Lancashire Sees London, Bermuda As The Best Of Both Insurance Worlds

Globetrotting to find expansion opportunities may be the principal activity of many Bermuda executives these days, but Richard Brindle, chief executive officer of Lancashire Insurance Company, which also has offices in London, is more comfortable simply underwriting specialty business.

"So many CEOs can't just sit down and concentrate. There's always got to be this flurry of corporate executive activity--racing around the world and signing joint ventures and deals," Mr. Brindle said during a recent interview.

Mr. Brindle was responding to the question of whether he envisions his company expanding beyond its focus on a small but diverse group of specialty businesses--direct and facultative property, energy, marine and aviation insurance, and some retrocessional coverage.

"I call it adult ADD [attention-deficit disorder]. That's fine if you're...a big, big company, but not if you're a specialty company," he said. "You should do what you do, and you should do it damn well."

"I can't see any reason why we should expand our portfolio. If anything, as the market softens, you should retrench," he continued. "We make no bones about the fact that we're going to reduce our top line this year by quite a lot."

"I've always believed that one of the central absurdities of this industry is that most companies write the least business when rates are at their highest, and the most business when rates are at their lowest," Mr. Brindle said, noting that Lancashire is determined to use intelligent underwriting and capital management to do the opposite.

The focus on underwriting and capital management that Mr. Brindle hit upon are two of four core principles listed throughout the company's annual reports and marketing materials. The other two are to maintain a strong balance sheet and to stay nimble. (See NU, Nov. 19, 2007, for more on Lancashire's approach to capital management.)

During an extended conversation, Mr. Brindle touched on all four values, as well as a variety of related features that set his company apart from other members of the Bermuda "Class of 2005" started up in the wake of Hurricane Katrina. He noted, for example, that Lancashire:

o Has been a public company traded on the London AIM (Alternative Investment Market) from Day 1.

o That insurance, rather than reinsurance dominates the underwriting portfolio.

o That underwriters participate in a daily conference call to collectively make underwriting decisions, relying heavily on technical models to guide their decisions.

Asked directly how Lancashire distinguishes itself for brokers and clients, he responded a bit differently, however.

"We try to make it fun," he said, revealing that one of the first things visitors to Lancashire's London office see is a Sony Wii machine--"there are lots of brokers hurling themselves around playing tennis" against the projected image on a television screen, "which is quite amusing."

Or they might be greeted by Mr. Brindle's Labrador Retriever, whose photo also appears several times in the company's 2006 annual report. "Clients and brokers love him," Mr. Brindle reported, noting that a pool table and several flat-screen TVs fill out the d?cor.

"Most people who bring us business are in their 20s and 30s. They don't want to sit in some dusty waiting room reading The Economist. They want to read GQ," he said.

"If you win their hearts and minds, the business will follow. It's pretty basic psychology," he added. "We're not alone in doing that in London."

Mr. Brindle's heart and mind are centered in London, where he makes his home. Even though Lancashire launched in Bermuda in late 2005, a licensed company was set up in London nine months later.

Why London?

"It's vital," Mr. Brindle said. "This is going to sound like a slightly smug British statement, but the London wholesale broker market is the most vibrant"--and for a company focused mainly on the specialty insurance lines that Lancashire is writing, "there's no better place to be," he added.

Lancashire still writes 40 percent of its business--consisting of large reinsurance deals and "big-ticket" insurance items--from Bermuda, but the balance is written in London. "Brokers like to be able to transact business face to face," Mr. Brindle said.

He reported that while reinsurance has always been less than 20 percent of Lancashire's business, early misperceptions arose--in part because other "Class of 2005" members were mainly reinsurers, and because the company's ticker on the London exchange is LRE.

Lancashire chose to focus on insurance because "insurance is a very inefficient market," he said. "It's much less model-driven [and] much less technically priced than reinsurance."

"We'll look at one [insurance] risk, and the price we're being offered by the broker is one-third of the technical price. The next one is three-times the technical price. It's literally that volatile," he said, noting that Lancashire--with a big team of modelers and actuaries taking part in the underwriting process--uses its technological edge to try to exploit the market's inefficiency.

Focusing on short-tailed lines, such as direct and facultative property or energy in the Gulf of Mexico, "we are very unusual in that we model everything prior to underwriting," he said, noting that during the daily conference call, the probable-maximum loss impact of every catastrophe-exposed risk is instantly available on a computer screen.

The underwriters then review "premium-versus-PML impact," he said, distinguishing this type of analysis from "the flat-earth approach...prevalent in the London market, of looking at premium versus policy limit."

At other organizations, "underwriters treat actuaries like lepers. They don't want to have anything to do with them," he said, adding that "they feel like naughty schoolboys" when they have to justify what they've done to the actuarial team.

But at his company, not only do underwriters work together with actuaries and modelers aided by homegrown technology, but underwriters whose expertise is in property have input on whether to write energy risks during the conference call, and vice versa.

Mr. Brindle, who has always been an underwriter involved in a variety of short-tailed lines--with 15 years of experience at Lloyd's Tarquin syndicate before it was sold to ACE Ltd. in 1998--surrounds himself with underwriters who are capable of breaking "ideological addictions" to a single class of business.

It's a fantastic learning experience for them to be immersed daily in looking at risks outside of their particular areas of expertise, he said, noting that most are fairly young and open to the process.

"It also means we don't have silos. Decisions are made centrally, so you're not going to have a rogue underwriter charging off and writing too much in his or her area," he said.

"Agnosticism to individual classes of business" is one of the qualities Mr. Brindle refers to when he speaks of the company's principle of "staying nimble." In addition, he said, the firm is tightly staffed with just 80 people, adding that expenses are low in a company where there are no private jets or first-class travel.

Asked if the centralized underwriting process necessitates a focus on large risks, Mr. Brindle said: "It's not that way around. Our appetite, regardless of the conference call, is not to write a huge number of tickets." He noted Lancashire writes about 2,000 deals per year, or just 40 per week.

With what Mr. Brindle describes as state-of-the-art systems in place, he said underwriting decisions are made quickly. "In the early days, sometimes the calls would take three hours because the technology was clunky...Now it's rare for a call to take more than an hour-and-a-half."

He said Lancashire is very focused on broker service, which makes the ability to deliver quick responses essential. In addition, the company is loyal to its London brokers, he said--noting, for example, that while other companies have tried to open retail underwriting networks in the United States, he views this as a "dangerous and flawed strategy."

"The people that that really infuriates and alienates are brokers," he said. "For a lot of them, their center of gravity is in London. I'm not being jingoistic. It's just a matter of fact." He noted that his London roots and relationships with senior people at Willis, Marsh and Aon in London, for example, brought business to his door the day after the company opened in 2005.

"We're very cutting edge in most respects, but we're terribly traditional when it comes to the distribution," he said.

Unlike other Bermuda competitors, Mr. Brindle will also not be buying a U.S. excess and surplus lines shell company or trying to set up a branch in Asia anytime soon.

"Getting licensed in all the states is an absolute priority for us," he said, but buying a U.S. shell is an expensive proposition--noting that it comes with the risk that it's not really a shell but has some residual liability.

"I read about people spending $50 million on shell companies," he said, noting that by applying for licenses state-by-state, Lancashire is undertaking a longer process, but it's costing "millions rather than tens of millions."

As for Asia, "I think this gold rush to Singapore is a fool's gold rush," he said.

Mr. Brindle believes that the large and growing Indian market can be accessed easily through the London wholesale broker network, and that there's not a lot of clarity over data in China. In addition, there's not much business in the Pacific Rim countries, he noted. "There's a danger if you set up an office there [and] people feel they have to write a certain amount of business to justify their own existence."

For the year ahead, Mr. Brindle said Lancashire's goal is what it's always been--"to build a world-class business."

"That's a difficult message to get across" when it is aligned with the message "that we'll be very defensive in soft cycles," he said, citing what he describes as a "puerile expectation" from the investment community that insurers must grow their top lines every year.

Mr. Brindle said the company's main goal is to continue to produce a strong return-on-equity--noting that at 31.7 percent for 2007, Lancashire's ROE is probably near the top of the Bermuda class.

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