Sapnar:
62:13
So then you become an insider and restricted on trading and yeah, and look, if they had said we brought him over the wall, we don't, we're not sure about this deal, you know, that would have, then we would have gone back and we would discuss more, looked at options, maybe pulled the plug a lot of different things we could do.:
David Wright:
62:28
Yeah, sure.:
Mike Sapnar:
62:29
And you know, there was one thing that, um, so Mary Pryshlak, who was at the time, the lead analyst at, at, at Wellington a she now has a much bigger role there and a really good, um, a student of the business. Um, when I talked to her after all happened, um, she just, you know, her one piece of advice was listen to your shareholders because I didn't know what, you know, what are we gonna do with these five beds and everything? She says, go out and talk to your shoulder shareholders listen to shareholders. Now when the deal was announced and there speculation, you get all these arbitragers had come into your stock and all they want is a nickel more. And they called me every day. They'd call multiple times a day. They've yelled at us, we're not engaging. We didn't engage Validus right away because we wanted them to sign some NDAs. Um, and they, they were not nice people.:
David Wright:
63:23
And you have to take these calls?:
Mike Sapnar:
63:24
Well, I felt it was my obligation to take the calls.:
David Wright:
63:27
Okay.:
Mike Sapnar:
63:29
They're ultimately going to be voting the shares.:
David Wright:
63:31
Yeah, sure. Yeah.:
Mike Sapnar:
63:32
And this was a very public fight, you know, valid. This is claiming and incompetent board said we're self, we're entrenched, all that stuff. Right. So, you know, you do not want to appear entrenched.:
David Wright:
63:43
So to what degree does, does everybody involved here see this as kind of a game and to what degree does this hurt?:
Mike Sapnar:
63:48
I can tell you, and, and I hope he listens to this Ed Noonan sees this as kind of a game, right? And, and you know, it's, he's right in a respect, right. It's, it's, you know, business is a game, right? Game Strategy. It's game theory. So, um, and, but you know, when Ed sues you and says it publicly and says you're incompetent and I was personally sued.:
David Wright:
64:11
Of Course. Yeah.:
Mike Sapnar:
64:13
But Ed and I have actually a very good relationship because when you talk, I didn't get angry. You can't get emotional. You, you have to stay focused. And I think:
David Wright:
64:22
Focused on your next move on the game board:
Mike Sapnar:
64:24
Everything, on everything. And um, now if you talk to most people at Transatlantic, you know, he's, he's like Voldemort, right? And that you're not going to. So, um, so it's the one thing about a merger too, is you learn a lot about your company because once other people started doing due diligence and you got to start answering some questions, you learn things. It's amazing. And, and maybe it's a little bit of an indictment, but you start going deep and you learn things. And there's nothing like a, you know, basically a business colonoscopy. It is. You really do learn.:
David Wright:
64:59
And you know, what's interesting about that is in some ways that mirror is an argument. The reinsurers make it out of their clients, right? We're going to, we're going to pull up the drains here.:
Mike Sapnar:
65:07
That's right.:
David Wright:
65:07
And you're going to learn something. They're like, well, what do I need to learn about my own business?:
Mike Sapnar:
65:10
That's a good point. And I think, and it's a really good point, and reinsurers need to do that without coming across as, as arrogant, I think if you're going to get the best result, because at the end of the day, yes, we're asking to learn and we're asking learn because we don't know your business as good as well as you do, but you might learn in, in with us while we're doing that. And you're exactly right.:
David Wright:
65:33
So one other thing that's interesting about that is that the ring, the people over the wall idea me broadening the embrace the tent is a, is a very insurance kind of, of, of, cultural feature, right. For the insurance industry is weird in some ways where people do collaborate in the sense of reinsurance and their shared deals and:
Mike Sapnar:
65:52
syndicated deals.:
David Wright:
65:53
Right. Syndicated deals. That's right. Yes. Right. So you're kind of relying on other people. And as soon after that, you entered into an interesting arrangement with Gen Re, and Trans, right? Where it was a collaborative, I mean you're competitors. Right? Right. Didn't something, you know, we have, there's a grand sense or a narrow sends some of your direct question, but it really, Eh, you know, there's a, there's a partnership there, which is in some ways not that unusual. I think the specifics of that deal are pretty unusual. Yeah. And you can you describe that if you'd like? Uh, but, but it's an evidence of something which is very insurancey, which is we're collaborating to try and grow our businesses.:
Mike Sapnar:
66:23
Right. Yeah. To, it's an interesting deal. You know, I think the, the structure of the deal is great. Um, unfortunately we've had some cat losses, so hopefully we get through that. And I, you know, from a financial standpoint, that's probably been a little painful for, for Gen Re, but I think, um, uh, ultimately it, it's a, it's a, it's a great deal for all parties.:
David Wright:
66:48
Why? Maybe describe it quickly and then...:
Mike Sapnar:
66:52
Um, so the deal is, um, I think it was 2016 now. Yeah. 2016, uh, when, um, Tad Montross announces his retirement and there they're putting Gen Re over to, um, to under Ajit's control. And, you know, my feeling was that, uh, if Gen Re came into the brokered market, it would be bad news for us. It's a, it's a powerful balance sheet. It's a great brand. And, um, you know, they could, they could really be a quite effective in the broken market in my opinion, because you'd be, the brokers would have access to the highest rated of balance sheet in the industry in the US which they currently didn't have. And so we started, I really started as a defensive move and I, and I called Ajit and I said, look, you know, Ajit's been in the broker market his whole life.:
David Wright:
67:46
Yep.:
Mike Sapnar:
67:47
And I don't think, um, he was going to sit on his hands with Gen Re. Uh, he has a great balance sheet with talented people and he wasn't going to just, it, it kind of shrunk. Um, and I wouldn't say it lost its way. They had a strategy and the, and I'm sure produce good profit, but I think it was under underutilized and I thought he'd want to be in the broker market, would that balance sheet. So, um, I said, look, you know, if you're going to come into the brokered market, you either have to change the culture of your company and have direct people do that. Um, which we all know is very, very difficult. Um, or you got to go hire a bunch of people and generally already had concerned about expenses because they had, um, construct it would just the portfolio significantly. Um, and it direct operation runs, you know, a lot of internal expense. Um, three you can buy somebody. Um, but I don't think that was in the cards,:
David Wright:
68:47
but they tried to buy you,:
Mike Sapnar:
68:47
they tried to buy us three times, which not a lot of people know, but they tried to buy us even before the hostile takeover. And, um, and or you know, we can partner together and I can give you variable cost access so there's no fixed cost. Um, and um, I can do it at a high integrity underwriting. They'd always. So he said, well why don't we do a retro? And I said, I don't want the retro, I want to be able to sell your balance sheet in the broker market. Cause I think that's far more powerful from a counterparty diversification. And the real goal he and I both had was to go after Munich and Swiss, his direct book of business together and do 100% deals, uh, and give the broker market an alternative to that. The problem was the market hasn't really cooperated in terms of pricing and cause you know Munich and Swiss can be quite aggressive there but we wound up picking up a lot of business just by hanging around the hoop because of the Gen Re balance sheet. So they, 80% of the businesses is in the brokered market, our pitch was why don't you want to see 80% of the business that's out there. And the deal is we can't put a line out bigger than ours. We put out an equal line on both new and renewal business. We have the right to retain our share on renewal business. We try to assign equally a new business, it's always up to the client and the broker as to how, how in what capacity. But we're selling both with the idea of basically duplicating Trans Re's North America book for Gen Re. That's the goal. And um, so I think it good for Gen because it's access to eighty percent of the business. This place in the marketplace at our underwriting standards, um, and at a variable cost. And we say around here, we treat our money like it's our own and we treat Gen Re's money like it's our parents' money. And because, and, and that is true. That is valuable capacity to have. And, um, I, I want to, I want to be successful for them. I want to produce an underwriting profit. It's obviously good for the, for the brokers because they have access to the balance sheet. Um, and if business is written through the broker market, um, you know, Gen Re has said, we will not move it direct. Um, so that's, that's an opportunity. It's great for the clients because if you were to go down a schedule, um, I guess it's f and then recoveries and premiums written, um, uh, they have huge counterparty credit limits with a risk with Swiss and Munich and Gen Re did not show up on a lot of peoples' sheets. Yes. So chance to diversify with the highest rated capital and obviously it's good for us because a lot of cases we can, you know, maybe drive differential terms, we can offer more capacity, we can offer a high quality security with no more administrative work.:
David Wright:
71:33
Oh, I want to, so we're running out of time actually, but I want to come back to maybe one theme that that's been through this and certainly in that last kind of segment there, which is on things that both the market that continues to surprise you. Is there something that, that you, that you would just baffles you about this marketplace and that frustrates you? Maybe in some ways, um, and uh, and that may be you see as something that should change or needs to change or can change?:
Mike Sapnar:
71:59
Well, I think, um, you know, I think when you see two planes go into two buildings on September 11th, nothing ever surprises you anymore to me.:
David Wright:
72:15
Right.:
Mike Sapnar:
72:16
Um, so I mean, are there, the only thing that's inexplicable to me is the, the business as a whole, the industry as a whole, um, continues to shrink as a percentage of GDP and the overall economy. And we continue to have a product that only returns 50% of the, of the, um, of the spend to the consumer. Yeah. And I think if we don't change that, we're going to, we're going to become obsolete.:
David Wright:
72:47
Right.:
Mike Sapnar:
72:48
And you can now, I think I was at a, at a presentation where Rod Fox showed a slide of, um, Michael Douglas on the beach and the scene in Wall Street where he's talking on a telephone that's probably two feet long, a mobile phone, and then he shows a slide of, of, uh, the computer in our pocket. That's also a phone. Yeah. And then he says in, we're still selling the same reinstatement one in a hundred, you know, cat programs that we sold back in the 80s here. And in 2019. And if we don't innovate and get the costs down and, and get the consumer more of the cost of goods sold, returned to them, that it's, it's, it's a problem. Insurance is a negative utility product, you know, no one wants to buy it our demand is driven by required, required purchases,:
David Wright:
73:41
compulsory purchases. Right.:
Mike Sapnar:
73:42
Whether it's more, uh, you know, because you have a mortgage because you have employees because you drive a car because you sit on a board, it's all compulsive, you know, a lot of it's compulsory appropriate purchases and then when you have a reason to use the product, it's usually something bad happened to you. Yes. Right. And then you've got to fight about a claim. Yeah. Not always, but often or too often I should say. So the biggest thing to me is why hasn't the industry figured out how to get down it's distribution costs or at least returned more somehow return more of the to the,to the buyer.:
David Wright:
74:13
Well, let me give you a counter argument. So I would say you're right, you're right, Rod that cell phones are smaller and better, but people aren't any different. And so the cost isn't about moving, moving bits through through the ethernet cords or fiber optic cables or whatever it is, which is way better. The cost is about actually humans relating to each other, humans lying to each other or not. And that's never going to change. And so the, the 50% number, you're saying it is stunning number and I, and I, I'd like to bring that up sometimes too or related related arguments. That's how much it costs to prevent people from having, you know, 50% go to call it 25% but have a much bigger, you're ready. I mean, so like let's say somebody 25% or sorry, 75% going back to the consumer, but claims costs are three times higher because there's so much more fraud. There's, there's less oversight, right? I mean, I think that the, the, the dark side to the insuretech phenomenon, right? So the skeptical live from the internist to industry looking at them and say, well, there's no underwriting standards and underwriting standards I think are kind of hard to separate from human touch.:
Mike Sapnar:
75:12
Well except you know, we just had a big fraud in North Carolina, um, on the life side. That's all out of out of human touch. I mean, I think the biggest frauds had been out of human touch. I mean I was just in Bogota where my credit card I used in a taxi was copied and then tried to use at an ATM. I'm chase shut it down in about two seconds. Yup. Right. So if they can do that, you don't think there are ways for us to at least identify potential fraud through artificial intelligence and I'm not sure human nature isn't changing. I Dunno about you. I mean, my kids are 19 and 20. Right? I don't know if they have a thousand friends or no friends. Right. They go on Facebook, they got a thousand friends, but don't talk to anybody. Yeah, sure. Right. They, they texted the to their friend next to on the sofa. And I just don't believe that they're going to want to drive 10 miles to talk to an agent to buy their homeowners coverage in 10 years. I could be wrong and maybe that always will be a human touch, but then we've got to minimize the human touch. And I, you know, I'm going to catch hell for this. But you know, you look at Marsh and Aon, they touch it three times going through the chain and they take a piece every time. So to me, if you're touching it, the front end, do you really have to touch it again in the middle and on the backend? So I think that they have a lot of leverage right now. I think that, um, consolidation around distribution, uh, potentially creates opportunity to drive costs down. And it seems to me it's been driving costs up.:
David Wright:
76:45
So what, what can Trans do to, to, to, you know, help shape this or realize this vision of the future of,:
Mike Sapnar:
76:51
well, I think we have to, we don't really want to be an insurance company. Yup. Um, although we do have insurance paper and I might use that with leapfrog technology, um, to, if we thought that we could start changing some of that dynamic. But I think it is, it is either investing or providing a reinsurance capacity or brain power or opportunity to experiment for, for our students and supporting those initiatives. We do some insured tech, um, one with beach actually, um, uh, selective initiatives where we want to try to change that. The other thing, transplant it can do is drive our own costs down to provide cheaper range shirts. And, you know, we're looking at we, I think we've done some of that, but we're looking at a lot of other ways to do that and to use the data we have more effectively to help people make better decisions so that they can be more fine with the pencil and they're putting, putting pricing down.:
David Wright:
77:49
My guest today is Mike Sapnar. Mike, Thanks for joining me.:
Mike Sapnar:
77:51
Thanks for having me.: