PartnerRe has transformed itself from a pure property-catastrophe reinsurer to one of the largest professional reinsurers in the world with a multi-line book of business and one of the most global of Bermuda's reinsurers. Herbert Haag explains the company's strategy.
In the short five years since its inception, PartnerRe has adapted as the market's dynamics have shifted. The company has grown from a specialised property catastrophe reinsurer with a handful of employees to a broadly based, diversified global reinsurer, with 630 employees in 12 locations worldwide.PartnerRe had been very successful in its niche strategy as a specialist catastrophe reinsurer, so it may have come as something of a surprise when, in early 1997, the company acquired the 115 year old French reinsurer. Société Anonoyme Française de Réassurance (SAFR). However, during 1996, the global reinsurance capacity available to support property catastrophe exposures had grown. Competitive forces were, thus, increased to levels not seen since the mid-1980s, as the industry witnessed a second consecutive year of substantial rate reductions at the 1996/7 renewals.
The options in an over-heated catastrophe reinsurance climate were limited: to grow premiums, which would result in greatly increased aggregate exposures - not a valid option - or to return capital to shareholders to avoid a dilution of return on equity.
A third alternative was to diversify into other lines, which required established expertise, tested infrastructure and profitability. These principal thresholds were regarded as indispensable if PartnerRe was to measure up successfully against the high standards set by the world's largest reinsurers. PartnerRe believed that to diversify piecemeal in this environment would create peril rather than add value for clients and shareholders.
At the same time, AGF in France decided it would sell SAFR, despite the company's consistent profitability, and concentrate on its core business - insurance. Overnight, the fate of the most consistent of the French reinsurers became uncertain, and the fact that some competitors tried to take advantage of SAFR's situation showed how competitive the reinsurance market had become. SAFR presented a unique opportunity for PartnerRe to develop its business in a new direction, broadening the scale and scope of the company's operations and beginning its transformation into a multi-line reinsurer.
The new choice
The significant consolidation the world reinsurance market has undergone in recent years has limited the number of participants. Acceptability of the excessive market share held by the largest reinsurers (the share of the top four reinsurers after recent acquisitions has expanded to 34%), is reaching its natural threshold.As competitive markets force weaker participants to depart, further concentration among the remaining participants will result. Therefore, the industry is likely to see fewer reinsurers than ever competing in the global race. This sets the stage for the next tier of reinsurers and PartnerRe plans to lead this tier, firmly establishing itself as: “The New Choice in Global Reinsurance”.
Three key components provide the platform for PartnerRe's success as “the new choice”:
• Fulfilling its clients' needs through a broad range of technical expertise (not only in catastrophe business).
• Providing responsive and flexible client service.
• Ensuring the highest level of financial security.
A broad range
The acquisition at the end of 1998 of Winterthur Re, with its specialty orientation in non-life and life business, and network of operations in key markets for the group, provided an opportunity for PartnerRe to further enhance its technical capabilities beyond catastrophe business. The transaction, completed in December, included Winterthur Reinsurance Corporation of America in New York, Winterthur Life Re Insurance Company in Dallas, Texas and reinsurance operations in Switzerland. The combined group has emerged with substantially strengthened resources and market presence, solidifying its position as a truly diversified, global multi-line reinsurer.
Following completion of the Winterthur Re acquisition, the company worked quickly and smoothly to integrate the group's reinsurance operations in France, Switzerland and the United States. The 180 employees of Winterthur Re's Swiss operations were transferred to the newly formed branch in Winterthur, Switzerland on 1 January 1999, and a new organisational structure, based on the framework established in 1998 after the SAFR acquisition, was announced on 1 April. In addition, Bruno Meyenhofer has been appointed chief operating officer of global reinsurance operations. Formerly the head of Winterthur Re, and a member of the executive committee since joining PartnerRe, he will oversee all reinsurance departments.
The acquisitions of SAFR and Winterthur Re also gave PartnerRe an ideal platform from which to develop its presence in the United States. In July 1998, the company had announced a number of initiatives to enhance its position in the US, signifying the importance of the US reinsurance market - the largest in the world - to its long-term strategic goals. Since that time the group has fortified its US operations by increasing its capital allocation to $328 million, appointing the group's former cfo, Scott Moore, as the new ceo of that operation, and by integrating its resources there.
While the breakthrough of capital market-oriented products is not yet assured, PartnerRe intends to be fully prepared to provide all the capabilities needed to transfer risks in any form desired by clients. It may be that traditional reinsurance forms, supplemented by some financial elements, will finally prove to be the most effective and efficient risk transfer mechanism of all. Therefore, PartnerRe's new choice strategy also focuses on expanding capabilities in the area of alternative risk transfer, to enable the company to maintain its position as one of the most sought-after discussion partners for all reinsurance needs.
The integration of the group's resources has created an enhanced “partnership network”, designed to offer clients access to both technical and geographic expertise, while maintaining the maximum amount of continuity between existing clients and group contacts. One team has been created for each geographic market, called client partners, and one team, called technical partners, has been developed for each business line as centres of competence. Each team consists of specialists located in the various PartnerRe Group offices who have been identified to manage the group's client and underwriting relationships.
The client partners are split into eight geographical groups: France, Belgium and Luxembourg; Northern Countries and Japan; Central Europe; Southern Europe; Asia excluding Japan; Latin America; USA; and Overseas, which includes Canada, Australia/New Zealand, Turkey, Middle East, India and Africa.In August 1998, the group opened a representative office in Tokyo, demonstrating its commitment to that market. This office will provide more effective service to clients, and meet the increasingly diverse needs of the Japanese market as it continues to undergo significant deregulation.
The technical partners are grouped under property and engineering, catastrophe, agriculture, aviation and space, marine, casualty, credit and surety, global risks, life and new solutions.
The scare the industry faced during last year's financial turbulence left behind the realisation that lower interest rates and increased financial volatility are likely to reduce the flexibility of the reinsurance industry decisively in the future. For reinsurers to survive in the long term, the focus needs to shift with urgency back to underwriting discipline.
Nevertheless, the glut of reinsurance capacity being provided both by the traditional and new markets is currently chasing a stagnant demand for risk transfer. If capital funds are destroyed, and reinsurers are weakened as a consequence of today's insufficient pricing, the industry will almost certainly see significant structural change, both in insurance and reinsurance.
As the market continues to refuse to address the rapid deterioration of results becoming evident in most lines of business, PartnerRe remains committed, now more than ever, to maintaining underwriting discipline, even at the expense of growth if necessary. Fortunately, the combined reinsurance portfolio of PartnerRe Group and Winterthur Re has enabled the company to renew its business selectively and deliver growth to shareholders without compromising underwriting standards and profitability.
PartnerRe is well positioned to meet the challenges of the future. The group's written premium in 1999 will be in the region of $1.5 billion and the substantial asset base of $7.8 billion will generate income growth which will dampen the negative effects of the current soft market conditions. Furthermore, with a greatly enhanced platform, technical expertise in speciality products and financial security, the group is well equipped to provide enduring solutions to its clients, and to be the New Choice in Global Reinsurance.
Herbert Haag is president and ceo of PartnerRe Ltd.