Aspen’s decision to split its reinsurance and insurance businesses has opened a new chapter for the Bermuda-based group. We meet the man at the helm, Chris O’Kane.
“Be cosmopolitan, be international. Diversity is critical to success.” In tones that bear only a trace of his upbringing in County Derry, Ireland, Chris O’Kane shares the ethos that has shaped his business. The group chief executive of Aspen could easily be describing himself. Pleasant and urbane, he is nobody’s fool – questions are greeted with a small silence and tense consideration. O’Kane isn’t giving much away without a fight.
Aspen was founded in 2002, specialising in property reinsurance, casualty reinsurance and specialty lines. It quickly became one of the stars of the Bermudian class formed in the early noughties following the fallout of 9/11, achieving record profits after tax of $489m in 2007.
By comparison, 2008 was a downbeat year as the company recorded a net profit after tax of $103.8m. Not bad, considering the turbulent financial climate at the time, but still a fall of 78.8% on the trailblazing figure of the previous year.
Last year’s much mooted merger with Ariel Re failed to materialise. But Aspen has stormed back, posting bumper results for 2009: net profit after tax of $473.9m and group premium earnings of $1.82bn compared with $1.70bn in 2008.
At the start of the year, Aspen announced that it was formally dividing its reinsurance and insurance business, and overhauling its management structure. Brian Boornazian has been appointed chief executive of Aspen Reinsurance, while James Few has taken on the role of president. Meanwhile, Rupert Villers has been appointed chief executive of Aspen Insurance and Bill Murray, president of Aspen’s insurance division, will continue to lead the firm’s US insurance business.
This is O’Kane’s first interview since the announcement and he appears upbeat about the changes, the market potential of the developing economies, and even the future of Bermuda as a low-tax domicile. He also casually declares that traditional reinsurance is no longer a growth business.
But first, what’s this management split all about? O’Kane plays down speculation surrounding the division, arguing that the two entities were already effectively separate. The main aim of this dividing line – O’Kane dubs it “a Chinese wall” – is to create a clearer identity for both.
He will not be drawn on what role the proposed merger with Ariel Re played in the restructuring decision – “I can’t confirm or deny whether there were any discussions”. But one thing he does concede is that the market is ripe for mergers and acquisitions.
The corporate rethink, however, takes the company in a different direction altogether. First, it removes any potential conflict of interest that may have erupted as a result of close ties with the reinsurance and insurance divisions. O’Kane also believes the changes will enable the company to grow more “safely”.
Focusing on the businesses separately will act as an additional safeguard and introduce an extra layer of risk management. “It lets us take another look at what we are doing and revalidate that we are doing the right things.”
More important, it helps tackle an image problem. O’Kane points out that reinsurance made up 90% of the business when it was founded. “Over the past six years, we have talked about building a more diversified portfolio,” he says. “Nevertheless, the world still thinks of us as a reinsurer because they saw us first as a reinsurer. We need to redress the balance.”
The problem, as O’Kane sees it, is that reinsurance is no longer a growth business and the anticipated period of mergers will cause the reinsurance giants to retrench. “These bigger companies that are created have bigger balance sheets and see less need to take on more risk. The question is whether the reinsurance business is fundamentally a growth business, and I think it is not.”
He sees insurance, and particularly the markets of the developing world, as the future focus of growth – and one that Aspen needs to tap into.
Splitting the difference
So how will the company split work? According to O’Kane, Aspen will not divide balance sheets but will continue to operate through the four it already has for Bermuda, the USA, the UK and the Lloyd’s market. Both businesses will be supervised by the same human resources department
and linked by decisions on group issues, such as retention planning and risk management. But the split will create separate ‘middle’ offices providing systems to support the demands of each division, such as client relations, underwriting and claims adjusting.
This begs the question of whether Aspen Insurance will one day find itself as a customer to its sister division. O’Kane doesn’t rule it out but insists it will be the exception rather than the rule.
“Occasionally, on some lines of the business, you get pricing imperfections where the reinsurance market is pricing incorrectly or too aggressively. In those circumstances, we would consider taking some of the insurance risk into our reinsurance company if the price is too high. But generally speaking that is not how we will be doing things.”
In the USA, Aspen’s main lines of business in insurance are property, general casualty and professional liability, while its main international lines include marine, transport-related business such as aviation, property, casualty and energy. O’Kane identifies the latter, particularly green energy, as a big area for growth over the next 10 years. Aspen recently bought Parhelion, a specialist risk company focusing on climate change and carbon trading. “That is a growth area – green technology, wind farms – there is more demand for it and that means more insurance needs.”
Over the past three years, Aspen has ventured into professional and financial lines outside the USA, a business that O’Kane puts at $125m. Aspen currently sells employers’ liability, public liability and property insurance in the UK – a market he is determined to expand on.
“We are a small player there, but very successful. Our UK employers’ liability line has become one of the most successful in the history of Aspen,” he says, adding: “But it could be bigger.”
Change of scene?
Meanwhile, O’Kane is keen to expand Aspen’s reinsurance operations outside the USA, where more than 70% of the business in concentrated. Aspen has branched into credit and surety reinsurance and is considering expanding into agricultural lines.
Once again, he sees the possibilities in the developing world. “International reinsurance is undoubtedly bigger than US reinsurance but our share of it is a lot smaller. Also, that is where the growth of the world economy is coming from. It is not coming from western Europe, Japan or the USA; it is coming from Latin America and Asia. So we need to be there.”
Aspen opened an office in Singapore 18 months ago, which currently writes $20m gross written premium, and O’Kane plans to open one in Miami to tap into Latin American and central American markets.
When it comes to rates, he is optimistic, predicting a hardening market within the next two years. He says the reserve redundancies that have been built up by the industry between 2002 and 2006 are coming to an end.
“In the next year or two, there will be no reserve redundancies and the industry will return to reserve strengthening. When that happens, it is the signal for a hard market. I can’t put a date on it; nobody knows exactly. Maybe this year or maybe next year.”
His outlook for the economy is decidedly gloomier. He believes western Europe and the USA will be in the doldrums for the next five years and that it will be “at least another five” before they are fully released from the shackles imposed by the banking bailouts.
So as mounting economic pressures force US president Barack Obama to take a tougher line on low-tax domiciles such as Bermuda, will Aspen reconsider its domicile? O’Kane is characteristically cautious in his response: “It is something we review continuously.” But he seems unruffled by the prospect of an impending crackdown.
“I think what Bermuda does is very good for the US consumer. Essentially, all the southern states, especially Florida and Texas, have benefitted from cheaper home insurance. If you tax Bermuda, this will increase costs and those will be passed onto the customer.”
He believes that despite the harsh words, political logic will prevail when it comes to the electorate. “I think it would be unwise to do anything that is not in the interests of the consumer,” he adds.
You get the sense that little ruffles O‘Kane. After graduating with a degree in politics, he rose through the ranks of Lloyd’s, beginning as a Lloyd’s broker in 1979. He joined Wellington Underwriting (now part of Catlin) from 1993 to 2002, where his roles included director, chief underwriting officer, and underwriting partner of Lloyd’s Syndicate 2020.
The restrictive environment of Lloyd’s eventually proved too much and led him to the team that went on to found Aspen. “Some customers wanted to buy policies outside Lloyd’s and we couldn’t offer them but our competitors could. We wanted a non-LIoyd’s capability and that was the idea that led to the creation of Aspen,” he says. “We wanted a business to have the entrepreneurial spirit of Lloyd’s but the corporate discipline that you would find in professional reinsurers. That is what we tried to do with Aspen.”
It sounds like a tough challenge but O’Kane says he has little trouble in striking a work/life balance. An avid skier and art collector, he now also juggles hefty work demands with a young family. “It is difficult to think of insurance when you are playing with a one-year-old,” he laughs.
Not that he underestimates the work involved in overseeing what will essentially be two businesses. “With diversification comes more complexity. Complexity means more offices, more cultures to deal with, more time zones, more people, more demands on time,” he says. “The challenge as you grow and become more complex is to have systems and controls that can manage those things while recognising that it just gets more difficult. I didn’t grow up in a huge multinational conglomerate, so in Aspen we work out every day how to do that.”
It is just as well he has faith in an old Irish proverb that he says works well both on and off the ski slope: “Fear nothing and no one.” GR