Allied World's CEO Hosts Investor Day - Conference Call Transcript

Allied World Assurance Company Holdings, AG ( AWH)

Investor Day

November 8, 2011 10:30 a.m. ET

Executives

Jack Sennott – Chief Corporate Strategy Officer

Scott Carmilani – President, CEO and Chairman

Frank D'Orazio – President, Bermuda and International Insurance

John Bender – President, U.S. Reinsurance

Joan Dillard – Chief Financial Officer

Marshall Grossack – Chief Actuary

Barry Zurbuchen – Chief Risk Officer

John Gauthier – Chief Investment Officer

Scott Carmilani – President, CEO and Chairman

Analysts

Matt Heimermann – JPMorgan

Matt Carletti – JMP Securities

Mike Nannizzi – Goldman Sachs

Dan Farrell – Sterne Agee & Leach

Donna Halverstadt – Goldman Sachs

Presentation

Jack Sennott

Take you through well out of it quickly, my name is Jack Sennott for those of you who don’t know I am the company’s Chief Corporate Strategy Officer, and for those of you who are all friends of Allied World thank you very much for coming. This is our very first Investor Day and we are very pleased to have you all here today.

We are webcasting this as well for those who couldn’t make the event live, so we are going to – I am going to take you through the format of what we are going to do today, but if you have questions and we will have questions and answer sessions after each speaker, and you are welcome to talk to each speaker directly. We are going to walk around with the mike largely so that folks in the webcast can hear your questions as well.

That’s our forward-looking statement we always like to start with that so make certain that I am sure you will hear things today that talk about our future plans and growth and we want to make certain folks are focused on that as well.

Here is our agenda today and you can see that we have our entire management team here today, our senior management team is you see that are up on the podium or in the audience here and available for you. We haven’t done anything like this before and I am going to take you through our objectives of this meeting in a minute or two, but suffice to say we would like to you to leave today with a very thorough understanding of Allied World, what we have accomplished in our first 10 years of business and where we are going. So we will follow this type timeframe here. Generally there will be five minutes of question and answer time at the end of each person’s session.

We will begin with Scott who’ll make our opening remarks then we will go into each of our business units. I do want to know that Gordon Knight who is the President of our US Operations had a death in the family and had to travel home to Georgia for that. So, I am going to do his presentation you are stuck with me for a longer than the five minutes I had planned, so I apologize in advance for that, and then we will take you through the day.

After the business units we will break for lunch, we have a fantastic lunch for you at the Zakardi Park (ph) right around the corner, and, no, we are not going to go in the card room which is out and down to right if you are facing out the back. That’s also where the men’s rooms and ladies rooms are and also the coat check but I am certain most folks have found that.

At the front door there are boxes, you’ve seen clock and a compass with Allied World’s logo, you are welcome to take one of those with you, and as our gift and thanks to you for coming today.

This, as I said, the management team of the company they are all here for you to speak with. We have tried to keep this to a condense, we realize it’s a lot of information in the short period of time. So we have in addition to the speakers who are up in front of you, David Bell who is our chief operating officer and Wes Dupont is our General Counsel, just raise your hands quickly guys, back here as well.

If you’ve got questions on claims which are under David Bell’s purview or for example our re-domestication which Wes was heavily involved in as well, they will be available. And at lunch each one of the management team will be kind of hosting a table and you will see there are names here and we’ll – you will be able to sit with whoever you want in that regard.

So our objectives in this presentation are, first and foremost to give you full access to this management team. We pride ourselves on transparency, on good disclosure and on our focused vision as an underwriting company, and we would like you to be able to see that and the breadth and the depth of the team. You often hear from Scott and John and John Gauthier on the earnings calls, and Scott and myself largely at investor conferences. But the goal is really to go beyond that and give you a sense of what we have here for a team.

We would also like to take a little credit for our performance, we won’t dwell on that too much but we’ve had a very strong 10 years in business and this is our 10 th anniversary, and five years as a public company. We got to ring the opening bell this morning, it was up when we came upstairs so if it’s down now it’s not our fault, and we would like to take credit along that line as well.

I think an appropriate question, we’ve been in the paper a little bit over the last six months for one reason or another and we think may be an appropriate reason to spend time to today is to answer the ‘what’s next’ question. Strategic over view directions where we are going to go, where we are going to go through.

I mentioned that we are an underwriting company first and foremost, and we want to take you through our underwriting segments in detail, we will do that. Wouldn’t be a complete day without a financial update and talking about capital management and we’ve also – we didn’t think one actuary who is enough excitement for you so we’ve brought both our key actuaries, Barry Zurbuchen our Chief Risk Officer and Marshall Grossack who is our Chief Actuary and they are going to take you through our loss reserves and enterprise risk management.

So with that let me hand the podium over to our President, Chairman and Chief Executive Officer Mr. Scott Carmilani.

Scott Carmilani

Good morning everybody and thanks for being here. Let me just make sure I got the logistics right on this thing. Okay, good morning, it’s a pleasure to be here, as Jack said we have the whole team. So, many of you in the share holder community and analyst community have asked for a deep dive on what we do, how we do it and why we do it. So, you are in for a treat in that respect.

We would like start out with a commercial, as jack always puts up here in all of our investment presentations, what we want to show you today is more than that. It’s about the stability of the company amongst the turmoil that we’ve been witnessing in the economy and in the market for the past few years. Our whole industry, and Allied World in particular, doesn’t seem to be getting the credibility or the street credibility for its risk management and capital management initiatives and actions. As all financial institutions are not the same nor are all PMC companies in what they do and how they do it, and how they diversified, and what products they are in, what geographies they are in and the discipline they use in their underwriting.

So, we are going to attempt to show you where and how we are strong enough to be a chosen market. How we have been nimble enough to stay focused when it makes sense, and to shift our mix when it makes sense, how we are flexible enough to take the steps necessary to stay in front of the markets, the market forces and economic events that are shaping our landscape. And there has been quite a few and we’ve certainly – the industry has certainly been tested over the last couple of years.

The state of affairs, from big picture perspective, is – as you can see here this is our key business strategies and how we are structured from a product standpoint and diversity of the products, we are focusing on being much more customer focused from big picture stand point, we are focused very much on geographic and product diversity, which I know a lot of people say that’s an acronym that people use in all of their statements, but action speak louder than words, and I think we have been very successful in doing that. And we’ve been very focused on risk management controls.

We’ve been able to beat that into the rating agencies, have them understand our processes, let them kick the tires and do deep dives on that. I'm going to show you some of the deep dive tools that we have. Having the state of the art risk management tools proves out your volition. We are in the risk management business and our business is really smooth, volatility for our clients and the customers we serve. And today, I hope you’ll get to see that in its entirety.

We are here, as Jack said, to celebrate our 10 year anniversary, but we admit not go through our timeline and show you our history in a graphic form. As you all know we started as a Bermuda startup company in 2001, and we were focused on large account markets. We quickly became a very large excess casualty market replacing much needed capital that was lost during that time and through the events of 9/11.

Remember this was an environment where most of the companies that were started up then were focused on CAT business and on treating reinsurance business. That was the model that existed in Bermuda and that is not how we started the company. We are often brought in by the same moniker but we became leaders in a slightly different way. We were the excess casualty and primary property market and quickly became one of the lead markets in the Bermuda market place.

Post 2006, once we got to the public stage of our operations, we saw weakenings emerge in the excess markets. We started to see shift in our U.S. focus and we started to get more customer focused. We moved some of our reinsurance underwriting capacity and auditing capacity to the United States. We started to physically get closer by location, building out the service capability, the front office and the back office. We made many move during that time. You will see where we – post 2008 after we acquired the Darwin professional liability company, we then began to hire out the front office underwriters to support that framework across the United States and while other companies were pulling back their large and over-weighted exposures to other CAT lies or capacity wise and reinsurance business, we were in a gross and build out mode, and a lot of people question that strategy at the time why we were doing it. It raised our expense ratio for a little bit and hopefully you can see what's happened from there.

Of course we then furthered that with opening up some farther outreaching offices, we opened a Lloyd syndicate platform to get access to more distribution, we opened a Swiss company, we jump started in Switzerland, and here we sit today three months after we terminated our opportunity to merge with the Transatlantic Reinsurance Company.

This is a really important slide. If I can leave you with one or two things this would be one of the key slides I want to make sure everyone in this room and on the web gets a good picture of. This shows you how we really morphed the company. Looking back to this slide from 2006 or the end of the 2006, just as you might recall we went public in the summer of 2006. So really from the early 2007 through today – most important thing I want to point out here, as you see the shifts in business from international insurance from 2007 being 52% to international insurance being 27% of the company, it is not because we dramatically shrunk that business although we did re-underwrite a lot of it and changed the mix of what's in it. There are a lot of other things going on simultaneously.

We really were able to transform the company. Transform the company and we did so in a profitable way, a very measured, very profitable way, and at the same time you can see our gross written premiums in 2007 finished at $1.5 billion and in – or as we sit here today well over $1.9 billion. Not a lot of companies in our space could say they grew over the same time period, a lot of them went flat or what I would like to describe as going turtle and we did their exposures because they had maybe overbuilt in 2004 and 2005 going into 2006, and they didn’t make the same moves that we had made.

So not only did we shift and grow, but we did it in a different way not just using our same tools that we had in our tool kit, something before. We did it in a very, very tough environment and a very tough economy if you think about what's happening in the financial services sector in those same period. I think that really differentiates us within the industry and I think that really differentiates us from the other financial services firms in general.

This slide is really going to drive home that point further. This is a new slide, we have not shown anybody in the public before, but just as I’ve been saying and with respect to transforming the company this shows you the number of policies or the number of customers that we serve, had gone up more than 10 fold over the same period. Insurance wise, Olin Taboot (ph) the largest growth is really coming from our small account business, but you will notice as I pull up this pointer and you look at the Bermuda business which is the large account business by policy count 1500, we only went to just under 1300 and we did some re-underwriting, we did some downsizing, we did some re-underwriting. We didn’t dramatically shrink that business, we improved it. And if you look at the totals we served 77,000 policies today or customers whereas just in 2007 that number topped about 5000. A dramatic overhaul for what we did and how we service the business really just four or five years ago.

The relative premium growth is shown here on the small account slide. This slide shows you really how we have grown the number of accounts in the small business and before anybody asked a question, 69,000 policies are small account policies not the total amount of the policies, and the amount of premium growth that’s gone with that. So we have had a little over $300 million of growth in that huge number of the clients and a lot of those clients are small, middle market businesses, whether they are healthcare, industrial, you name it.

The next three slides is to be very interesting, and I want you to pay attention to this as well. This is data from the CIAB, the Counsel of Insurance Agents and Brokers, many of you in the industry attend the annual conference they have out in Broadmoor , Colorado. So this is their stats not our stats, so we will follow their stats. This shows you the rate progression really since 2000 all the way up till today for both small accounts, mid sized accounts and large accounts, and you can see the ’01-02 period, ’03 even, where the large account business and even the mid sized accounts really witnessed a spike, hundreds percent of rate increases. Again, where we saw that market inflexion, right here. This is where we came in to the market. That’s where we started the business and started to grow through our large account business.

As I said before, on or about ’05-06 you start to see that real precipitous drop, I'm losing my pointer. If you look at the chart you will start to see the precipitous dropping rate, we had a real reason for pull out at that point. That real concern, that’s when we made a move to buy the Darwin Company that’s when we started to build out to U.S. franchise. That’s when we took a small office of 12 people in New York and build out the framework that we – what we have today and I’ll run through that in a bit.

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