When AIG sold its majority stake in Transatlantic Holdings, the reinsurer’s chief executive Robert Orlich saw the silver lining. Here he talks about shaking off negative associations and what the group plans to do with its new-found freedom
By his own admission, president and chief executive of reinsurance group Transatlantic Holdings Robert Orlich is an optimist. Given recent events, this is probably a good thing. It would have been easy, for example, to get downhearted about majority shareholder American International Group (AIG)’s decision to sell its 59% stake in the company; not least because the ownership had afforded Transatlantic first refusal on assuming the reinsurance business of the world’s largest insurance company. Orlich insists, however, that the divestiture has done nothing but good for his firm.
After being bailed out by the US government in the fourth quarter of 2008 to the tune of $180bn, as a result of its credit default swap exposures, AIG embarked on a fire sale of assets, including Transatlantic, to help pay back the government funding.
The Transatlantic sell-off took place over two secondary stock offerings. The first, which closed on 10 June 2009, cut AIG’s stake to 13.9%, although this remaining stake was held by AIG subsidiary American Home Assurance Company rather than AIG directly. The second, on 15 March 2010, reduced the stake to 1.1%, and it now resides somewhere between 0% and 1%.
Blessing becomes a curse
There is little doubt that AIG’s ownership of Transatlantic was extremely beneficial to the reinsurer, particularly in its formative years, and not just because of the guaranteed supply of business.
“A lot of where the company is today is a result of our long-term relationship with AIG,” Orlich admits. “I firmly believe that we would not have been able to build such a strong global franchise without their assistance. It was very helpful in getting us licences and giving us credibility, long before we would have been able to achieve it on our own.”
As a subsidiary of AIG, Transatlantic was able to take advantage of its parent’s reputation and enviable international connections. Transatlantic now has offices in 23 countries, and has been able to write business in certain countries long before its peers, giving it a competitive advantage.
For example, the global reinsurance industry waited with bated breath for many years for the Brazilian reinsurance market to allow foreign entrants to compete with the state-owned reinsurer, IRB Brasil Re.
When the Brazil market finally opened in April 2008 – 11 years after the liberalisation process had begun – Transatlantic had already been operating in the market for 10 years, enabling it to gain a thorough understanding of the market long before its rivals.
“We know the companies, we know the business they do,” Orlich says.
But while Transatlantic may no longer be given first refusal on AIG’s reinsurance business, it still has the global network its former parent helped it to build. And although association with AIG had been a blessing in its earlier years, it quickly became a curse amid AIG’s financial woes in 2008.
“Clients and brokers were questioning whether Transatlantic would be affected by AIG’s financial condition,” Orlich recalls. The chief executive sent letters to clients in September 2008 explaining that, despite AIG’s 59% ownership, any insolvency at AIG would not encompass Transatlantic because the firm could not access Transatlantic’s assets without the board’s approval. Orlich believes the letters cleared up a lot of the uncertainty.
But the first secondary offering of AIG’s stock in June last year truly silenced the noise. “We didn’t have to spend the first 20 minutes of a 30-minute meeting explaining how Transatlantic would or would not be impacted by AIG,” Orlich says. “That was very helpful.”
Now it is no longer part of the AIG group, Transatlantic has much more control over its own destiny.
One area in which the firm is enjoying its new-found freedom is capital management. “We are able to access the capital markets on our own, as opposed to being lumped in with AIG and being subject to a group credit exposure,” Orlich says. “And while we could have bought back shares in the past, every share we repurchased would have meant that AIG would own more of us.” Accordingly, on 21 December 2009, Transatlantic authorised a $200m share repurchase programme.
Equally, Transatlantic can now explore avenues that were closed when AIG controlled close to 60% of the firm’s voting rights. For one, the company can now consider redomestication, which Orlich says AIG was not in favour of. It can also explore setting up its own insurance division should it need to issue policies to clients from an admitted US insurance entity.
“When we were affiliated with AIG, we had access to primary insurance paper,” he says. “Now that we are independent, we still enjoy a strong relationship with AIG, but we are keeping our options open.”
While the loss of guaranteed business from AIG might be perceived as a blow, Orlich points out that, although reinsuring AIG and its subsidiaries accounted for around 70% of Transatlantic’s business back in 1986, it now only makes up roughly 6% of the reinsurer’s business.
Plus, Transatlantic has reinsured AIG for a long time, and so is a trusted partner. “The business we do with AIG tends to be longstanding programmes,” Orlich says. “We continue to pay our claims and they recognise that we can do that. We anticipate that we will be able to maintain our business relationship with AIG.”
Nevertheless, there is a chance that AIG could do less business with Transatlantic going forward. Insurers generally are trying to reduce the reinsurance recoverables exposure they have to individual reinsurers, and AIG naturally has a large balance of recoverables with Transatlantic, given the nature of the relationship.
But any business lost from the AIG relationship could be replaced by new business from clients that would not have placed reinsurance with Transatlantic when it was part of AIG.
Orlich says one of the biggest changes since the sale of the stake has been an increase in the submissions received from clients. Orlich attributes the increase to would-be clients’ concerns about ceding business to a reinsurer owned by a major competitor.
“There were Chinese walls between ourselves and AIG – they received no information from us,” Orlich says. “But AIG is the biggest competitor to the rest of the insurance industry and early statistics indicate that some of our clients were not showing business to us because they were concerned that we would share information with their competitor.”
The changing relationship with AIG is not the only challenge Transatlantic has faced since the onset of the financial crisis. Rating agency AM Best downgraded the firm’s financial strength rating to A from A+ in September 2008 when it downgraded various AIG subsidiaries following the US government’s initial $85bn bailout of the firm.
Standard & Poor’s followed suit in January 2009, cutting Transatlantic’s ratings to A+ from AA-, citing, among other concerns, the firm’s inability to meet the rating agency’s performance expectations over time. Moody’s jumped on the bandwagon in September 2009, amid concerns about increased catastrophe exposures going into the 2009 hurricane season.
Orlich plays down the effect of the downgrades, and says they were in part reflective of the agencies’ view of the industry overall. “We didn’t like the downgrades, but there haven’t been many upgrades,” he says. “The ratings we currently enjoy are certainly sufficient, if not high, for the marketplaces we deal with. I would argue there was no impact from the downgrades we had in 2009.”
But challenges for the company remain. Like most reinsurers, Transatlantic has had a shaky start to the year, thanks to natural catastrophe losses. Its first-quarter 2010 net income of $15.9m was 78.9% down on the $75.2m it made in the same period of 2009. In addition, pricing in most lines of business remains soft.
Orlich is determined that Transatlantic will maintain underwriting discipline, asserting: “We never go into a deal with the expectation that it is going to produce an underwriting loss.”
But he is equally determined that discipline should not be an excuse for stagnation. “I chalk up a lot of the growth opportunities to having a really broad, diversified book of business and a global franchise,” he says. “I know in some years growth is more difficult than in others, but as long as the airlines are still flying and people can still walk, they can find ways to grow premium income as well as book value.”
While Transatlantic is in most of the countries it needs to be, it will set up new branches as needed. The company is planning a Bermuda office to tap the local business that never makes its way off the island.
As well as being the growth engine, Orlich argues that Transatlantic’s international network is also key to ensuring profitable underwriting, as the business is written by locals who understand the market.
“That tends to give you better information. Information is always going to be paramount in our business,” he says. “The more information you receive, the better chance you have of being disciplined and underwriting properly.”
The catastrophe losses suffered by the reinsurance market in the first quarter have failed to push up rates at the June 1 and July 1 renewals, affording reinsurers little cheer. But Transatlantic’s strong foundations and competitive position should help ensure that Orlich’s optimism is not unfounded. GR