Fast-moving business.

Expect more takeovers of life reinsurers says David Atkinson, who views the US market from his positi...

Expect more takeovers of life reinsurers says David Atkinson, who views the US market from his position within one of the sector's leading companies, Reinsurance Group of America.

Let me take you back to a time when the US life reinsurance industry was quite different from what we see today. Long, long ago - in 1995 - there were 18 reinsurers with market shares of 2% or more (see Table 1).

Over the last six-and-a-half years, over half of those 18 have been taken over; eight were merged into other reinsurers while three - Transamerica Re, Reinsurance Group of America (RGA) and Cologne Re - were left intact by their new parents.

Life reinsurance has been and will continue to be a high-growth business.

While the US market has slowed from a remarkable and unsustainable 25% compound annual growth rate (CAGR) in reinsurance in force, it will continue to grow at a CAGR of about 15% for years to come. Why? Because, while approximately 60% of new business is being reinsured, only about 25% of all business in force has been reinsured; and companies continue to reinsure an ever greater percentage of their business.

In fact, this trend has spread to the UK, which is now experiencing amazing growth in life reinsurance. Other markets will follow suit, as reinsurance pricing becomes more attractive in those markets. The US life insurance industry has proven that it makes economic sense to outsource the lion's share of mortality risk to a competitive market of mortality risk experts - the life reinsurers.

You would expect such phenomenal growth to have spawned many new entrants to the life reinsurance business. In fact, successful new entrants to the US mortality risk business have been surprisingly few.

Since 1995, the two significant new entrants have managed to capture a combined market share of only 4%. Instead of new entrants prospering, the largest reinsurers have become much larger. In 1995, the top six reinsurers accounted for 61% of the US market for recurring business.

Today, the top six account for 81% of the market. This is because size brings the ability to accumulate greater expertise and deliver services cost-effectively. Smaller reinsurers that compete largely on price will have a difficult time surviving. Larger reinsurers that bring valued capabilities to the market will command higher prices and do well.

Cut by consolidation

As a result of consolidation, today there are only 12 reinsurers with market shares of 2% or more (see Table 2). On average, the industry has lost one reinsurer per year over the last six years.

Swiss Re, Munich Re, and Employers Re Corp. (ERC) have vastly increased their combined market share - from 11% in 1995 to 46% in 2001. Six years ago, the top four US reinsurers were US-owned. Today, only one of the top five reinsurers is US-owned.

Since 1995, Swiss Re and Munich Re have quadrupled their market shares, while ERC stands to do the same with its acquisition of American United Life's life reinsurance. Taking into account the more than threefold increase in the size of the market, ERC is now 10 times larger than it was in 1995. Swiss Re and Munich Re are 15 times larger.

Over the last six years, three of the now top six US life reinsurers - Swiss Re, Munich Re and ERC - have significantly increased their market shares through acquisition. The acquisitions were driven by some disappointing earnings on core property and casualty (P&C) reinsurance businesses, coupled with the fast growth of US life reinsurance business and attractive earnings by public companies that include RGA and Life Re.

The acquirers have done a good job of eliminating expenses through consolidation.

They have also done a good job of holding on to and even increasing their market shares, largely through aggressive pricing well in excess of the minor gain you would expect from improved economies of scale.

So what does the future hold for these companies? Swiss Re has attained an impressively large market share of 28%, but one that could be difficult to hold as US insurers routinely split their reinsurance between four or more reinsurers. Once Swiss Re digests the Lincoln Re acquisition it may be satisfied with its market share.

Munich Re, at 9%, has less than a third of Swiss Re's share of the US life market. With no shortage of capital, it is likely that Munich Re will acquire one or more competitors and close the gap with Swiss Re.

Investment bankers have suggested that General Electric will spin-off ERC, following in the footsteps of Citigroup's successful spin-off of the Traveler's property and casualty business. Whether or not GE spins it off, ERC is more likely to acquire than be acquired, due to its size.

This is shown by its pending acquisition of American United Life's life, long-term care and international reinsurance businesses.

Organic growth

Three of the top six US reinsurers - RGA, Transamerica Re and ING Re - have grown their life reinsurance businesses organically, rather than through acquisitions. While large in the US life market, each of these reinsurers is a small part of a much larger parent. Transamerica Re is wholly owned by Aegon, MetLife owns 59% of RGA, and ING Re is part of ING of the Netherlands.

Everything has its price and these reinsurers could be purchased, just as Lincoln Re was purchased by Swiss Re. However, the companies produce good financial results and generally keep their owners happy, so the right price may be too high for a prospective buyer. That said, it is possible that at least one of them will be acquired over the next few years, with Munich Re the most likely buyer.

Generali Re (formerly Business Men's Assurance) and Allianz are mid-sized life reinsurers with very large parents. They are likely to benefit from further consolidation as ceding companies continue to spread their reinsurance among multiple reinsurers.

Since disclosing workers' compensation losses in 1999, GeneralCologne Re's US life reinsurance unit has been quite conservative and its growth has lagged. The operation will probably continue on its conservative course.

If confidence in its life reinsurance business is rebuilt, GeneralCologne Re could find itself a small US player with a very large parent willing to bankroll a tremendous amount of growth.

Mid-life changes

Gerling Global Re (GGRe), Hannover Re and Scor Re are mid-sized, European-based companies specialising in P&C reinsurance, with life operations in a number of countries around the world. (Gerling Group, the parent of GGRe, was recently put up for sale.)

In the US and some other life reinsurance markets, these companies may be faced with a choice: either grow the local operation to capture a significant market share - or exit the market. As such, it is likely that one or two of GGRe, Hannover Re, and Scor Re will expand their US life reinsurance businesses through acquisition and the remainder will sell their operations.

In fact, Scor Re recently announced its interest in buying a mid-size US life reinsurer.

There are two significant new entrants to the US mortality risk market, both Bermuda-based public companies: Annuity & Life Re, and Scottish Annuity & Life (also known as Scottish Re).

Their initial share offerings in 1998 raised almost $600m, along with considerable pressure from Wall Street to quickly deploy that capital.

The share offerings were successful because of the rapid growth in the US life reinsurance market, the companies' low overheads typically associated with start-up operations and the competitive advantages that P&C reinsurers have already demonstrated by being based in Bermuda, namely the use of more favorable Gaap accounting and the absence of corporate tax.

As with all new entrants, Annuity & Life Re and Scottish Re have found the US life reinsurance market a hard nut to crack. In any industry and any market, it takes years to build the relationships and reputation needed to compete on an equal footing with more established players. Both reinsurers have successfully compensated by using a low-price strategy to penetrate the market.

Their sales results to date have been amazing. After four years of serving the US market, they have combined Gaap assets of $4bn and Gaap revenue of $500m.

Annuity profits have been disappointing, mainly due to losses from one large annuity block. Life profits have been more encouraging, but could be distorted by lags in reporting - time will tell. If one of the Bermuda-based companies performs much better than the other, look for the better performer to acquire the other.

Facts of global life

It would be interesting to rank the world's leading life reinsurers by pure life premiums, but statistics for life premiums (ie, excluding health premiums) are not available for some companies. Table 3 shows the top 10 reinsurers ranked by life and health insurance premiums. While life-only premium rankings would be different, the top 10 would probably be the same.

If reinsurers were ranked by life premium, Swiss Re, with the largest share of the US, UK, Canadian and many other life markets, would clearly be the world's largest life reinsurer. Munich Re, with strong positions in just about every major market, would seem the obvious choice for second largest.

When it completes its acquisition of American United Life's life reinsurance business, ERC will probably be the third largest, since GeneralCologne Re has significant health premiums.

It is not clear which of GeneralCologne Re and RGA would be the fourth largest in terms of life reinsurance premiums. GeneralCologne Re is much larger in Europe, while RGA is larger in North America.

Depending on the size of Hannover Re's health reinsurance premiums, which are quite significant, Transamerica Re could be the sixth largest life reinsurer, ING Re the seventh largest and GGRe the eighth largest.

Over the next four years, there will be some additional consolidation among the top 10 life reinsurers and considerable consolidation among the rest. By 2006, it is likely that all but a few markets will be served by five or fewer major life reinsurers, with the US market down to eight major reinsurers (a major reinsurer being one with a market share of 3% or more.)

With the global life reinsurance industry poised to grow at a rate of 20% or so for many years to come, the larger reinsurers that survive the continuing wave of consolidation will have very bright futures, due to much larger businesses and fewer competitors. Four years from now, though, the market may marvel at how incredibly naive these predictions were.

David Atkinson is executive vice-president and chief operating officer of RGA.

Table 1: US life reinsurers in 1995*

Rank Company Market share (%) Since acqured by
1 Transamerica Re 16 Aegon
2 Lincoln Re 13 Swiss Re
3 Reinsurance Group of America 12 MetLife
4

Life Re

8 Swiss Re
5 ING Re 6
6 Swiss Re 6
7 Mercantile & General Re 4 Swiss Re
8 American United Life 4 ERC
9 Cologne Re 4 General Re
10 CNA Re 4 Munich Re
11 BMA/Generali Re 3
12 ERC 3
13 Phoenix Home 3 ERC
14 Allianz Re 3
15 Hartford International Life Re 2 ING Re
16 Gerling Global Re 2
17 Cigna Re 2 Swiss Re
18 Munich Re 2

* With a 2% or greater market share
Source: Based on 1995 Society of Actuaries survey of US ordinary life reinsurance in force, excluding portfolio reinsurance and retrocessions

Table 2: US life reinsurers in 2001*

Rank Company Market share (%) Ownership
1 Swiss Re (incl. Lincoln Re) 28 Swiss
2 Reinsurance Group of America 11 US
3 Transamerica Re 10 Dutch
4 Munich Re 9 German
5 ING Re 9 Dutch
6 ERC** 9 US
7 Allianz Re 5 German
8 American United Life** 4 US
9 BMA/Generali Re 4 Italian
10 Annuity & Life Re 3 Bermudian
11 General Cologne Re 3 US
12 Gerling Global Re 3 German

* With a 2% or greater market share
** ERC stands to gain an additional 4% market share with its acquisition of American United Life's life reinsurance in 2002
Source: Based on 2001 Society of Actuaries survey of US ordinary life reinsurance in force, excluding portfolio reinsurance and retrocessions, with adjustments to Swiss Re to include Lincoln Re recurring business

Table 3: Global life & health reinsurers in 2000

Rank Company Global market share* (%) Life & health premiums** ($m)
1 Swiss Re (incl. Lincoln Re) 20 5909
2 Munich Re 13 4011
3 General Cologne Re 8 2263
4 ERC 5 1637
5 Hannover Re 5 1499
6 Reinsurance Group of America 5 1404
7 Transamerica Re 4 1178
8 ING Re 3 966
9 Gerling Global Re 3 890***
10 Scor Re 2 492

* Based on estimate of $30bn of total life and health net premiums
** Based on Standard & Poor's survey of life and health premiums written in 2000, net of retrocessions and excluding financial reinsurance premiums
*** Estimate based on life/non-life split for written premiums
Source: Standard & Poor's

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