|Title:||United States top 11 life reinsurance companies ranked by in-force non-affiliated business in dollars for 2009|
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U.S. Life--Leading Reinsurers (2009)
($ thousands) Amt. of In-Force Non-Affiliated Company Business
RGA Reinsurance Co. $X,XXX,XXX,XXX Swiss Re Life & Health America Inc. X,XXX,XXX,XXX Canada Life Assurance Co. USB XXX,XXX,XXX Munich American Reassurance Co. XXX,XXX,XXX Hannover Life Reassurance Co. of America XXX,XXX,XXX Transamerica Life Insurance Co. XXX,XXX,XXX Security Life of Denver Insurance Co. XXX,XXX,XXX Generali USA Life Reassurance Co. XXX,XXX,XXX Lincoln National Life Insurance Co. XXX,XXX,XXX Berkshire Hathaway Life Ins Co. of Nebraska XXX,XXX,XXX Employers Reassurance Corp. XXX,XXX,XXX
Source: A.M. Best Co.
For reinsurers, today's economic environment is characterized by market-cycle pressure, low interest rates and tightening regulation, both in the United States and abroad. In this uncertain climate, reinsurance companies are doing all they can to sustain and grow their businesses.
According to an A.M. Best Global Reinsurance Special Report from September 2010, reinsurers have been looking at every aspect of their operations, from capital management to underwriting discipline to the size of their balance sheets.
Two experts--one a New York-based actuary and consultant, the other a Bermuda-based chief financial officer--provide an overview of how reinsurers are dealing with these challenges.
Ernst & Young: Life Reinsurers Cautious About Regulatory Changes
Life reinsurers are currently grappling with uncertainty about the changing regulatory environment, according to NewYork-based Richard de Haan, principal in Ernst & Young's Insurance and Actuarial Advisory Services practice.
"Reinsurers are cautiously viewing what their opportunities are," he said. "They're looking at where there is a market for their services against the different and varying regulatory frameworks that are changing our industry. Use of capital for growth will then be determined by how much is really available for them to use."
In the United States, the National Association of Insurance Commissioners is reviewing its Risk-Based Capital framework. And in Europe, Solvency II will be in place in 2013, but its exact rules are still being finalized. "There's a general sense of where it is going to go, which is to increase the required capital levels that insurers and reinsurers need to keep," said de Haan. "But exactly by how much is yet to be determined."
Adding to the uncertainty is that U.S. regulators will want their supervisory regime to become Solvency II-equivalent, de Haan added.
So what should life reinsurers be doing with their capital?
Certainly, they should continue to try to consolidate. "Their game is about aggregating risk, and scale is an advantage," said de Haan. One way to achieve that is acquisition of blocks of business, and he said a number of reinsurers are very active in that space, or are trying to be.
Reinsurers also are being cautious about taking on variable annuity risk. "The VA business has gone through its trials and tribulations and has caused a lot of direct writers to reevaluate their exposure and implement risk-mitigation strategies" said de Haan. "The reinsurers obviously would be very selective in how they approach that marketplace."
In particular, the industry is being very careful about variable-annuity living benefits, particularly the guaranteed lifetime withdrawals.
"These are much more difficult risks to off-lay, simply because the cost of capital that backs it and the economic cost of covering the risk is going to be a lot more expensive now for a direct writer," de Haan said. "Reinsurers have not entirely backed away from that segment, but in general, most of them are probably not in the VA reinsurance game anymore."
An area that continues to be a primary focus is mortality, which has been profitable for reinsurers. Direct writers, however, have taken note and have decided it's probably better to retain mortality risk than to reinsure it, de Haan said.
In fact, direct writers have become more selective around their use of reinsurance. For example, from 2001 to 2008, a large element of reinsurance by volume was associated with two new regulatory standards--Triple X, which upped required reserves for the level-premium term life business, and A-Triple X, which increased reserves for universal life insurance with secondary guarantees.
"As capital markets solutions evolved, direct writers ceded less of this business to reinsurers," he said. "The financial crisis in 2008 again changed the landscape, making the capital market solutions a lot more expensive. Recent innovations have involved reinsurers partnering with banks in providing capital market solutions. This has provided reinsurers an opportunity to play."
Reinsurers certainly have a significant amount of capital, but de Haan said that measuring excess capital depends on the lens one applies, whether it's a pure entity in the United States subject to RBC guidelines, or its global ultimate parent that would reside in another jurisdiction that might be subject to Solvency II or some other regime.
"Most reinsurers have a global footprint," he said. "The game of reinsurance is really to aggregate risk. What reinsurers like to do is diversify as much risk as they can, not only around lines of business, but geographically....
"Reinsurers are certainly more adept at moving capital and risk around the world than just a pure direct writer would be. And that is one of their competitive advantages."
But from an investment-strategy perspective, the liability profile of life reinsurers is similar to direct writers'. Among their current concerns are the low interest-rate environment and asset deterioration on a mark-to-market basis under international financial regulatory standards and asset impairment rules in U.S. Generally Accepted Accounting Principles.
"From a pure investment perspective, they have fairly similar asset investment strategies," de Haan said. "They wouldn't be as much in illiquid assets, such as real estate, as a long-term life insurer would be, but they would manage their assets to liabilities in a similar way."
Endurance Specialty Holdings: Exploiting its Advantages
A majority of property/casualty reinsurers are trading below book value, said Michael McGuire, chief financial officer with Bermuda-based Endurance Specialty Holdings Ltd.
"Those are things out of any company's control," he said. "Part of the reason is that institutional investors can easily overlook the P/C insurance and reinsurance sectors. If you add up the market cap of the P/C industry in the U.S. and Bermuda, other than Berkshire Hathaway, the total is approximately that of ExxonMobil by itself."
Among the challenges the industry faces is a soft market. "When you combine that with the fact that risk-free rates are at historically low levels, it's very tough for the industry to earn a solid return on equity," McGuire said.
But he also said that Endurance's valuation is above the average of companies against which it competes, due to its track record of excellent risk management and the franchise's ability to generate above-average returns on equity. Endurance's business is well-diversified, both by business line and geography, and the portfolio is skewed toward more specialty and shorter-tailed classes of business, which should perform better through a softening market.
The company uses both vendor and proprietary models as tools to assist underwriters to better understand the risks they accept and how each risk affects Endurance's overall portfolio.
Overall, about half of Endurance's business is insurance-based; the remaining half is reinsurance. On the insurance side, about XX% of total business is multiperil crop insurance underwritten as part of the federal crop insurance program. The crop business is not exposed to P/C market cycles, and underlying trends in the agriculture business are currently bullish because of increasing global demand for agricultural commodities, McGuire said. "It also does not consume a lot of capital," he added.
The company's other insurance lines include its Fortune XXXX insurance business, which is about XX% of total business; a middle-market excess and surplus operation, representing about X% of total business; and its program business, representing X%.
On the reinsurance side, some XX% of total business is written by Endurance's Bermuda-based operation. It covers severity risks, including property catastrophe, both in the United States and globally; aerospace and aviation; casualty clash, workers' compensation catastrophe and other specialty lines of business.
"It is a very technical, model-driven market with high margins," said McGuire. "You take a lot of risks, but if you properly assess them and carefully construct the portfolio in such a way that you balance the volatile risks you take, you can be quite successful."
In the U.S. reinsurance segment, which represents XX% of net 2010 premium, Endurance takes working-layer reinsurance risks in which specialty underwriting teams focus on various lines of business.
The lines include agriculture; personal accident; surety; casualty; professional liability; property per risk treaty; small business; and direct treaty.
The international reinsurance segment represents X% of total premiums written out of offices in London, Zurich and Singapore.
Lines of business include property; personal accident; motor; marine; casualty; surety; and a small amount of trade credit.
Endurance is only about a decade old and has grown its capital base from $X.X billion to more than $X billion, McGuire said.
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