SCOTT CARMILANI President and CEO Allied World Assurance Company Ltd

What competitive advantages does Bermuda have over other offshore jurisdictions?

One of the competitive edges of Bermuda is its location, it is an easy flight away from most of the Eastern seaboard states, and it is an easy flight away from the UK. It is an attractive spot offshore but north of the Equator. Another attraction is its regulatory environment, which upholds a very high international standard and is very concise in not over regulating In this it differentiates itself from the U.S. in that you have to adhere to the regulations of each and every state in which you do business. This makes it much more easier to deal with regarding auditing and business relations.

Bermuda is also a one-stop shop for the insurance sector, which is an advantage for clients and gives us an advantage in the international marketplace when choosing other markets Clients, mainly Fortune 1000 companies, can come to Bermuda and do all their shopping in a six-block radius, they can put together most of the capacity they need and can't easily get in the U.S. or European markets in a very short time frame, which is an attractive asset for the buyer.

What would you say are the main challenges that Bermuda is facing?

Well Bermuda has an area of 22 square miles and there are infrastructure challenges such as having enough people and enough space. However, in today's economy all companies are global. So while we have the headquarters in Bermuda and the lion share of our underwriting discipline is here, we still have many services outside of Bermuda, in New York, Boston, London, Dublin and soon to be in San Francisco and Chicago. So we have geographic distribution points for the client but still are concentrated here in Bermuda.

How would you describe Bermuda's importance in the world?

When I last checked there was some $24 billion in premium written here in Bermuda amongst maybe ten main companies. From a capacity standpoint I would not like to guess the size of the capacity that represents, but hundreds of millions of dollars for any one account or company. How does that compare to the rest of the world? I don't think any other venue in the U.S. can provide that much capacity and do it that often and repetitively for all the worlds companies. U.S. companies will only deal with U.S.-domiciled risk, many European countries will only deal with a European-domiciled risk; Bermuda companies have operations in all those places so are therefore able to provide solutions to all those people. There are of course the very large companies, such as AIG or Swiss Re, that have the capacity to serve everybody and they have businesses all over the world, but if you go beyond those five or six there are only a few companies that can provide capacity in every jurisdiction, which gives Bermuda an additional advantage.

Bermuda has historically been there for the world when the world has needed it most, for example after the 1992 hurricane wave, 9/11. Nevertheless there is this negative media attention that has been given to the island, which does not always seem fair. What would you say is the origin of this negative media attention?

I don't think there is a problem I think it is the competitive nature of companies to question success at times, to wonder why some are succeeding when they are not. I think it is valid to do so, but when all is said and done and you analyze each and every company there is no fault to be found. I think one of the advantages that Bermuda has always had is its speed in responding to world challenges, whether it be the crises of 1993, the lack of capacity for property insurance after the hurricanes that hit Florida or the 9/11 events, which caused a shortage of capacity. Bermuda has always been a place that responded mostly with American money. Most of the providers were financial institutions and financial private equity funds that respond to an opportunity and found executives who were able to respond to the need. Bermuda as a jurisdiction provides that solution where you can quickly start up a business and quickly find capacity and provide policies and services to the clients that need it. When you are able to provide solutions to clients, over time you develop loyalty and relationships in business. So, I think the forces from 1985 were the beginning, the forces of 1993 built upon the initial wave and then the forces from 2001 added more strength to the curve. It is an amazing place because no one event could really be tied to it but when you add all three together it has made Bermuda. It has been a great story and all the time in between it was the number two market in the world, despite its many ups and downs. Today much of the capacity and capabilities of the European markets have come from Bermuda, because that is where a lot of the key distribution points are, as well as the access points for the brokerage community, and clients have a history of buying from there. Even today Bermuda is even bigger than it might otherwise be seen because it is also part of the European and U.S. markets. When it hit the saturation point, in order to grow and meet shareholders' demands and the employees desire to be competitive in the marketplace, most companies had to expand into the U.S. as well and provide an alternative capacity to the North American market, which was mostly complementary to the large U.S. firms but also provided a much needed relief.

The 2003 IMF report concluded that Bermuda's regulatory framework lived up to the highest of international standards. Yet, there were some recommendations that the BMA took into consideration and that lead to the Insurance Amendment Act. Some people fear for an increased amount of red tape. Will Bermuda be able to resist to international pressure?

I think so. I think that the regulatory authorities in Bermuda certainly want to be as judicial as they can in their oversight of the companies. They also understand that most of the companies are regulated by multiple regulators and multiple jurisdictions all at the same time so we are held to the scrutiny of the FSA, the DEPE in the EU and the SCC in the U.S. Overall the Bermuda regulatory authority and then the rating agencies also provide quite a bit of scrutiny, we meet with BEST multiple times throughout the year and annually we are rated and compared to all of the companies in the business, so Bermuda reviews all of those things and then renders their own opinion while trying not to be too intrusive in the process. It is less political than it would be in some of the other jurisdictions and the opportunity not to get into that one state versus another or one country versus another dynamic. Bermuda doesn't have to fall victim to that, they can review the results of all the auditors and regulators as well as our own checks and balances and render a single opinion with a single body. It seems to be much more cooperative that way. I think the industry works collectively with the regulators to ensure that they have the resources, that they understand what they are reviewing, and that they have enough resource and staff to support the industry so they are in synch with what is going on with the country and with the companies.

The world has had to deal with many catastrophes, how do you keep up with this ever changing risk environment?

It is certainly a challenge to do so and things happen faster than they did five years ago and much faster than they did ten years ago. That is a fact of life; everything is happening faster, and it is the same in the insurance industry, the implications are just bigger. The weather patterns are getting more adverse, there is global warming, there are changes to the wind patterns, there are lots of things that effect the world in a much more global way. There is terrorism and natural and unnatural catastrophes that we have to stay closer to. The way we stay on top of it is somewhat scientific in terms of our actuarial analysis and our view on the economy and the world's events. You have to be part scientist, part economist and part mathematician but you also have to have a good historic background and a good relationships with the clients with whom you do business. The trick in all of it is to be much more artistic than just a bank, there is much more art than science to our work; it's unpredictable. If you can be right six times or seven times out of ten then you are doing well.

It is also an issue of finding the best and the brightest?

To me the recipe for success is much broader than that, it is not just having the brightest people in one particular area, it is having a balance. Employing the brightest professionals in multiple areas and having roles for each of them as well as letting them have a say and contributing to the company's success. If you put all the decision-making in the financial bodies of the company you will make a mistake, if you put all the decision making to the shareholders you will make a mistake. Teamwork is crucial for any insurance company to be successful going forward and it is really the strength of that team rather than individuals that will make or break a company.

A big part of your business is reinsurance, what is the importance of reinsurance for the insurance sector and what is the advantage of writing both?

We are primarily an insurance company with a reinsurance bond. We are almost the opposite of many of our competitors who are primarily reinsurance companies with an insurance side. The advantages of being an insurance company are more evident in harder cycles, where you are closer to the decision-making, the rate adjustments, the rate design and the policy design and the policy terms and conditions. So in a harder environment it is easier to control, it's easier to manage, it's easier to understand your successes and failures and beak even points. On a softer cycle the reinsurance side becomes more advantageous and becomes often your access to the insurance market; you can structure terms and conditions to only be providing capacity or certain terms and conditions and you can choose to be a co-share participant with the insurer or to be access of his or her destiny and balance the portfolio. So reinsurance can help you to have a more balanced portfolio, insurance is more of a direct in or out. For the Bermuda companies, we are more of an industry participant than we are a price driver even though we sometimes like to think we are driving the price. The prices are normally driven by the larger players, the bigger U.S. companies such as AIG and Swiss Re, who are usually the primary insurers of a particular risk. As a reinsurer or as an excess market we get to participate in the excess layers so we can set the price on the excess layers or we can choose to accept or deny the price from a reinsurance standpoint. And that is really deciding whether we think they are right or not, if we agree with their underwriting and philosophy then we sign off and otherwise we don't. So we don't necessarily drive the price so much as they do but we can sit back and either accept or reject it.

AWAC is doing well. You have very strong 2004 results especially compared to some of the other key players. What is the difference between you and some of these other players? Why would a company choose AWAC as its partner?

Well it goes back to teamwork, providing service. The insurance industry has not been known throughout history as being a great service provider. As an excess market with a considerably limited infrastructure we decided earlier on to be the best service provider amongst our peers and be fast in terms of response. Whether positive or negative it would be a quick decision taken with integrity. We aim at being honest, clear and concise with our clients. That has paid off; we have a strong team with good relationships and also provide a strong service that has given us a better leg up than most of our competitors, who concentrated on other things. We also concentrate on the insurance side, so our branding was closer to the client than most of our immediate competitors for the first two or three years. Diversification in terms of geography and in terms of the product line is a moving forward, so you can provide more services to the same client. I don't think it was such an issue in the first year, it was a little more of an issue in the second year and a it is a very important issue this year.

Were you not affected by the 2004 wave of catastrophes in Florida?

We were affected by that; for the third quarter of 2004 we had quite a bit of negative impact because of the four Florida hurricanes. We did have an income loss in that quarter but because of the financial strength in the first three quarters we were still able to show a profit for the year. We still have 60% of our business in other areas besides property insurance, which helped us dramatically, and Ren Re have probably 60% of their business in that so they were more affected. They did make a bigger bet in the Florida area again this year and that is where the art comes in, so we shall see.

So when we talk about the rating agencies, you have A+ from A.M. Best. How would you describe the importance of that rating? Is it purely based on a financial audit?

No I don't think so, I think 95% of it is financial and the other 5% comes from both the investors, the board and the shareholders and then the management team. I think the rating agency evaluate all those things; they spend a lot of time addressing the management team, myself included, to understand how much of our business is art or science and what the mix is and I think they have to walk away feeling very comfortable with both the style and the quality of how that gets done.

But people look at this rating?

More so now than in the past; I think ten years ago it was not so much of an issue, now it is becoming more and more of an issue and there many companies have been dramatically downgraded and gone out of business. I think more and more companies look for stability, especially in light of their own instability.

Why do you focus on Fortune 1000 companies?

Because Fortune 1000 companies have the largest need in terms of capacity and there are only 1000 of them so it was easy for us to target that mix of business given the limited infrastructure that we have in terms of number of employees. AWAC has only 200 employees. Clear focus, clear market segment. I think going forward as we grow and mature, we will broaden that, but until we have a good understanding and market-penetration, we will continue to concentrate on Fortune 1000.

What is your plan when it comes to growing globally, what markets will you target? We understand Europe is going to be important for future growth. What does Europe need most at this moment?

Well let's talk about Western Europe first; France and Germany in particular for many years relied on solely the French and German markets both from a stability standpoint, from a home country business standpoint and from a convenience standpoint. I think in the end not having the diversification or a well-rounded capacity hurt the countries, the governments and the companies in those local countries. I think they now realize they have to have diversification and it is dangerous to put all their eggs in one basket. So they are now opening their eyes and wanting to have some portion of their business protected outside of that market. The same with France, it is having the same sort of experience and that drives the bigger opportunity for Western Europe. All one has to do is go to Dublin to see the vibrancy of the economy there, and the business is booming. They have a very complimentary regulatory environment and are also very pro business. As for Eastern Europe, it is an economy that has changed drastically over the last six or seven years and has so much potential that as it matures and realizes its own potential and resources there will be amazing opportunities. Places like the Czech Republic, the Ukraine and Poland, all have great potential if they pursue it and we will want to be part of that. We are staying very close and monitoring those territories, even Turkey, if they can get some of their terrorism currency issues under control. You have to stay close to Asia. It is a huge place and hard to overlook, they are very set in their ways and it takes years and years for relationships to break in, there are companies that are working at it and doing it. It will be harder for the newer companies like us to become a major player in those industries but it won't be that hard for us to develop relationships on the reinsurance side for those companies that are there in an additional capacity, and that is probably the opportunity for companies like us. Reinsurers who have high rated paper and high rated financial backing can provide stability to the companies who do win the relationship and do win the insurance business.

More and more capacity is getting into Europe, competition will increase and prices will go down. How will you differentiate yourself, how will you brand AWAC in Europe?

That is an interesting question and I'm not sure it is one easily answered today. I think right now we have got to be branded from a relationship standpoint as a friend to those countries and companies; show we are there for them and build relationships over time and not try to force our way in, but try to win our way in. That will take time. We have to work on our reputation and integrity, our service and responsiveness to our markets so we can build a comfort level and that will take time. We will look to find local partners in those places that have knowledge and skills, brokers, clients and staff. It is a big challenge.

What has been your greatest achievement personally?

I was very proud when the company exceeded a billion dollars in revenue. I was also very proud when we got to the 5 billion dollar mark in terms of assets and investments and our next goal is $2 billion in revenue and a billion dollars in profits - that is our next goal. I think the next goal will be harder and will take a lot longer than the first goal but we are willing to be patient and continue to build the value of our company. I am most proud of being able to build a company that in only four years has become financially sound and solid and will undoubtedly be here for the next decade; me and the AWAC staff are very proud of that as a group.