London firm awaits Gallagher decision but says client focus and US expansion are also integral to 2019 agenda.

Most (re)insurance businesses confront the prospect of new owners with a sense of trepidation, but for top ten reinsurance intermediary Capsicum Re it is instead a celebration of success.

Re-Insurance met with Capsicum Re CEO Rupert Swallow at the Monte Carlo Rendez-Vous with the firm poised to celebrate its fifth anniversary and contemplating the very real prospect of a change of owner.

It also comes as the firm makes this publication’s inaugural survey of top 12 reinsurance intermediaries in only its third full year of trading (see Sunday edition) with its revenues leaping by 50 percent from £25mn in 2016 to £37mn in 2017. It is a remarkable success considering the received wisdom following Aon’s £850mn acquisition of Benfield ten years ago that there was no future in independent reinsurance broking start-ups and because the firm did not actively begin trading until late 2014.

Rupert Swallow – a member of the Benfield management team that negotiated the 2008 sale – tells Re-Insurance that his firm is excited about 2019.

He explains that ever since Capsicum Re was conceived as a concept by him and former Benfield CEO Grahame “Chily” Chilton in the Autumn of 2013 (Capsicum Re, of course, is a pun on Chilton’s nickname), 2019 was pre-ordained as a crucial milestone in the firm’s history.

This is because Capsicum Re partner and 20 percent owner Gallagher – the industry’s fourth largest insurance intermediary – has a 12 month call option beginning December 2018 to buy-out the remaining 80 percent of the business from the company’s founders, namely Chilton and Swallow on the one hand, and the equity owning producers including recognised market leaders such as motor reinsurance expert Raj Balasuriya, who joined the firm through the first of the nine limited liability partnerships that operate under the Capsicum Re flag.

“From its earliest days, it was assumed that if Capsicum Re succeeded then there would likely be a sale event in 2019. From day one, the business has had a private equity-style capital structure designed to attract and incentivise the best talent and to enable them to prosper in their success”.

“It is entirely up to AJ Gallagher to decide whether to take up its call option but, if it does, then Capsicum Re is ready to begin phase II as a consolidated member of the Gallagher family,” Swallow added.

Swallow explains that Gallagher’s “window” opens in December and lasts for a year.

Despite working to a pre-conceived five-year plan, Swallow acknowledges that Capsicum Re’s evolution did not proceed entirely as envisaged with the unexpected – albeit temporary – departure of co-founder Chilton in February 2015, some 14 months after the firm was established.

This is itself down to Gallagher who, in 2015, found its large UK operations suddenly rudderless following the controversial defection of CEO David Ross and members of his management team to rival UK broker Towergate (now the Ardonagh Group).

Chilton – whose close relationship with Gallagher CEO Pat Gallagher led to the group’s sponsorship of Capsicum Re, which includes sharing back office infrastructure – agreed to take up the reins of the large but disorganised UK division.

But this also meant immediately stepping down from Capsicum Re and Swallow became the firm’s reinsurance group CEO – and very much its visible leader – just as the company was beginning to move out of start-up phase and in to execution stage.

As a consequence, Swallow – together with COO Simon Behagg – has exclusively led the company’s evolution for the past three and a half years, which has included the formation of the majority of the LLP partnerships (see table) together with a number of separate hires, including former Mazars actuary Dale Lee to build an analytics team and the well-known London market figure Harry Parshall, who places a key nuclear account into the London market.

Chilton’s time away from Capsicum Re is coming to an end. Ahead of Gallagher’s decision over whether to exercise the Capsicum Re call option, Chilton announced he would step down from Gallagher (succeeded by Simon Matson, the founder of Gallagher’s London wholesaler Alesco) and return to the company inspired by his nickname.

He is expected to formally rejoin as “chairman” next month with a particular focus on managing the Gallagher relationship and business production with Swallow remaining as CEO.

“We’re thrilled Chily is returning to the company that bears his name. His drive, passion and unrivalled connections will be a huge asset to the firm. He’s been away for a long time, and we’re all looking forward to having him back,” smiles Swallow.

One thing that won’t change, however, is Capsicum Re’s focus on the client, explains Swallow.

“All start-ups – whatever industry you’re in – have to work harder to get noticed and to prove their value proposition. For us, we put advocacy at the heart of our value system because it is our industry expertise and our understanding of our clients’ requirements which sets Capsicum Re apart. It was part of the DNA that Chily and I imbued in the company from the day we began”.

But isn’t it all about modelling these days, asks Re-Insurance?

“Ten-twenty years ago it was modelling and analytics that set the leading reinsurance intermediaries apart and it is still an essential component of an intermediary’s armoury. But we a lso operate in a world where technology and analytics is embedded into every facet of the distribution chain. What clients want is a partner who understands their business, has unrivalled sector knowledge, comes up with innovative solutions and advocates these requirements to the markets,” Swallow replies.

“All of the Capsicum Re businesses are led by people who understand the client comes first and we work hard – and think hard – to transact on their behalf.”

“When we commit to a sector, we commit to being a leading authority in it.

Take, our motor & casualty team under Raj, for example. We are the leading producer of UK motor reinsurance business while our cyber team, under, Ian Newman, is widely regarded as one of the leading authorities on cyber reinsurance.”

“More recently, our mortgage reinsurance team led by Steve Rance advised on a number of major transactions, including the ground-breaking mortgage credit risk transfer program IMAGIN launched by Arch Group and Freddie Mac.”

IMAGIN was launched in 2018 as a pilot designed to provide stable capital to the US mortgage market through economic cycles by providing collateralised reinsurance support to Freddie Mac.

“It is precisely this kind of ‘out of the box’ thinking and practical solutions that separates Capsicum Re from other intermediaries that focus more on either remote modelling or transacting reinsurance renewals”, Swallow explains.

But what does phase II look like for the firm?

“We cannot pre-empt Gallagher’s decision but Capsicum Re has developed it’s plans to continue the organic growth story it has so far achieved.”

“In addition, approximately 50 percent of the world’s reinsurance business emanates from North America and many of our clients are US-based. This market place is one of the obvious phase II priorities for Capsicum Re,” Swallow confirmed.

“But whatever happens we will retain our culture. In only five years, we are very proud of our identity and values. For example, we have now raised over £300,000 for charity via our Capsicum Re Foundation through the endeavours of our staff and partners. There is a tangible esprit-de-corps that has emerged as part of the Capsicum Re DNA and we are determined that this remains next year on behalf of our clients and also, one hopes, on behalf of Gallagher”.

If Gallagher does consolidate ownership of Capsicum Re it will be second-time lucky for Gallagher. Thirteen years ago a team of ex-Benfield brokers defected to launch Gallagher Re as a London-headquartered reinsurance intermediary but the initiative failed to gain traction.

Under the stewardship of Swallow and Behagg, the second attempt has been far more successful but it remains to be seen whether Capsicum remains independent or formally becomes part of the Gallagher family, in the same way as, say, Guy Carpenter with Marsh and Willis Re with Willis.

2019 will be the most eventful year yet in the firm’s short-histo