Valerie Denney examines recent developments at Stockton Re and finds a company that is going places.

While many Bermuda based companies are busy acquiring other insurance companies, one reinsurer is steadily strengthening its position as a specialist. Stockton Reinsurance Limited (Stockton Re) has undergone significant changes in the last eight months: It has hired a new ceo and president, Daniel V. Malloy; completed a successful private placement of shares in its parent, Stockton Holdings; hired new senior underwriting staff and most recently received an A. M. Best rating of A- (Excellent).

A wholly owned subsidiary of Stockton Holdings Limited, Stockton Re has engaged in global reinsurance since 1994. When initially capitalized, with shareholders' equity in excess of $217 million, Stockton Re immediately became the second biggest player in the Bermuda finite risk market after Centre Re. Since then Stockton Re's business and reputation has grown due to its successful completion of a number of reinsurance contracts and facilities. At its fiscal year end, 31 March 1998, Stockton Re reported shareholders' equity of $504.8 million, $1.6 billion in assets, and gross premiums of $205.6 million. For the same period, net income was $75.4 million and total return on equity was 17.73%. As of 31 August 1998, shareholders' equity had grown to $633.4 million.

The company provides a wide variety of risk transfer coverages to corporations, insurers, and reinsurers on a traditional and finite basis. In today's market, its principal underwriting focus and major line of business is that form of (re)insurance referred to broadly as "finite risk". Finite risk contracts are typically written over a multi-year period for several lines of business and feature an aggregate limit of liability with profit sharing to reward favorable results.

The appointment of Mr Malloy as its new president and ceo was announced in April 1998. Mr Malloy brings to Stockton Re seventeen years of industry experience. Prior to joining Stockton Re, he was the chief underwriting officer and senior vice president of Zurich Reinsurance (North America) Centre Re division. He is also a former president of Centre Reinsurance Company (Bermuda) Limited. Mr Malloy replaces Thomas F. Dailey who returns to his former position as executive vice president of Stockton Holdings.

Mr Malloy has been charged with increasing Stockton Re's presence in the international insurance and reinsurance markets. He is tackling his mandate using a multi-fold approach of heightening Stockton Re's profile through renewed marketing efforts, hiring senior underwriting professionals and partnering with significant industry players.

Mr Malloy told Global Re: "Stockton Re's status as an independent reinsurer is a strong selling point in a changing market. Our location in Bermuda ensures that we will not compete on an admitted retail basis with our insurance customers. Moreover, our private ownership enables us to focus on long term results and manage our clients' volatility. As a result, we are able to assist our publicly traded clients who monitor their results on a quarterly basis."

Another important recent development was the highly successful completion of a private placement of shares in the company's parent, Stockton Holdings. The private placement was completed in June 1998, shortly after the company's fiscal 1998 year end, raising $173.5 million for Stockton Holdings. Roughly two thirds represented new primary capital and one third represented the secondary sale of shares to founding members. As a result of the placement, Stockton Re was able to increase its shareholders' equity by $113 million from $504.8 million at its 1998 fiscal year in March to over $600 million two and a half months later.

The placement attracted serious investors from the insurance industry along with other notable private and publicly traded institutional investors. As a result, sophisticated investors such as Conning Insurance Capital Limited Partnership V, L.P. and Risk Capital Reinsurance Company, joined an existing group of distinguished shareholders which include ORIX Corporation, Prudential Corporation plc, and The Goldman Sachs Group L.P. Subsequently, Conning and Risk Capital Re were elected to seats on the Stockton Holdings board.

With a large balance sheet and a strong investment pedigree Stockton Re is poised to compete head to head with any reinsurer. Mr Malloy remarks: "Stockton Re has distinguished itself as a company which is creative and efficient at solving reinsurance problems and highly focused on advancing its clients' goals. We employ exceptionally talented, focused and applied thinkers and provide them with a creative environment and the tools to use in real-world applications".

Mr Malloy has recently recruited several senior underwriters and actuaries with significant industry experience to round out its existing team of professionals. New senior executives who have come aboard as principals include: Michael Cash, formerly of Centre Re, who contributed significantly to the first cat bond issued in 1998; Paul Livingstone, a former vice president of Zurich Re (North America) Centre Re division; Allen Binder, the former head of TIG Re's finite division; and Arlene Brock to head up strategic initiatives including the development of client relationships and inter-company alliances. Jed Rhoads, formerly of Sedgwick Re Philadelphia and New York, represents the company's latest hire as principal, having arrived this October. He will be focusing on cultivating business relationships with brokers and US clients as well as underwriting. In addition, the company hired Dane Commissiong, who brings 15 years of banking and investment experience in the new role of treasurer. In London, Stockton Re's rep office welcomed Carl Draper, previously with the Cox group in Lloyd's, to their staff as an analyst.

Mr Malloy has also created new positions internally including an underwriting services department managed by Laurie Orchard, to ensure excellent client service, and a marketing and corporate communications department headed by Andrea Dismont, to tackle the company's previously understated stance. Mr Malloy has expressed that over time the team may grow to 25 underwriting professionals, a level of resources needed to adequately entertain presented opportunities. He envisions that the professional staff may be eventually spread over several offices around the world in addition to its representative office in London opened two years ago.

Filling out the corporate war chest, Stockton Re has recently been assigned an initial rating of A- (Excellent) from A. M. Best. Rating agencies usually wait four or five years before assigning a rating to companies. Stockton Re was able to receive a rating prior to starting its fourth year of business. This rating will enable the company to market itself to new clients who may have previously overlooked it, despite its financial size and solidity, in favor of other rated companies. In assigning the "A-" rating, A.M. Best noted Stockton Re's excellent capitalization, consistently strong operating earnings and returns on equity, management and underwriting talent, and continuing commitment to sound underwriting practices and rigorous actuarial analysis.

The A.M. Best rating is significant according to Mr Malloy: "This is an important milestone for us. We are very pleased to receive a strong initial rating at this stage of the company's development. While Bests could have waited to give us a rating, the fact that we have received an 'A-' (Excellent) after less than four years in the business acts as a positive signal of Stockton's strength to existing and potential customers."

Setting itself apart from other reinsurers, Stockton Re supports its underwriting activity with a diversified global investment strategy designed to generate attractive long-term rates of return while containing downside volatility within acceptable parameters. Stockton Re's surplus and reserves are allocated to its two wholly-owned subsidiaries, Stockton Reinsurance Investments Limited (SRIL) and Hamilton Partners Limited (Hamilton Partners). SRIL, which holds and invests a significant portion of Stockton Re's surplus and reserves, invests in a diversified portfolio of futures and commodities and to a lesser extent securities. In 1997, Stockton Re entered into an investment advisory relationship with Goldman Sachs Asset Management to manage SRIL's assets. Focusing on a different approach, Hamilton Partners directly manages the portion of Stockton Re's surplus and reserves that is allocated primarily to securities using a variety of fixed income and equity arbitrage strategies.

Stockton Re has written a diverse book of business from inception to date. Due to the customized nature of each contract it is difficult to group the company's business into traditional categories. The underlying business written to date includes whole account coverages and such classes as workers' compensation, automobile and general liability, professional liability, mortgage indemnity, crop hail and multi-peril, credit insurance, property catastrophe, structured settlement insurance and certificates of financial responsibility (COFRs). Stockton Re was instrumental in developing First Line, later replaced by SIGCo, one of the first facilities to issue COFRs in response to the US Oil Pollution Act of 1990 requiring vessels to prove they had financial backing to clean up oil spills. In another example of creative problem solving, Stockton Re reinsured farmers' hail and multi-perils crop damage insurance policies. The unique twist applied by Stockton Re was in its hedging of the reinsurance exposure in the futures and options markets, thus successfully applying a capital markets approach to a familiar insurance problem.

In a counter-play to the much heralded view that the insurance markets will unilaterally access the capital market, Stockton Re anticipates it will see more cases in which it will be using its investment expertise and capital markets experience to structure, design and hedge its reinsurance contracts. On the subject of future endeavours, Mr Malloy states: "We are now turning our attention to providing risk coverages with features that may provide enhanced investment returns typically not seen in a world in which reinsureds typically limit themselves to fixed-income securities. Our appeal in this approach is that we apply the same rigorous diversified investment strategy to our own capital and surplus. We are not selling an approach that we do not trust in ourselves in the hopes of only generating additional fee income. In terms of expanding, we intend to diversify geographically through the brokered market as our London representative office sources business through Europe, and as opportunities develop in the Asian market, facilitated by existing shareholders such as ORIX."

Valerie Denney is editor of this publication.