Centre has been in the vanguard of providing alternative ways of approaching risk problems. Sarah Goddard looks at one of the industry's foremost innovators.

The Centre story starts almost 15 years ago, in 1988. It was then that Steven Gluckstern and Michael Palm founded a new breed of reinsurer, focusing on finite risk and backed with $250m of equity. Of that, $100m came from Zurich Insurance Co. Zurich took the decision to invest because, according to then CEO Rolf Huppi, "nobody in the insurance business explained the issues and the solutions as clearly" as the two partners.

At that point, the dislocation in the market between buyers and sellers of reinsurance had raised more and more question marks over the business, and Centre set out to challenge the old methods and search for new solutions. "This wasn't about being different, or radical," according to Centre. "It was about defining a business based upon a customer's needs; not pursuing a commodity-based strategy driven by product offerings."

Direction change
That direction came easily to Mr Gluckstern, who was originally a teacher and public school administrator. After two years as New York investment banker, he joined Berkshire Hathaway in 1984 as general manager of reinsurance operations. Two years on saw him appointed CFO and vice president of finance and administration for Healthco International in Boston, before he set up Centre, pioneered finite risk and became involved in Zurich in 1988.

From the outset, Mr Gluckstern, now back with Zurich Financial Services since the beginning of last year having set up Capital Z in 1998, has championed the focus of the Centre difference: its people. From six people at the beginning, Centre has now expanded to around 350 people worldwide, according to Oscar Tymon, general manager of Centre Insurance International Co in London. From those early days, "the creative problem-solving approach still remains," said Mr Tymon, although now it is applied to a much wider business area.

Creativity is very much the name of the game at Centre. From its off-the-wall corporate reports to its design-led website, everything about Centre shouts `unorthodox', at least when compared to the traditional re/insurance business. The latest annual report - one of a series of beautifully produced publications - is a strong example of Centre's steadfast refusal to conform. "Achieving a balance between ingenuity and discipline," are the first words of the report, written many times larger than the company's name on the front page. No long CEO report, no detailed breakdown of business; the figures take up a minimum amount of space, sharing a page with an internal combustion engine. As a report, it is amusing, attractive, but most of all challenging, and it is this which is really at the heart of the organisation.

Fresh approach
From the outset, Centre aimed to create new ways of approaching financial problems. At first it was developing the finite risk solution, nowadays it is through a plethora of business areas from real estate to collateralised debt obligations. But one of the constants across the business has been that Centre and its people are innovative, but not maverick. "We have always had very strong actuarial base," said Mr Tymon. "We come up with an idea, then model the hell out of it." However, a model is only as good as the information put into it, and "when looking forward, history is unreliable," commented Mr Tymon. Instead, Centre relies on a combination of analytical skills and judgment from its people.

Indeed, it is a rare creature that is a Centre person. This is not to say there is a designated template that the `Centre person' needs to be shaped from; backgrounds range from across various finance-related disciplines to legal experience. But the type of individual that can successfully operate in such a distinctive organisation, where "the magic ingredient is the people we have," is scarce. As well as an impressive intellect, a Centre person must be a team player who is also a free thinker. "This is a team-based culture," said Mr Tymon. "No one individual has the right answer. We must allow a problem to be looked at from a variety of different backgrounds."

Thus the Centre person needs to challenge other people's ideas, while being challenged in return. At the same time, Centre runs what Mr Tymon described as "a very rigorous business process," lending authority to commit to transactions to a very small number of people.

"People have got to recognise the value and work in teams," he added. "Centre is not for one-off prima donnas." This very strong culture is definitely not for the faint-hearted, and as a result "there's a limit to how quickly we can absorb a lot of people," said Mr Tymon. In fact, Centre is one of those organisations which does not require masses of bodies. A single transaction can take many months, and a team gathered from across several of its ten offices around the world, to put together. These transactions are few in number - "50/60 deals a year is a lot," he said - but complex in execution, which means some will fall by the wayside. "I would be surprised if there were more than 20 transactions in Europe" in a year, said Mr Tymon.

Substantial business focus
From the finite risk reinsurance basis of Centre back in 1988, focused mainly on US p/c clients, 2001's crop of business has shifted massively. Now, the US accounts for 35% of its transactions, with global risks accounting for a further 26% - the same volume as Europe-based risks.

As for the types of business, a similar change has been seen. Property and casualty re/insurance accounted for 26% of Centre's 2001 transactions, as did collateralised debt obligations (CDOs). These latter products provide credit support to clients, and Centre's CAIRNGORM transaction with the Royal Bank of Scotland is thought to be the first with a reference portfolio solely of leveraged loans in the European market. Operating - and regulated - as a reinsurance entity, Centre has entered the asset-backed structured finance market with such deals. In the CAIRNGORM transaction, Centre provided £15m of capacity for the Class E notes, which were part of a synthetic securitisation linked to a reference portfolio of up to £300m of senior and mezzanine leveraged loans. At the time, Daniel Riediker, head of Centre's Zurich operation, said, "Our involvement was possible due to Centre's in-depth understanding of the underlying asset class and particular know-how of the CDO technology. This transaction, together with Centre's involvement in the Duchess 1 CDO fund, elevates Centre to be one of the most prominent participants in mezzanine and equity tranches of European leveraged loan CDO. We are an attractive counterparty because of the unique way we evaluate risk and have the appetite to deliver solutions."

Project finance is another area Centre has been increasingly involved in. Towards the end of 2000, Centre helped in the financing of a hot dip galvanising line project in Estonia by enhancing the credit quality of the project. This was Centre's first foray into Eastern Europe, and is unlikely to be the last as local markets develop. The Tallinn project, designed by Danieli of Italy, required a total of $205m financing, and was sponsored by Germany's Hypo Vereinsbank, among others. Philip Harkin, who heads up Centre's Dublin office, commented, "The ability to execute quickly and efficiently to secure a successful financing package under a tight timeframe enabled this transaction to happen and highlights the benefits that Centre can bring. It is also another example of how insurance companies can provide additional forms of capital within business."

Much of Centre's European business is transacted through its Dublin operation, which is the heart of its underwriting and actuarial disciplines. Other offices in London, Paris and Zurich act more as production points, though they too house individuals central to the business beyond the production process. For example, the London complement includes two lawyers with structured finance backgrounds. Dublin has "the bulk of capability, particularly from the analytical perspective," said Mr Tymon, "though there is specific expertise in specific offices." After a certain amount of success in France, Centre decided it needed a permanent team there and opened a Paris office, partly to show that it has a local as well as global outlook. "The nucleus of our team in Paris is from other Centre offices," said Mr Tymon. Germany may be targeted in the future as a location for a new operation, depending to a certain extent on opportunities in Eastern Europe, but also depending upon the number of good people available to lead new set-ups. However, "for the European group, we're about right at the moment," said Mr Tymon.

Although the conventional P/C reinsurance market has hardened over recent months, Centre has shown its countercyclical colours, and not been particularly active in the conventional reinsurance market. Towards the end of 2000 it did, however, work with two Lloyd's entities, Euclidian Insurance Services and SOC PLC, to increase the agents' capacity on their syndicates for the 2001 year of account. When several years before, Euclidian had set up Integer for traditional Names at Lloyd's, Centre supported the proposition.

More recently, last summer it worked with Standard Chartered Bank to launch mortgage insurance in Hong Kong, and mortgage indemnity business is providing another string to the Centre bow. "A lot of major lenders set up offshore insurance companies, with much higher capital requirements than regular offshore captives," explained Mr Tymon. "We find a way of structuring ten year non-cancellable reinsurance programmes, which met more with regulations laid down from Bank of England and the mortgage council."

"We are in the financial enabling business," said Mr Tymon. "We are in the business of helping people to get finance from their assets." Whether that's the Tallinn plant, or the recently-launched `The World', the ocean-going apartment-liner, it is these unusual risk propositions which are Centre's lifeblood. For example, two deals structured by Centre for Royalty Pharma have helped the business raise money from its intellectual property, in this case supported by revenues from drug royalty payments.

"The worldwide pharmaceutical royalty interest market is growing much faster than the pharmaceutical market itself," said Royalty Pharma co-CEO, Pable Legoreeta. "In 2000, royalty payments made by big pharmaceuticals and biotechnology companies exceeded $2.5bn, an increase of around 30% per annum over the last five years. By focusing on the strength of our assets and our business, Centre has provided us with access to additional capital to expand our business in this rapidly-growing market." Mr Tymon saw these types of deals as being typical of the kinds of transactions Centre will increasingly become involved with, and it does raise the question of what type of organisation is it. On the one hand, it is increasingly moving towards the banking side of financing, though it is very much retaining its reinsurance character, at least as far as regulatory oversight is concerned.

"We are a reinsurance company by regulation," said Mr Tymon. "Insurance companies analyse price and take risk, and in combination with a commercial bank this can be a very powerful partnership."

As well as becoming closer to the banks, the re/insurance industry in general has been trying to get closer to the risks of its clients, and Centre seems more than others to dive into the very heart of their problems. "We are helping people manage the consequences of assets," said Mr Tymon.

Case study 1

Duchess
Duke Street Capital Debt Management (DSCDM), a newly-formed division of private equity manager Duke Street Capital, sought to launch its first CDO into the market, Duchess 1 CDO SA. This CDO was one of the first CDOs in Europe to purchase both senior secured and mezzanine loans associated with leveraged buyouts. But to make significant impact in the traditionally bank-dominated loan market, DSCDM required scale. Centre provided protection on a substantial portion of the most subordinated financing layer. This extra capacity enabled DSCDM to close its first CDO fund at ¤750m, the largest fund of its kind in Europe.

Advisors: Duke Street Capital, Canadian Imperial Bank of Commerce

Case study 2 Structured finance/royalties

Capacity: $22m
Provider: Centre
Recipient: Biopharma Royalty Trust
Partners: Royalty Pharma AG; Westdeutsche Landesbank Girozentrale (West LB)

Universities and research organisations usually do not have the resources to commercialise the technologies that they develop and patent. Although these organisations generally license their technologies to manufacturers in exchange for royalty payments, many would prefer to monetise them. Centre helped Royalty Pharma raise the funds necessary to permit them to purchase future royalties relating to a pharmaceutical product used to treat a life-threatening disease. The institution that held the patent sought to realise the patent's current value in order to address current capital needs, and Royalty Pharma sought to add an additional pharmaceutical product investment to its portfolio.

Case study 3 Market: Capital Asset Finance

Capacity: $260m
Provider: Centre
Recipient: ResidenSea Ltd
Partner: Westdeutsche Landesbank Girozentrale (WestLB)

Would people be interested in buying apartments on the world's first residential cruise ship? The banks weren't sure. Centre, along with partner WestLB, provided an innovative insurance structure enabling ResidenSea to secure financing for the construction of the world's first ocean-going resort. The structure includes credit enhancement and contingent finance support which mitigates ResidenSea's financing risks of a shortfall in residential unit sales.

Case study 4 Market: Emerging market project finance

Capacity: $10m
Provider: Centre
Recipient: Galvex
Partners: Hypo Vereinsbank; The Danieli Group; International Steel Industries LP

The galavanised steel plant that the Galvex Group sought to build in Tallinn, Estonia would wed state-of-the-art technology and Tallinn's location at the crossroads of markets in both Western and Eastern Europe. However, because of the necessary time and project constraints, and lack of familiarity with Eastern Europe, one remaining piece of the financing of the project's $205m cost was not readily available from western financial institutions. Centre provided a payment undertaking in support of a subordinated loan. This enhanced the credit quality of the project, enabling the project's sponsors to obtain attractive financing for a complicated project on a timely basis.

Centre offices

Bermuda
The Zurich Centre
90 Pitts Bay Road
Pembroke HM08
Bermuda

Dublin
IFSC House
Custom House Quay
Dublin 1
Ireland

Hong Kong
38/F Tower 1
Lippo Centre
89 Queensway
Hong Kong

London
The Zurich Building
90 Fenchurch Street
London
EC3M 4JX
UK

New Jersey
One Exchange Place
Suite 1000
Jersey City
NJ 07302
US

New York
One Chase Manhattan Plaza
New York
NY 10005 US

Paris
Succursale de Paris
16 Rue de Marignan
75008 Paris France

San Francisco
One Market Plaza
Spear Street Tower
Suite 1715
San Francisco
CA 94105 US

Sydney
Level 38
Tower Building
Australia Square
264-278 George Street
Sydney
NSW 2000
Australia

Zurich
Bahnhofstrasse 82a
8001 Zurich
Switzerland