The Intelligent Quarterly from the publishers of The Insurance Insider

Spring 2012

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David Cash For David Cash - a Bermudian national now running a Bermudian (re)insurer - the first few months as Endurance Specialty Holdings' CEO proved something of a baptism of fire.

An actuary by trade, the former Rhodes scholar has been with the company since its launch in late 2001, spending the last five years as its chief underwriting officer.

But within days of Cash being announced as successor to Endurance founder Ken LeStrange in a February reshuffle, the (re)insurer faced a challenge from board member and founding investor Richard Perry and his fund manager Perry Corp.

The company's strategy was questioned as Perry urged fellow investors to join him in reviewing strategies to improve shareholder value that could include M&A activity and a board shake-up.

But eight months down the line - with Cash and his senior management colleagues having spent much of their time soothing investors (see box-out) - things appear to have settled for the Class of 2001 (re)insurer.

"A good deal of the uncertainty that surrounded Endurance earlier in the year has been dispelled"

Aided by stellar third-quarter results, the calmer outlook is reflected by a rising share price in recent months.

IQ sat down with Cash at Endurance's Hamilton headquarters to discuss the company's strategy - in particular its plans to build on its European presence...

IQ: There's a lot of buzz about M&A among Bermudians and the wider (re)insurance community. Unlike several of the Class of 2001 and 2005 alumni, Endurance has not made a game-changing acquisition. Can we expect to see an uptick in deal activity and will it involve Endurance?

I suspect that we will see some increase in M&A activity over the next few years. In the case of Endurance, we have built our business through a combination of organic growth and some mid-sized M&A transactions - the 2002 renewal rights for LaSalle's cat book, the Hartford reinsurance book in 2003, the acquisition of crop insurer ARMtech in 2007 and, most recently, the Glacier Re renewal rights deal. As far as future acquisitions, we are regularly evaluating potential transactions. In each case we are looking for businesses that are complementary to our existing businesses and where we are positioned to enhance the business through the application of knowledge, capital or some other existing competency of Endurance. With the uncertainty in the direction of the market today, we are quite cautious about the transactions we are prepared to look at.

IQ: How about Lloyd's then? In recent years Endurance has pointed to the possibility of a Lime Street platform?

Click to enlarge We're still open to it. The Lloyd's market has clearly done phenomenal things over the last 10 years in terms of positioning, organisation and discipline. That said, a large portion of the companies in Lloyd's make a material portion of their income writing products very similar to those we write in Bermuda. The correlation between the two sets of products is significant and the capital consumed by linking those books of business would not be trivial.

Aside from the issue of correlation, our primary international focus is in reinsurance, where Lloyd's global insurance licenses matter less. The critical question is does Lloyd's bring you a type of risk that you want to see that you can't see elsewhere? We feel that we can trade as a reinsurer internationally without the need for Lloyd's paper at this time.

Truth be told, some international reinsurance cannot be accessed from London directly and must be accessed through local relationships. For that reason we've chosen to put more effort into building our platforms in Zurich and Singapore.

However, if the right opportunity came along at Lloyd's - one that perhaps was less reinsurance focused and provided us with local European business - we would certainly consider it.

IQ: So tell us a bit more about your European reinsurance strategy?

We have reinsurance teams in London, Zurich and Singapore headed by Hans-Joachim Gunther. In London, the team underwrites predominantly UK and Irish insurance companies and does very little reinsurance of Lloyd's.

In Zurich, we underwrite through regionally specialised teams. Today we have in place a team focused on Southern Europe including Spain, Portugal and Italy, teams focused on France and Germany/Eastern Europe and finally a team that targets Nordic clients.

In Continental Europe, we believe it's more about relationship building, where you underwrite clients across their portfolio, so managing relationships is very much our focus - strengthening our capability and writing classes of reinsurance we haven't historically written in that region. So while the teams are aligned geographically in terms of relationship management, they write on a multi-line basis across property, marine, some personal accident and a bit of casualty.

IQ: How can the wave of new entrants to the European reinsurance market realistically hope to break the hegemony of the direct reinsurance giants Munich Re, Swiss Re and Hannover Re?

If you look at the US reinsurance market in the early 1990s it was dominated by directs, such as Gen Re, American Re (Munich), North American Re (Swiss Re) and Employers Re. When Hurricane Andrew hit, they quickly pulled back on their level of exposure to property events.

When it became clear that clients wanted to buy $500mn or $1bn of cat reinsurance, no direct reinsurer could ever satisfy their demand for capacity and that fact strengthened the hand of reinsurance brokers in North America.

In effect, catastrophe reinsurance became the oxygen that the broker reinsurance market needed to gain ground in the reinsurance battle against the directs.

In my heart I believe the broker model works well, but I understand that the acceptance of that model in Europe among clients will be a slow one. If it will change, it may be through a change in perception around cat risk - or through the emergence of small insurance companies that compete locally with the larger ones and that value the knowledge and capital that a reinsurer can bring to them.

At the moment you have a locked-in relationship between large national and pan-European insurers and the direct reinsurance giants. If small start-ups emerge that are more nimble and do a better job of distribution and product design, I do not believe that they will necessarily embrace the direct reinsurance model and I could easily see the new entrants taking ground in that market.

Solvency II also creates some pressure. If clients have 10 different reinsurers that they can choose from, then the counterparty risk issue is largely addressed.

That said, once you start to syndicate, it doesn't mean that the world stops at 10 - we're probably the 20th largest reinsurer and we're large enough to be seen as relevant and a good counterparty risk.

For there to be syndication, you need the brokered market.

IQ: With that focus on European reinsurance expansion, would you consider making the move that some of your peers have by physically redomiciling the company?

I'm comfortable with our domicile right now. If there was a compelling reason that we needed to think about redomiciling and if it made sense to move our balance sheet to Zurich or Dublin, we'd look at it.

But as long as brokers are getting on planes to Bermuda to do business, our insurance and reinsurance business will stay here.

IQ: What factors do think will eventually turn the market - and in particular harden US insurance rates?

Rates harden only when you start to see loss reserve deficiencies being recognised in companies' balance sheets.

Only when you have significant loss reserve increases can you expect a meaningful shift towards harder market conditions.

The industry has had positive loss reserve emergence for five-plus years now and it will not surprise me if there is more positive emergence still to be experienced.

Certainly, that is likely to be the case with short-tail lines of business.

Once this period of positive loss reserve emergence ends, it is almost certain to be followed by a period of negative loss reserve emergence and then in time a harder market.