Matt Damsker

Catching up with Henry Keeling at the recent Bermuda Insurance Symposium wasn't easy. His time for industry chat was measured out in quarters of an hour as he kept moving from meeting to meeting with an intensity one can easily discern in his high-velocity, highly focused conversation. Indeed, ask Keeling a short question and you'll get a lot of answer in a short time.

It's a style whose time has come, apparently. Last year. Keeling moved up in the hierarchy of Bermuda insurer XL Capital Ltd., when he was made CEO for all reinsurance operations after a stint as president and CEO of XL Mid Ocean Reinsurance Ltd. As XL rebrands all of its reinsurance entities (totaling some 500 staff, in 25 offices in 14 countries) under the XL Re rubric, its multiline approach includes high-profile U.S., Latin American and continental European branches, and an emphasis on specialty lines.

So Keeling, a former Lloyd's underwriter, has a lot on his plate, especially as the flight to quality in a post-9/11, post-Enron world continues. Risk & Insurance editor-in-chief Matt Damsker nabbed Keeling for a quick interview at the Bermuda conference.

Damsker: What opportunities do you see in the area of specialty lines reinsurance?

Keeling: Well, with the (recent Bermuda reinsurance) start-ups, everybody's been focused on property cat, which is a great area, and we do plenty of business there, and we see good pricing improvement, and we're very happy with it. But the specialty lines are very interesting at the moment for a number of reasons. Firstly, and primarily, you're getting strong double leverage on the business as a reinsurer, because you're seeing primary rates increasing in marine and aviation, and D&O. You've also got improving reinsurance terms--whether it's increased excess of loss rates or reduced commission terms on proportional business, etc.

The other thing that is very interesting for a company like XL Re is that in the specialty lines you've got to be a little bit more imaginative, a little bit more intuitive, and a little bit more skillful in what you do and how you approach the marketplace. It's not just, 'Well, we're gonna write a slug of premium. 'You've got to do it in a slightly more creative way, and with that, a bit of history, a bit of relationship, a bit of a track record--which we have in these areas--are very helpful.

The sort of things we're seeing that's very interesting in the specialty lines is marine excess of loss, always a strong forte for us. We saw it January 1--a very significant tightening in terms of commissions in the marine excess of loss market--particularly out of London. A lot of the sort of peripheral or gratuitous coverages that were in there previously--onshore exposures, political risk exposures-are not in there anymore.

If you take the marine market for 2001, there were a number of significant events that hit that market--Petrobras, the World Trade Center, Sri Lankan air losses, and you've got the Toulouse Elf plant. If those losses happen again in 2002, basically Petrobras is the only one that would really be paid by the excess loss market, because the others are either excluded or they are not covered in the treaty.

You've got a contraction in coverage, you've got increased deductibles, and you've got property getting on for double the price as well. That equates to, in our analysis, an effective rate increase of roughly 200 percent, or three times last year's pricing. That's very compelling in those sorts of markets. Now, is it enough? Well, actually, yes. We think that's very attractive.

Certainly, the prices we're seeing in the airline business at the moment, when you include the war surcharge, is very attractive money. Probably, the global airline premium has gone from around $800 million to around $4 billion. So you're now at a level where, certainly, based on historical results, you should be able to make good money.

Damsker: Given that sort of increase and given that the risk profile has changed, do you view it as sustainable?

Keeling: Given all the discussion that we've had about cycles, of course, ultimately it may not be sustainable. I actually think that in the marine market we're going to continue to see more increases, because the capacity of the marine market is very severely limited, and the capacity of the marine excess of loss market is very severely limited.

Damsker: Is there any perspective on the influx of new reinsurance capital and companies in Bermuda--in terms of generating a really competitive situation?

Keeling: We haven't really seen them try to get involved in these specialty areas. Obviously, (Axis Specialty CEO) John Charman is a well-known underwriter in some of these fields, but more on the insurance side than the reinsurance side. John knows what he wants to do in life, and he generally finds a way of doing it, so I have a lot of respect for him as an underwriter. But we really haven't seen any activity in this area.

To be frank, Bermuda's good at a lot of things and it's a great location to do a lot of things. We don't write this business out of Bermuda, though; we write it mostly in London because it is typically a London market-oriented portfolio.

Damsker: What about the opportunities and challenges you see in continental Europe given the control you now have of Le Mans Re, a French-based joint venture with MMA?

Keeling: Well, we have a lot of opportunities there. We're going to be doing a number of things. (Taking majority control of Le Mans Re) was part of a phased approach--it wasn't accidental the way it's happened. We initially went in at 49 percent, which was a minority interest; MMA had control. We felt it was the right time to do it--and this was pre-91/11--because the market was changing.

And we felt that they would benefit a lot from a closer association with XL and the improvement in their rating. And, with some of the structural changes that were going on in the European market, both with the clients and with the reinsurers, it was the right time to take that step. We committed more capital to the business as well. So I think there are great opportunities for La Mans Re, and we will in time brand it with an XL brand.

Our objective at the beginning was to become a strategic alternative to the major direct writers in continental Europe. And we are gradually getting there. I think the biggest challenges are, firstly, maintaining our underwriting discipline whilst we're building market share, which we have to do and will do. Secondly, we're going to be culturally integrating the staff both in terms of our business practices but also as part of the XL family, which I don't think is going to be that difficult...

Damsker: Are there differences in the way the European side underwrites, or in the attitude toward what risk should be underwritten?

Keeling: No, not significant differences, and that's one of the reasons we did the deal with them in the first place. They have very good quality, strong technical underwriters. But in continental Europe, there tends to be a greater emphasis on the relationship and the durability and the consistency of the relationship than on, 'How are we both going to make money out of this deal?' So that's probably the single biggest cultural difference, and I wouldn't overemphasize that at all, because I think the Le Mans guys really do understand the need for underwriting profitability, and they're not pure relationship, market share people at all. They are culturally attuned to us.

Damsker: Given the Enron debacle, there's strong movement toward transparency and accounting reforms, and looking at the companies you will write for, do you view that as something that will enhance what reinsurance can offer?

Keeling: I think the impact of Enron is going to be multifold in our business. One of the clearest impacts, if you look at the way some of this has come out, is that we'll see more of a back-to-basics trend in the way people do their business--transparency, communication, information, quality decision-making. And that's going to flow both ways, from the reinsurers to the insurers.

Matt Damsker can be reached at mdamsker@lrp.com.

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