Endurance still eyeing acquisition targets
Endurance Specialty Holdings Ltd is still in the market for an acquisition after its attempt to merge with Bermuda rival Aspen Insurance Holdings Ltd last year failed to work out.
Endurance chairman and chief executive officer John Charman told The Royal Gazette that the company was also on track for strong organic growth during the next four years, after being primed for expansion by a “root-and-branch transformation” over the past two years.
In a wide-ranging interview, Mr Charman said he expected the business models of traditional reinsurers and third-party capital managers to converge in the coming years, as the reinsurance industry undergoes a transformation amid the “most brutal competitive trading conditions” he has seen in his 44 years in the industry.
And he also talked about the insurance industry’s efforts to come to grips with cyber risk and predicted that the industry would learn by difficult experience in the coming years.
Mr Charman is one of the best known executives in the world of international insurance and reinsurance, having made his name in the Lloyd’s of London market, founded Axis Capital Holdings Ltd in Bermuda in 2001, and having taken over the reins at Endurance in May 2013.
Undeterred by the unsuccessful attempt to merge with Aspen, Mr Charman is still on the lookout for an acquisition of a company of strategic and tactical value to Endurance.
“We would prefer a global business but we are also actively considering regional add-ons,” Mr Charman said. “As we demonstrated by walking away from the Aspen transaction, we will not in any way endanger the company that we have built or erode confidence in its balance sheet.”
The consolidation taking place in Bermuda and London was “long overdue”, he added. “It’s good for our market, creates bigger, stronger companies which should become more efficient, more relevant, more sustainable and have greater potential to increase their profitability and value for their shareholders.
“I believe that the momentum that has been created by the mergers of XL and Catlin, as well as PartnerRe and Axis, will continue. In order to provide the wide range of products, as well as the ability to deliver greater capacity to a fiercely competitive global marketplace, we can no longer run the equivalent of comfortable ‘Mom and Pop’ like corner shops.
“We have no choice but to quickly develop ‘financial supermarkets’, which are truly global in their reach. In my view those new businesses need to be in the $5 billion to $10 billion range and I suspect over the next few years it will be necessary to be at the higher end of that range. It is a necessity not a choice.”
Immediately after joining Endurance, Mr Charman secured board approval to overhaul the company.
“Endurance is really comprised of three companies, 2012 and prior, 2013 and 2014 and then 2015 onwards,” Mr Charman said. “The 2012 and prior years were the ‘old’ Endurance, a great company that had rather lost its way in the world to the extent that it would either be sold or would be radically changed.”
The critical transformational years were 2013 and 2014, he said, and the results of those changes would begin to become apparent in this year’s financial results. “Had we not undertaken the root-and-branch transformation of Endurance over the last couple of years, we would be in a highly vulnerable position today,” Mr Charman said.
Within two months of Mr Charman’s arrival, Endurance let go 30 per cent of its highest paid executives, generating savings of more than $20 million annually — savings that were put into growing the underwriting businesses.
A new London business was established, which now employs some 20 specialty underwriters and which Mr Charman expectsto generate $750 million to $1 billion of premium within three years of its launch.
Historically, around 70 per cent of the firm’s insurance business was related to US agriculture and Endurance had developed only $500 million of other business in its first 12 years. Mr Charman said Endurance’s insurance premiums would total between $3 billion and $4 billion by 2017.
“We can achieve this target because we have brought in a large number of market-leading underwriters who are highly valued by the international markets, their clients and the broking community,” he said. “This will enable us to quickly obtain market share not through price competition but importantly, based on their core competencies and embedded value to our industry.”
The CEO expects Endurance’s reinsurance business to be writing $2 billion in premiums by 2017 — meaning far less dramatic growth.
“The global reinsurance markets are experiencing the most brutal competitive trading conditions that I have experienced in my 44 years in the industry,” Mr Charman said. “Our company philosophy is to grow slowly, strategically and importantly, profitably.”
Endurance would benefit as underwriting expertise, stability and sustainability including fair and competent claims handling capabilities would become differentiating attributes in the market, he said.
On the alternative capital that has poured into the reinsurance business in the form of catastrophe bonds and sidecars, Mr Charman said: “It is my view that market conditions have caught up with many of the third-party capital vehicles that have been established since 2005. As a result they are finding it increasingly difficult to fill the buckets they are paid to fill.
“The amount of catastrophe business available to them is finite, so they are having to stray away from their comfort zones and venture into other more highly specialised areas.
“The big concern that I have always had about these types of businesses is the lack of underwriting bench strength within their companies. Historically, the differentiating factor between underwriting businesses is the ability of their underwriters to select the right risks thereby presenting a greater opportunity for them to be more profitable.”
The third-party capital vehicles operated on “modelled output underwriting strategies”, he said. “As a result their risk selection by definition is much diluted, even put on the back burner. In my 44 years in the industry such a strategy has proven to be a very bad approach.
“Over the next few years, I believe these types of businesses will either be forced to start acquiring real diversified insurance or reinsurance companies or return their funds to their investors. In essence, in the future they are going to look and operate much more like the traditional market vehicles.
“I also believe that the traditional markets cannot remain as they are. They need to evolve quickly into entities that possess the characteristics of both traditional and third-party vehicle businesses. The future for us will be very different from the past.”
Mr Charman said it was high time for a changes to the industry’s “highly inefficient” capital structure and capital requirements that had remained largely unchanged for more than 100 years.
“With Solvency II approaching and the accompanying intensity that surrounds the global oversight and financial analysis of our companies, we should be allowed to leverage our capital structures in a similar way to that of the global banking businesses,” he proposed.
“Banks have historically been allowed to structure their capital in three separate tranches as opposed to the largely single structures we live with today. I would love to see our regulators in Bermuda differentiate themselves globally by introducing such a transformational change to our capital structures.”
Mr Charman said the industry was suffering from a substantial regulatory burden.
“We are very fortunate to have a very good, globally recognised regulator here in Bermuda, it is critical to our global capabilities,” he said. “However, we still have to deal with other regulators in all of our other jurisdictions. Apart from having to deal with some very obvious self-protection of their domestic industries, some of these regulators are forcing enormous duplication of effort and reporting requirements upon us.
“They are also trying to fragment our capital structures to force much higher local capital requirements whilst at the same time insisting on very strong holding company capital. I fear that we will continue to have to deal with this confused, uncorrelated regulatory interference for some years to come.”
One of the major issues facing the industry is how to underwrite cyber risks. Data breaches at huge retailers such as Target have had massive repercussions and the industry had to be conservative in providing coverage, Mr Charman said.
“Cyber liability impacts us all as citizens on a daily basis and it is an extremely worrying issue,” he said. “There are huge and very costly efforts being undertaken on all our behalves by governments and financial institutions to stop these never-ending and increasingly more sophisticated daily attacks on our data and wealth.
“We at Endurance have very good capability and experience to underwrite cyber liability coverage. We are very conservative in our approach to this product which is still in a developmental stage.
“I have a concern that recently a number of consortia have been formed in London that purport to be able to underwrite very large limits in this highly volatile product. Our industry needs to adopt a cautious approach to cyber liability if nothing else because of the unforeseen and unmodelled potential contagion across a wide range of industries.
“I suspect that we will witness some nasty hiccups over the next three to four years as this market develops. On a positive point cyber insurers are requiring enhanced standards of data protection from potential clients, thereby raising those standards over and above what would have been otherwise in place. This shows how the insurance industry can positively add value not only in terms of providing much needed insurance coverage but also is enhancing commercial businesses capabilities to better withstand these very targeted attacks.”
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