The Intelligent Quarterly from the publishers of The Insurance Insider

Winter 2011 / 2012

Search archive

Advanced search

Scott Carmilani It's eight weeks to the day since the TransAllied deal dissolved on a late Friday evening in September.*

(*Editor's note: Since this interview with Scott Carmilani, Transatlantic Holdings confirmed it had agreed to sell to US insurer Alleghany in a $3.4bn deal. Former Gen Re CEO Joe Brandon will sit as chairman of the combined company, with Mike Sapnar as CEO.

The transaction was agreed despite an increased bid from Validus, and a firm offer on the table from a Stone Point Capital consortium that included Enstar and JC Flowers, and which would have seen Allied World take on Transatlantic's ongoing operations.)

After a four-month battle to seal a "merger of equals" they had billed as the perfect fit, both parties were forced to concede painful defeat as it became obvious that Transatlantic shareholders would vote the transaction down.

But as IQ joins Scott Carmilani in his firm's downtown New York office, it is soon clear from the Allied World president, CEO and chairman's relaxed manner and sanguine tone that if there were wounds, they have quickly healed.

Of course, the pill was somewhat sugared by the receipt of $48.5mn of termination fees and merger-related expenses - together with the knowledge that should one of its rivals for Transatlantic agree a deal in the next 12 months, there'd be a cheque for another $66.7mn in the post.

And Carmilani is fresh from an investor day earlier in the week to mark the tenth anniversary of the company's launch as a Bermudian (re)insurer in the aftermath of 9/11 - a celebration he was able to mark by ringing the famed opening bell of the New York Stock Exchange.

He - along with a cast of Allied World's leading executives - used the occasion to put a line under the TransAllied affair, draw a clear picture for investors of where the company has got to after several years of transformation, and the direction it is now heading in as a standalone entity.

What lessons has Carmilani learned from the failed transaction, though, and how has it left his company positioned for the next steps in its strategic development?

"What it proved to us was that large shareholders need to be well courted and it's hard to get the market, from a shareholders' perspective, to see the merits of a strategic combination versus one that is perceived as an economic takeover when the industry is trading below book value," he says.

It was one shareholder - Davis Selected Advisors - that did most to derail the deal and Carmilani acknowledges that both companies trading at a discount had made institutional investors nervous.

Missed opportunity
But he is adamant that Transatlantic shareholders have now missed out on the chance to create "a powerful entity of combined forces".

"Our premise in an M&A is never grabbing cheap capital and restructuring an organisation. It's always about taking the strength of both entities to make something that's more valuable than just putting the two together.

Click to enlarge "The shareholders and the company have missed that opportunity. The outcome will likely be economically viable for one half of the combination and destroy franchise value in between. That's just a fact," he argues.

The several months of integration planning not only left Allied World feeling "really good" about the strength of its team, but also cemented its view on where the gaps exist in its platform and how it wants to fill them, explains Carmilani.

Geographically, it was the US reinsurer's Canadian presence and its Eastern European and Asia Pacific operations that would have most complemented Allied World's existing strength in the US and in the UK and Europe through its Lloyd's and Zurich platforms.

"Those are places we found very attractive - as diversification tools that Transatlantic had that we'd like to see more of in our reinsurance portfolio," says Carmilani.

"I fully believe that outside the US, European and Bermudian markets, reinsurance is a better mousetrap than insurance - unless you're committed to putting huge resources on the ground in each country you're licensed."

And Canada has been a focus of recent visits by the Allied World CEO. Of a $40bn P&C sector that includes a significant personal lines and auto business, Carmilani is most interested in its specialty marketplace, which is made even more attractive by the country's economic prospects, with GDP growth and what appears to be relative stability.

"We're looking at it from both an insurance and reinsurance perspective. And we're looking at it organically, by product and for potential bolt-on acquisitions," he reveals to IQ.

The company is also pursuing opportunities in Latin America. But in its pursuit of the complementary platforms that a Transatlantic merger would have brought, will Allied World attempt to go down the aisle with another major M&A transaction?

While Carmilani would not comment on the possibility of tapping into Transatlantic teams if the US reinsurer is taken out by one of its suitors and restructured, he says an attempt at another transformational deal is not on the agenda.

"We also learned from the failure of the transaction to consummate that it's really hard to do a bigger deal when you don't have the currency to do it within your own stock price.

"If you can't offer your stock at a premium as part of the deal you're only left able to merge stock for stock, or pay cash, and we only have so much cash," he says. Instead the company will look to grow organically and with bolt-on acquisitions.

Evolution
The (re)insurer's existing platform has been shaped by organic growth as well as a significant acquisition, with its deal to buy Darwin in 2008. Now integrated into Allied World's US operations, Darwin has led to a dramatic change in the make-up of the group's portfolio.

The top line at Allied World has increased from $1.5bn in 2007 to $1.9bn in the 12 months to 30 September 2011. While such strong growth is notable, the shift in average premium size and policy count is even more so.

In 2007, the average premium size on direct policies in force was $232,000 with a total policy count of just 5,226. In 2011, premium size had shrunk to $21,000 while the policy count had surged to 77,115.

Allied World argues that the timing of the Darwin deal and expansion of its small account platform in the US was timed just right, as large account pricing came under the greatest pressure.

"We went for that middle market business because there's less volatility, a smoother rate environment, better retention and it's stickier business," says Carmilani.

"Not a lot of companies in our space can say they grew over the same time period. Many de-risked and went turtle. We did it in a very tough environment and I think that really differentiates us," he says.

He adds that the company is also building its US presence with a focus on industry verticals - targeting several lines of business to sell in a specific industry.

To further set itself apart, Allied World is looking to grow in a way that it says will focus on client service, adding loss control, engineering and risk management to create value, "thereby justifying more price or more fee for service, other than the policy fee".

Click to enlarge Longer-term, Carmilani says the (re)insurer wants to elevate itself to become one of an elite group of carriers that can offer customers a truly "global" policy, handling claims and endorsements and dealing with taxes and policy language centrally.

"Very few can genuinely do that and that's what our big clients need. Companies that figure out how to do that will differentiate themselves from the pack."

The theme of differentiation is a constant as IQ traverses the industry landscape with Carmilani. And the executive says his company's efforts to be "bigger and better" - rather than just hunkering down and waiting for the cycle to turn in the hope of being profitable when it does - ought to be better recognised.

"People have asked why we're doing this in the current environment. There was a perception that we'd sacrificed an expense ratio lower than everyone else to spend extra money just to be like everyone else," he says.

"But we never felt we were spending money to be like everyone else. We've always spent money so we can differentiate from everyone else, and I'm pretty sure we're going to keep doing that over the next few years."