A new breed of life reinsurer has evolved in recent years, mostly domiciling in offshore jurisdictions. By Roger Crombie.

Within the past two years, Bermuda, traditionally a property/casualty reinsurance centre, has added life reinsurance to its armoury. When many of the start-up companies announced their formation, interest rates were at or around the historical average of 5% and the future looked bright. Today, US interest rates are at 40-year lows and European rates are bumping along only a little higher. The prospects, at least in the short-term, are that increases in these rates may not materialise much before the end of the year. The result has been the life and annuity equivalent of a `soft' market.

Assessing the condition of the Bermuda life reinsurers as a group is a difficult business. Each has staked a different corner of the market and several sets of special circumstances apply. Overall, it might be said that they are performing as well as can be expected under the circumstances, but that simplistic view encompasses a range of performance from solid to rather less so.

Annuity & Life Reassurance, formed in Bermuda in April 1998 as a subsidiary of Annuity & Life Re (Holdings), led the charge. Annuity & Life mounted a successful initial public offering that raised more than $350m in capital. In relatively short order, several new life reinsurers joined the fray. Their main market was North America, where considerable restructuring of the primary life market saw the conversion of mutual companies to stock or mutual holding companies, as well as mergers and acquisitions by domestic and international organisations. Reinsurance was a basic requirement.

The North American life reinsurance market grew at a steady pace throughout the 1990s, and approached $4trn in 1999, an increase of 26% from a year earlier. With the property/casualty market mired in what was then a 12-year soft market, it made sense for reinsurers to look at the possibilities represented by life and annuity business. Bermuda, and some Caribbean countries which do not levy corporation tax, offered an opportunity to build reserves faster than would be possible onshore. Market conditions were right. Demand was strong. Traditional lines were sluggish. With Annuity & Life's successful experience, the signs all pointed in the right direction.

New entrants
Of the new companies, Max Re has been among the most successful. The company is active in the life, disability and annuity reinsurance market, underwriting individual and group life insurance products. Rather than simple risk premium reinsurance, Max Re's life and annuity products typically take the form of investment-oriented business co-insurance in areas such as in force life insurance, single premium immediate annuities, structured settlements and close-out pensions and disability reserves. Through the transfer of assets to Max Re, the reinsurance transaction offers capital relief and improved investment returns.

For the year ended 31 December 2001, gross written premiums and deposits received increased by 97% to reach $806.7m, from $409.7m for 2000. Net written premiums for the year ended

31 December 2001 were $594.1m, compared to $401.8m for the previous year. Net earned premiums for the year ended 31 December 2001 were $500.9m, compared to $401.4m a year earlier. The majority of Max Re's business is on the life and annuity reinsurance side.

ACE Tempest Re, one of the world's largest property catastrophe reinsurers, has embarked on a programme of diversification aimed at transforming the subsidiary of the ACE Group into a leading global multi-line reinsurer.

In pursuit of that goal, the company has established ACE Tempest Life Reinsurance, a Bermuda-based company offering life, annuity and health reinsurance worldwide. A separate operation focusing on non-catastrophe property and casualty business has been launched in the US, with another start-up operation in London.

Net written premiums in 2001 were $406.3m, significantly ahead of the $141.3m recorded a year earlier.

`We see the Bermuda life and annuity market as vibrant,' said Kin Gee, chief life and health officer of Tempest Re's Bermuda-based life and annuity operations. `A number of companies have started up, each focusing on a different segment of the market. We write ongoing treaty business in group long-term disability and some insurance risk embedded in variable annuities."

Mr Gee reported that the events of September 11 had no material change on the life and annuity markets; the losses more dramatically affected the property catastrophe business. "If you look at the Bermuda players in the life, health and annuity reinsurance market, there is only a relatively small number, a handful," he said. "Each of us has a different strategic focus and we do not overlap. So there is room for growth. We believe our business plan is right, especially with a soft market. The opportunities are there."

After three solid years, Annuity & Life Re suffered a setback in the fourth quarter of 2001, announcing it would take a fourth quarter charge of approximately $33m related to minimum interest guarantees on its largest annuity reinsurance contract, which is managed by another reinsurer. The charge comprised payments for 2001 and a reserve for anticipated future payments. Shareholder XL Capital agreed to provide additional protection for up to $10m for possible losses related to the minimum interest guarantees under this contract in excess of the $33m charge. Commenting on the situation, Jay Burke, Annuity & Life's chief financial officer, said: "In the third quarter (of 2001), we wrote down deferred acquisition costs on this contract.

"During the fourth quarter, we received information from our client reinsurance company that the primary carrier's investment performance was not sufficient to fund the minimum interest guarantees. This resulted in a significant increase in our exposure, due to the excessive lapse rate. As a result, we have provided for the 2001 deficiency and a reserve for future liability. Our estimate of the company's exposure assumes the same lapse rates used to calculate our write-off of deferred acquisition costs in the third quarter of 2001. We believe our assumptions and actions are realistic. This charge will increase the damages that management is already pursuing against this reinsurer."

Lawrence S Doyle, president and chief executive officer commented: "While we are disappointed by the poor annuity results, our core business - life reinsurance - continues to perform very well. Life premium grew by over 50% during 2001 and we anticipate significant growth in 2002. Our future earnings will be primarily driven by our life business, producing more stable income in the future."

Scottish Annuity & Life Holdings relocated its headquarters to Bermuda from the Cayman Islands in April 2001. The company has two main lines: life reinsurance, and the direct issue of variable insurance policies to high net worth individuals.

In its life reinsurance business, Scottish provides lines of business that may be subject to significant reserve or capital requirements by regulatory and rating agencies. The company assumes risks associated with primary life insurance policies and annuities, both in force and new business. Scottish reinsures mortality and ancillary morbidity, investment, persistency and expense risks.

The company originates its reinsurance business predominantly by marketing its products and services directly to US life insurance and reinsurance companies, and through a subsidiary, originates reinsurance business though reinsurance brokers and intermediaries. Scottish competes with a small number of larger firms, such as Swiss Re and Reinsurance Group of America.

The company is pleased with its progress. Net operating earnings for the year ended 31 December 2001 increased by 34% to $21.6m, from $16.2m for the prior year period. Excluding the effects of September 11, the company's net operating earnings for the year would have been $22.1m.

"During the year there were many important accomplishments at Scottish," said chairman and CEO Michael C French. "We tripled the amount of traditional life reinsurance in force, doubled our fixed annuity reinsurance business and gained meaningful traction in our wealth management business. In addition, we completed the acquisition of World-Wide Reassurance, welcomed Pacific Life as our new strategic partner, added four world-class directors to our holding company board and listed on the New York Stock Exchange."

Two other notable Bermuda start-ups that include life reinsurance in their product lines are Hampton Re and Imagine Re.

Hampton Re was the first to the start line, with an initial focus on block life transactions, mostly in the US. Formed in late 2000, Imagine Re's operating focus is on providing finite risk reinsurance to property/casualty customers.

Four other new life reinsurers that were rumoured to be in line have failed to materialise as yet.

At 31 December 2001, Global Preferred Re, a Bermuda life reinsurer, had approximately $9.1bn of life reinsurance in force and more than $266m of reinsured annuity contract benefits in force, and reinsured over 335,000 life insurance policies, riders and annuity contracts. The company reported total revenues of $31.3m for the year ended 31 December 2001, an increase of 4% on the previous year. This increase was primarily attributable to growth in the reinsurance premiums on Global Preferred Re's variable universal life reinsurance business. Net income for the year rose to $5.5m, or $1.32 per diluted share. Atlanta-based parent company Global Preferred Holdings has recently deferred its initial public offering.

PartnerRe has an active European life reinsurance business.

Current market conditions have limited all but a handful of the new enterprises from getting off to a fast start, but changing circumstances have simply delayed, rather than cancelled, plans. If the recovery begins to gather steam in the second half of 2002 and interest rates begin to climb back, Bermuda's new life reinsurers will be in a good position to take advantage.

By Roger Crombie

Roger Crombie is a journalist and chartered accountant who lives in Bermuda. He has written extensively for Global Reinsurance since 1994.