1 January 1970

Endurance: defence of the realm

The move up from chief underwriting officer to CEO seems to be a path well trodden by Bermuda’s reinsurers. But when the arena is Endurance—young, ambitious, successful, striving—ensuring the right match-up is key. Enter David Cash, the man charged with leading Endurance out of the chaos of the global market meltdown into an ordered existence.

Previously the company’s chief underwriting officer, where a big part of his day job was working with his peers on underwriting strategy and direction, Cash took over the headship from the revered Kenneth LeStrange, who gave life to Endurance back in 2001. The former chairman of the board, president and chief executive officer left behind a company enjoying a healthy financial position due to strong management, line diversification, well-timed and successful acquisitions, and judicious global expansion.

Cash, as CUO, undoubtedly had a key part to play in the firm’s upward trajectory and will be the first to acknowledge how that role is helping him settle into his latest challenge, in particular his experience of communicating with investors. “As CEO, I spend a lot more of my time now on corporate issues—finance, investors, board and strategy—and I do a lot of communicating, both internally and externally,” he says.

However, as an actuary by trade, Cash is still able to provide continued, hands-on business input in that area, despite the change of letters in his title. “A lot of what we do to generate value is to try to underwrite risks better than our competitors, and having come from that background, it makes it easier for me, as CEO, to describe our strategy in a way that makes sense for our investors.”

But as CEO of the company, Cash also needs to convey the tough decisions, the ones that could potentially worry investors. The reinsurance industry, especially in Bermuda, fared better than most during the global financial crisis, but it now appears to be coming up against a number of threats, veiled or otherwise.

Farmers’ market

Take Endurance’s operation in the US, where it has a similarly established market presence. There are proposed changes in 2011 to the crop insurance programme, known as the Standard Reinsurance Agreement (SRA), which governs the relationship between America’s farmers and a number of crop insurance companies. The SRA proposes significant structural and economic changes that will affect reinsurers’ profit expectations. Cash explains: “Margins will be squeezed in that space by virtue of the expected reduction in some the subsidies historically earmarked for insurers. It may cause some consolidation in the business; it will certainly increase the emphasis on efficiency.

“However, as the fifth-largest crop insurer in the US, our business model and our technology model are quite strong, and are ones that can be scaled at relatively low cost. I therefore think we have the right structure and the right point of emphasis to do well as a result of this change and, as such, I am confident that we will gain market share.”

That is the kind of approach that instils confidence among employees. For a comparatively young CEO, Cash appears not to be afraid of making tough decisions, adjustments that focus on the long term. One area that benefited from a touch of prudential pruningwas, as one might perhaps imagine, Endurance’s underwriting business, which was scaled back by about 10 percent in 2009. Cash explains: “There were a few areas where we either consciously chose to scale back from the market—such as our workers’ compensation and UK property businesses, where profit margins were weak—or where the faltering economy dictated lower premiums, as in our agricultural insurance operation, where crop prices experienced significant downward pressure in 2009 from the high-water mark figure of 2008.”

Risk is good

These types of adjustments were largely indicative of the rollercoaster ride that was the reinsurance industry for a period of time, when investment income went from weak to positive in the space of a few long months. The result is that today, says Cash, many insurance companies are investing in mostly fixed income instruments, such as bonds. However, the hidden danger as far as these are concerned is the threat of inflation, which could lead to interest rate rises, which in turn could affect bond values.

The threat is compounded by the fact that no one knows when inflation will rear its head, leading all around to a sense of caution. Cash says: “The fear that we have had recently is the potential for a rise in inflation. If that inflation were to occur, and the markets were to price for it, it would cause bonds to lose value. So the investing position we have taken over the last year has been quite defensive with a relatively short duration.”

However, Cash is also contemplating how best to position the company for when the economy strengthens, particularly in terms of taking on more risk. “I would expect us eventually to take a little bit more credit risk. Right now, our portfolio is rated ‘AAA’. It would be natural to take a little more risk, such as ‘AA’ and maybe even some single ‘A’-rated positions. The challenge that we and others face is that we’re not sure when the markets might signal that the threat of inflation has sufficiently passed.”

While inflation may at the moment be the hidden menace, something that is being felt by all reinsurers is the assault on their book value, which can make investors seeking a return on their capital outlay a little twitchy. The tried and tested methods to increase value and market presence that have been successfully practised by Endurance in previous years are diversification of lines and growth through acquisitions.

Cash explains the Endurance approach: “There are two places where we are light in terms of scale: our international reinsurance business, which represents three percent of our premium base, and our middle-market US insurance business, which represents seven percent. Our goal is to grow those businesses in line with market conditions. In either case, an acquisition might make sense to help us achieve that scale. However, we don’t have any nearterm expectation that that will happen, but it’s something we would clearly look at.”

Catastrophe watch

Before then, however, there is the need to emerge from the perceived soft market, which is cutting into profit margins. Manyin the industry, says Cash, believed that by price monitoring and identifying places where prices were weaker than they should have been, it would be possible to slow a soft market and turn it into a hard market. However, that assumes that underwriters are focused on what they see in front of them. But as in other walks of life, Cash believes that for there to be a period of pronounced hardening, people need to have experience of being able to “look backward in the rear-view mirror at their loss reserves and find those loss reserves to be materially deficient”.

Further, the view that a soft market just needs a catastrophe to turn it into a hard market is something of a red herring. Cash argues that the recent disaster in Chile, for instance, isn’t something that will alter the prevailing mindset. “It will undoubtedly cause people to think differently about the Latin American market from a catastrophe perspective, but I would be surprised if that rippled outwards and resulted in an overall hardening of the market.”

Capital adequacy

No matter how skilled the CEO or adaptable the company, reinsurers in Europe are also now beginning to brace themselves for the might of Solvency II, an insurance industry-directed regulatory programme targeting capital requirements, which is due in 2012. Bermuda’s reinsurers have their own related challenge: helping Bermuda’s Monetary Authority achieve Solvency II equivalency.

Some Bermuda-based firms are a little spooked by the potential implications of achieving equivalency, and have even contemplated redomiciling. However, Endurance under David Cash is preparing to tough it out. “We are working with the Bermuda regulators and the international regulators to make them more comfortable with the way we manage capital.

“For me, moving a domicile from Bermuda to elsewhere assumes that you already know the outcome of what any proposed US tax reform is going to be, and that you know it well enough that you can pick the right domicile and the right structure to move towards. I don’t think we’re at the moving stage yet.”

He continues: “We are one of a handful of companies that are rated by Standard & Poor’s as excellent for enterprise risk management, and we think that we can lead the way when it comes to the way we measure and model our use of capital, and also how we control and govern our use of capital.”

As becomes evident, Cash runs a well-managed outfit that takes challenges in its stride while still managing to maintain and even improve market share. It’s a successful company within a successful industry and employs more than 700 staff in locations across the world. A not insignificant figure, as Cash explains: “Last year, we grew in book value by $700 million, which means we grew in value by a million dollars per employee.”

Cash also believes that such impressive figures are enough to ensure that Endurance attracts the kind of employees who are able to maintain its success. “In an environment where you’re making money and have a business model that is largely unconstrained, geographically distributed and with a young culture, there are a lot of opportunities for a graduate to find a home in our company.” The resume is in the post.