Where have all the US independent P&C reinsurers gone? Many have been sold, merged, run-off, or liquidated, Ronald Gift Mullins discovers.
The number of reinsurers in the US has been declining since the early 1980s. From a high of 130 in 1983, the number had shrunk to just 20 at the end of 2007, according to the Reinsurance Association of America (RAA). Of the top ten reinsurers in the US in 2007, half were US-controlled and half owned by parent companies in Germany, Switzerland, Bermuda and Canada.
Starting in the 1960s and into the 1980s, primary insurance companies began setting up reinsurance departments within their own companies or capitalised separate reinsurers hoping to reap additional income off their own reinsurance transactions. Alien reinsurers also landed in America eager to take advantage of the exploding reinsurance premiums.
“When the primary companies realised they may have doubled up on exposures coming and going on the insurance and reinsurance sides,” said Frank Nutter, president, RAA, “they pulled out of the market.” Later, there was the dramatic soft market with huge, bottomless asbestos and environmental claims which compelled more reinsurers in the US to flee the market or seek consolidation and mergers. Even a partial list of those reinsurers that either merged, discontinued business or sold out during the past two decades runs into the hundreds (for a sample of that list, see the box below).
The US reinsurance industry is largely dependent on parental capital, much of it from outside the US. “In fact,” Laline Carvalho, Director, Financial Services Ratings Group, Standard & Poor’s, said, “without the support of their stronger parents, a much larger number of US reinsurers would have gone into run-off or insolvency.”
The underwriting of reinsurance in the US has only shown a net profit in the last two years. Before 2006 and 2007, each year since 1981 the industry had an underwriting loss. Even in the net profit years of 2006 and 2007, eight reinsurers in each of those two years had an underwriting loss. In 2001, of the 31 companies reporting to the RAA, only one (Enhance Financial Group) had an underwriting profit. This bleak financial picture persuaded a number of reinsurers to exit the US reinsurance market.
In addition, US reinsurers’ writings have continued to contract as other markets such as Bermuda and London continue to write increasing amounts of US risk on a direct basis. Historically, Carvalho notes, it has been the US risks that have been less profitable most often, “representing some of the worst performances.” In the late 1990s, significant cash flow underwriting of business and high casualty losses, a negative legal environment, all of these factors hampered profits. “I think we have found that reinsurance companies want to write US business because it is so big,” she said, “but investors before committing capital want to have enough confidence that they will make an acceptable profit.”
NEED FOR SPEED
Carvalho noted one of the reasons reinsurers are being formed outside the US is that companies “tend to be formed post-large cat event. There is a need for speed. After the catastrophes of 2001 and 2005, there was a severe contraction of capacity. A number of investors, many outside the insurance and reinsurance fields, wanted to come in to the market, anticipating that pricing will go up, especially in property.”
To take advantage of the improved pricing, investors had to move fast. Getting approval for a new reinsurer by going through US regulations takes a substantial portion of time and can be costly. “In Bermuda, a new reinsurer can be set up in less than a month,” Carvalho said. “Speed offers a great, competitive advantage.”
The reason no stand-alone reinsurers are being formed in the US now, and haven’t been for a long while, Andy Barile of Andrew Barile Consulting observed, is that reinsurance business is global in nature. “So why struggle through the thicket of US requirements to get a reinsurer licensed in all states.
This is very expensive and time consuming. Rather, form a Bermuda company, raise capital, then write risks directly from the US or form a US affiliate. The gigantic hedge funds are providing billions but aren’t saying they want to invest in a new US reinsurance company.”
Rating organisations have provided new off-shore reinsurers with an ‘A’ rating, which demonstrates that “even the rating people are giving a positive nod to non-US reinsurers,” Barile said.
“Why struggle through all the thicket of US requirements to get a reinsurer licensed? Rather, form a Bermuda company, raise capital, then write risks from the US.
There is also value in the “cluster effect,” Nutter said.
“In Bermuda, there is already an established group of underwriters, accountants, lawyers, and other disciplines that service the insurance and reinsurance industries. New companies can get into business very quickly.”
If speed in establishing a reinsurer is not so urgent, there is another powerful reason to set up off shore. “Taxation has to be considered. Bermuda has no income tax,” Carvalho said, “so you have an advantage right there. Ireland and the Caymans have good tax advantages for starts ups as well.”
Nutter, recognising the burdensome regulations in the US to establish a fresh reinsurer, said the RAA and other insurance organisations have been working with the National Association of Insurance Commissioners and Congress on ways to streamline the system. He mentioned that discussions are underway to establish a federal administrator of insurance and to create a single port of entry state that would issue a licence that would be recognised in all states.
Although the formation of new, independent US-based reinsurers is unlikely over the near term, according to Carvalho, the softening cycle is increasing interesting some competitors–particularly Bermuda companies–to set up new subsidiaries or enhance the role of existing subsidiaries in the US.
“This is because, as the market softens,” she said, “some of the business previously going directly to Bermuda is being placed more easily in the local US, UK, and European markets. To compete for this business, Bermuda companies are looking to expand their operations in the US. Part of the reason is that with pricing competition taking place, companies are finding that staying close to brokers is a smart idea, and regional markets, too. Reinsurance business that now goes to Bermuda usually is the larger contracts.
To capture more regional business, Bermuda companies need to get near the US local market.”
Additionally, cat bonds and side cars have relieved some of the pressure to develop additional reinsurers.
“It was exceptional that the side cars arrived just at the right time following the 2005 hurricane disasters,” Carvalho said. “Now that there is more than enough available capacity, side cars are not needed.
In the future, the alternative market will develop quickly following catastrophic events, further eliminating the creation of reinsurers in the US.”
Ronald Gift Mullins is an insurance journalist based in New York City.
US reinsurance - where they went
Abeille Reassurance U.S. 1996 merged with AXA Re, now in run-off
AGF Re Corp. of U.S. 1991 became SAFR Re Corp of the U.S., which became Partner Re U.S.
American Independent Re 1989 purchased by Great American Insurance and changed name to Seven Hills Insurance Co.; then purchased by Alea and renamed Alea North America in 2001; in 2006 the company was renamed Praetorian Specialty and is now part of the QBE group
American Mutual Re 1985 Company discontinued writing of all new and renewal business
Bellefonte (Excl. Armco. Re) 1983 merged into Universal Re, 1991 merged into Northwestern National â€“ no longer writes reinsurance
Belvedere America Re 1993 became Allstate National Ins Co.; no longer writes reinsurance
Capital Reins. Co. 1999 acquired by ACE
Capital Assurance Co. 1989 purchased by Skandia Intl Ins and reinsurance placed into run-off, later sold to Skadeforsakring Holdings
Capital Mortgage Reins. Co. 1999 acquired by ACE
Chartwell Reins. Co. 2002 merged into Trenwick, now in run-off
Chatham Reins. Corp. 2000 changed to Mapfre Re
Christiana General 1997 name changed to Commercial Compensation Insurance Co., no longer writes reinsurance
Commercial Union Re 1997 merged into Commercial Union
Insurance Co., no longer writes reinsurance
Constellation Re 1985 merged with Great American Insurance NY, the company later liquidated
Home Re 1987 changed name to U.S. International Re and went
insolvent in 2003
Houston General (Reins. Dept.) 1975 name changed to Equitable General Ins. Company, later became part of the GEICO Group, no longer writes reinsurance
INA Re 1983 Changed name to Cigna and ceased writing
reinsurance in 1987
Inner Harbor Re 2000 dissolved
Metropolitan Re 1992 changed name to Metropolitan Group P&C Ins Co., stopped writing reinsurance
Mony Re 1992 acquired by Folksamerica Re
Multiplus Ins. Co. 1989 changed to U.S. Capital Ins Co.,
liquidated in 1997
Philadelphia Re 1991 the company was placed into run-off
Rochdale 1999 placed into rehabilitation
U.S. Intâ€™l Re. 2003 declared insolvent
United Republic Re. 1997 placed into receivership