The man behind the money at Endurance explains his strategy for dealing with increasing competition, financial turbulence, low interest rates and new regulation
Q What are the biggest challenges you face now as a chief financial officer?
A Competition is one of my biggest concerns, as there remains a fair amount of excess capital chasing a finite number of opportunities. Though pricing is beginning to improve, I wonder how long it will last. We haven’t seen it yet, but I worry that the need to put capital to work may drive some competitors to accept lower rates than they should for the risk they take.
Another challenge is the impact of the economic downward spiral across Europe on insured values, insurable interests and economic output - all drivers of demand for insurance and reinsurance products. It is hard to see positive signs at this point, so we are taking a cautious view on Europe from an asset and insured value perspective.
Q How do you deal with these challenges?
A In terms of competition, a chief financial officer’s role should be to put strong return hurdles in place, ensuring that at the point of sale there is a clear appreciation of our cost and that we are earning an appropriate return. In an environment where there is competitive pressure, you need the discipline to price your products appropriately and walk away if the returns aren’t there.
The path to disaster is chasing yields, not understanding what you are investing in’
As far as the economic environment, we have done a fair amount of work to, as far as possible, inoculate ourselves from European contagion. A few years ago, we began reducing our holdings in European sovereign debt and financial institutions, and I feel quite good about how we have managed our asset portfolio to mitigate those risks. However, we need to hold European assets in our portfolio so that it remains an ongoing concern. We continue to put a strong level of caution on our investment approach to Europe.
A chief financial officer also needs to stay attuned to the capital markets - where there are opportunities to enhance or adjust the capital structure. I believe we have done that well at Endurance.
Q How big a problem is the low interest rate environment?
A Given where risk-free interest rates are, it is difficult to generate decent risk-adjusted returns on a traditional fixed-income investment portfolio.
As a result, we have been diversifying our portfolio on the margin by adding non-fixed-income investment assets, such as equities and alternative assets, to mitigate potential inflation risk as well as the current low interest rate environment.
However, as the market learned in the last financial crisis, the path to disaster is chasing yields and not really understanding what you are investing in. Investors need to accept that we are not going to generate the kind of investment returns we were able to generate five or six years ago. As a chief financial officer, that needs to be front and centre in your investment decisions.
Q What impact is Solvency II having on your job?
A Endurance, as a Bermuda-based company, and the Bermuda market as a whole are well positioned to meet the demands of Solvency II. The focus of Solvency II is to put a risk-based capital framework in place for Europe, and the Bermuda market is essentially operating today as a risk-based capital market. That said, there will be an increased administrative and reporting burden.
While I don’t expect Solvency II to fundamentally change the amount of capital we need to hold, it may change the composition. For example, pure debt capital may not receive the same credit as other types with a higher equity content, such as preferred shares. Therefore, there may be shifts in how companies structure their balance sheets, but I would expect those changes to be on the margin.
Q What will the impact of International Financial Reporting Standards be?
A At this point, it is not clear that the key financial reporting objectives of consistency and comparability will be enhanced under an IFRS model.
Q What changes do you expect to make to your capital structure over the next 12 months?
A I don’t see any material capital changes for Endurance in the near term. That said, we are in a volatile industry, and should the need to raise capital arise because of some large industry event or unforeseen opportunity, we would be prepared to look at a variety of ways to adjust capital. Currently, I don’t view that as a likely outcome over the next 12 months.
Q What qualities are most important for a (re)insurance chief financial officer?
A Communication skills are paramount. The chief financial officer, along with the chief executive, is generally a key spokesperson for the company, externally and internally.
They also need to be strong providers of analytical capabilities to help companies understand what positions the business for success. As stewards of companies’ capital, they should drive performance management and performance metrics that can aid in strategic planning.