Alea may not have had one of its better years in 2004, but as Mark Ricciardelli tells Nigel Allen, the group is well placed as it enters its growth phase
For the ceo of a group which has just announced an adverse reserve development of $93.7m for 2004, coupled with second half storm losses of $51.4m, resulting in a combined ratio of 104.2%, while profits before tax fell some $43.6m to $10.9m, and added to which the group's CFO has just resigned at a time when the company's senior management structure has been going through a significant period of change warranting one rating agency to place the group on a negative outlook, Mark Ricciardelli seems extremely comfortable.
"If you look at the core underwriting ratio," explained Mr Ricciardelli, group president and CEO of Alea Group Holdings, "so you strip out the storms and you strip out the adverse development, you will see that the primary company is running at about 89.1%. You look at the overall underwriting portfolio and it's at 93%. That is a reflection of the fact that the core strategy is working."
AT THE CORE
So what is Alea's core strategy? The Alea group strategy appears geared towards taking as much of the risk out of the risk business as possible.
The underwriting focus is rigidly on small to mid-size accounts with very moderate type volatility, "and this is the strategy we have going forward," confirmed Mr Ricciardelli.
This rigid focus was clearly apparent in the January renewals. While a significant percentage of the group's business renews in later quarters, the first quarter renewals are an important time for Alea Europe. However, the group announced that it had declined some 18% of business which was up for renewal as at 01/01, representing $97m and relating primarily to US casualty reinsurance. These strategic exits were because either the business "fell below our profitability hurdles, had deterioration in terms and conditions, or was outside our core strategy," according to the CEO report on the preliminary results. "This is not an issue when you are focused on profitability and dealing with portfolios that we can manage effectively through the cycle," said Mr Ricciardelli, giving an example of one account, a large quota share account which he described as being high volume low margin and which simply didn't fit the strategy.
Alea has never been slow to exit lines which are deemed outside of the core. A prime example is that of Alea Europe, which exited credit lines completely in 2002, withdrew materially from marine in 2000, and further withdrew in 2003, and aviation which it exited in 2001, all of which had been written by Rhine Re (re-branded the Alea Group in September 2000) in underwriting years 2000 and prior. "These lines of business experienced much greater swings than we were comfortable with at the time," explained Mr Ricciardelli.
The exiting of lines deemed surplus to core strategy has come as part of an extensive review of the group's business practices, which has included a detailed analysis of both portfolios and reserves, seen the commencement of a global expenses review geared towards enhancing overall productivity, a significant restructuring of senior management, and an overhaul of the group's US operations to effectively realign resources to those areas considered to have the greatest growth potential.
THE RESERVING CONUNDRUM
In its preliminary results, Alea announced an adverse reserve development of $93.7m for 2004, $72.5m in the second half of the year, with 98% of this strengthening on the reinsurance side. Breaking this figure down, it equates to $58.8m of reserve additions for US casualty reinsurance 1999-2002, two thirds of which stemmed from five accounts (none of which have been renewed), $33.2m for European casualty reinsurance in 2000 and prior, most from the Rhine Re portfolio, and the remaining $1.7m was on the insurance side. The group cited a number of reasons for the adverse development: market pressure on pricing between 1999-2002 resulting in a drop in casualty premium rates; a rise in the number and size of claims due to an increase in court filings; corporate scandals; and rising tort costs and settlement awards. Arising from a limited number of lines, the adverse development stemmed primarily from D&O, E&O and excess umbrella liability.
"We have taken a very active approach and a very aggressive approach to our reserving position," Mr Ricciardelli explained, "to get to a position in '04 where we have taken a lot of the uncertainty out of the company." In fact, he is confident that the rigorous review process which Alea adopted has left the group in a strong position. "What we are hearing now is that we appear to be a bit ahead of the curve."
Alea has undergone a major senior management restructure in recent months, which has seen the appointment of a new group chief executive, chief underwriting officer, chief administrative officer, and chief executive for Alea North America, in the last nine months and the resignation of Amanda Atkins as group CFO. Such changes have warranted Standard & Poor's to place the group on negative watch. Peter Grant, an S&P analyst said, "While the new team appears to have solid credentials and has indicated that no material changes to the underwriting strategy are under consideration, it is unproven as a team and it is too early, at this stage, for Standard & Poor's to make an assessment of the impact the new management team is likely to have on Alea's medium-term strategic direction, risk appetite, and operating performance, in a challenging marketplace." Expressing his disappointment at the decision, Mr Ricciardelli highlighted the fact that the team now in place both individually and collectively represents a vast amount of experience, having amassed over 30 years of industry knowledge himself, while others such as Gary Prestia, bring some 20 years of experience to Alea North America.
When asked for the reasons behind the management changes, Mr Ricciardelli stated that it was a combination of personal reasons and business reasons.
"I think a lot of this has been driven by the fact that this is a company which is emerging," he explained. "We are going from what is a build phase as an immature company to a growth phase ... So I think it is a reflection of how we are emerging and developing as a company."
INSURANCE ON THE UP
While there is little doubt that Alea will stick rigidly to its strategy of small to mid-size low volatility risk, the group is certainly flexible when it comes to new business opportunities. Over the last two years, Alea has shown a marked growth in the size of its primary insurance portfolio, which currently accounts for some 45% of the overall portfolio (compared to approximately 11% in 2000), and which recorded a combined ratio of 89.1%, compared to 110.9% on the reinsurance side. "We are seeing better price adequacy in the insurance portfolio right now than in the reinsurance portfolio," said Mr Ricciardelli, adding that, "the reality of the situation is that we are a company that is focused on underwriting for profit and there are times when the insurance business responds better on a profit basis than the reinsurance business. Which means that we just change our book. It is one of the strategic advantages that we have in the marketplace."
With a high risk-averse core strategy carved in granite guiding a company which is fleet of foot and capable of adapting to the peaks and troughs which dominate the international re/insurance market, Alea appears well positioned going forward. "We are optimistic about what we have been able to accomplish in the past," concluded Mr Ricciardelli, "and how we have been able to take out a significant amount of uncertainty in our business, which now positions us extremely well for the future."
- Nigel Allen is editor of Global Reinsurance.