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From US Insurer, October/November, 2005
A Two-pronged Attack
Life reinsurance start-up Wilton Re is looking to win new business and buy runoff business. Michael Loney talks to Chris Stroup, its chief executive officer, about how the company plans to make a name for itself.
On January 1 this year, the first new life reinsurer to be formed in more than five years opened for business. Life reinsurance buyers were pleasantly surprised by this – they have been more accustomed to companies departing from the market. For the first time in years they have a new company to use when buying coverage.
While Wilton Re will be a new name to most life insurers, that of its leader will not. Chris Stroup, the chairman and chief executive officer of Wilton Re, is a life reinsurance veteran. He was chief financial officer of Life Re before Swiss Re bought it in 1998 and he worked for, and subsequently led, Swiss Re’s North American life reinsurance business until 2003.
Stroup initially tried to find a life reinsurer to buy. When that failed, he was forced to set up from scratch. Wilton Re was launched with $628 million of capital last winter after getting licenses through the purchase of Prudential Select Life Insurance Company.
This newcomer is mounting a two-pronged attack on the life reinsurance business. It is targeting both new and old business. It aims to steal new life mortality business from the few remaining life reinsurers left in the market. But it also wants to build a presence in the life run-off market by buying blocks of run-off life business or entire companies.
Making progress
Wilton Re, now nearing the end of its first year of operations, has already achieved much. It now boasts 25 staff, many with considerable experience. It secured an A-financial strength rating from AM Best in February. And Stroup says the company has made good progress in attracting life reinsur ance business, although he declines to say how much premium the company has written.
“We started on January 1, and since then we have accomplished a lot,” says Stroup. “There is a terrific senior management team now on staff, we have put in place the basic operational and technology infrastructures, and we have begun aggressively marketing business. We are seeing a lot of opportunities and we are winning a large proportion of them.”
Wilton Re has also had some success with the second part of its plan. In August, it reached an agreement to assume all of run-off Bermudian reinsurer Annuity & Life Re’s life and annuity treaties through novation or 100% coinsurance agreements.
As well as marking Wilton Re’s entry into the runoff market, Stroup says the deal may help forge relationships with potential cedants for new business.
“The transaction is attractive to both Annuity & Life Re and Wilton Re,” says Stroup. “It gave us the opportunity to invest our capital and gives us reinsurance contracts with a number of companies we were planning on seeing anyway. In many situations we already had relationships, in some we didn’t. So we view it as a favorable opportunity.”
Annuity & Life Re was placed into run-off after making big losses on guaranteed minimum death benefits business and the termination of a contract with Transamerica Re that the company took a $61 million charge for. Stroup is quick to point out that Wilton Re is not taking any of these contracts on. The company will also rewrite the policies it is inheriting.
“Some people were confused and thought we were taking on troubled contracts,” says Stroup. “We will also re-underwrite and renegotiate terms so we end up with attractively priced business for Wilton Re.”
Bucking the trend
Wilton Re is well placed to do plenty more deals in its two markets. Stroup is confident the company can carve out a niche for itself in both areas.
In the traditional reinsurance market, it is hoping to fill the gap left by the departure of others. Consolidation has left the market dominated by few big companies.
According to Society of Actuaries data, the top five US life reinsurers had a 77% market share by 2003 in-force business, up from 57.8% in 1998. In the past three years alone the North American life reinsurance operations of Allianz, Employers Re and ING Re have been sold and Annuity & Life Re has been put into run-off.
ING Re was the last to pull out of the market. It was also, arguably, the biggest loss from cedants’ point of view. Its sale to Scottish Re last October not only took a big player out of the market but also the most competitive, according to Standard & Poor’s (S&P).
Because of this reduction in capacity, observers are tipping Wilton Re to be a success. “Although the company has yet to make a significant impact on the market, it is well positioned with more than $600 million of committed capital and a strong executive pool, with many former Swiss Re senior executives,” said S&P in a report in September. “Wilton Re is likely to fill a portion of the void left by ING Re’s market exit.”
Stroup says cedants have been pleased that a new player has entered the market. Conflict between life insurers and their reinsurers has increased recently. Insurers are unhappy that their choice of reinsurers has decreased, while reinsurers are clamping down on what they feel is lax underwriting by cedants. Stroup believes a new reinsurer may ease tensions in the market.
“Most ceding companies had adjusted to having a smaller number of choices,” says Stroup. “Having said that, another choice is quite welcome and it is clear the market is happy there is another professional reinsurer with strong capital. It may also help mitigate the obvious tension in the marketplace.”
Part of the conflict has stemmed from ambiguities in contracts about what cedants’ and reinsurers’ commitments are. Wilton Re aims to avoid this problem. Stroup says it being very direct with its clients about the price at which it is willing to reinsure business and the terms and conditions under which it is willing to operate.
“The best way to serve clients is to be perfectly clear about our expectations,” says Stroup. “What is maybe different about Wilton Re is we are very clear about what our obligations are and what cedants’ obligations are, and this is clear in the contract. We are finding most companies are willing to engage in that.”
Dwindling demand
Wilton Re’s competitors may be worried that the newcomer will try to undercut them on price to gain business. But if Wilton Re’s actions match its words, then it will remain disciplined. Consolidation has pushed up reinsurance rates. But, far from looking to offer cheaper rates, Stroup does not believe prices are high enough for some business.“
“Reinsurance has become a bit more expensive and terms have tightened a bit,” he says. “But I would not view it as significant hardening. Insurers are still buying at reasonable rates and I don’t see significant tightening in terms and conditions. In some situations, frankly, reinsurance pricing is not sufficient. There still have to be further increases in pricing.”
Prices may be rising in the life reinsurance market but demand is falling. In the past decade, the amount of business ceded by life insurers has shot up. They have looked to reduce their exposure to volatile mortality business to focus more on asset management lines of business. In 1992, cession rates were about 15%. By 2003, this had increased to about 60%.
That trend is now reversing. Demand is slowly starting to fall for two reasons. Firstly, companies are buying less reinsurance because of higher prices. Secondly, some primary companies are finding ways of hedging their risks in the capital markets instead. A number of insurers have used securitization to take XXX reserves off their balance sheets, for example.
But Stroup is not concerned about this. He says Wilton Re has taken falling cession rates into account in its business model. “When we wrote our business plan we predicted cession rates would fall in 2004 and 2005. But I don’t believe the fall in cession rates will be overly big. They will maybe drop below 50% but not much below that. In the near term, I can’t see more than a 5% to 10% fall,” he says.
Run-off rewards
In contrast to this fall in demand for traditional life reinsurance, Stroup is confident that the desire for companies to buy and manage books of life run-off business will increase. And Wilton Re will have even fewer competitors to worry about in this market.
Stroup says only two companies are committed to buying blocks of run-off life business. Protective Life was the first company to pursue this strategy. But the market leader is undoubtedly Stroup’s former employer Swiss Re. Through its Admin Re program, it has done more than 40 run-off deals in the past decade.
Stroup says there is plenty of room for another firm to move into this market. “There are other companies that participate in this market but Swiss Re and Protective are the main two. When I was at Swiss Re, I always thought that someone else would come in but I didn’t realize it would be me with Wilton Re.”
Selling run-off business enables life insurers to free up capital to concentrate on core lines of business, move unwanted risks off their balance sheets and reduce administration costs. Run-off buyers are able to make money by buying the blocks of business at a discount to their embedded value. Also, they can achieve economies of scale from lumping business together.
Stroup says life insurers are slowly realizing the benefits of selling run-off business. Recent million-dollar deals by Swiss Re – such as the purchase of CNA’s life insurance business and Royal & Sun Alliance’s US life book of business – have drawn attention to the market.
“The biggest challenge is to illustrate to insurers that a run-off solution is a good risk and capital management tool, and that they should consider it along with tools such as excess of loss reinsurance or accessing the capital markets,” says Stroup. “In the past several years, Swiss Re has completed some very sizeable transactions and that helps the overall popularity of the market. It is gaining in popularity because it works.”
Staying focused
Sticking to what you know is the key to building a successful life reinsurer, says Chris Stroup, chief executive of Wilton Re. Very few companies have entered the market in the past eight years. Even fewer have successfully built market share.
“There has only been a handful of new life reinsurers in the past few years,” says Stroup. “Scottish Re has been very successful, Annuity & Life Re not so, and Max Re has been mixed.”
All three were formed in the late 1990s. Scottish Re has established itself as a big player. In recent years it has bought the life reinsurance businesses of Employers Re and ING, and is now ranked the second biggest US life reinsurer by in-force business. Max Re has branched out into other areas of property/casualty reinsurance to build its business. And Annuity & Life Re was placed into run-off in 2003 after suffering big losses. Stroup says much can be learnt from Scottish Re’s and Annuity & Life Re’s contrasting fortunes. “Scottish Re and Annuity & Life Re are interesting case studies,” he says. “Annuity & Life Re wrote contracts outside of traditional mortality business. Scottish Re, on the other hand, didn’t assume those kinds of contracts – it stayed focused on traditional mortality. Secondly, Scottish Re’s management team had great depth, whereas Annuity & Life Re was run by someone with property/casualty experience. What I learn from this is: stay focused on areas where you have expertise.
”Wilton Re is maintaining a narrow focus. It will only write US mortality business. Stroup, the former chief executive of Swiss Re’s North American life and health operations, certainly has plenty of experience in this area. He also has expertise in the second of Wilton Re’s markets – buying life run-off business – having overseen Swiss Re’s Admin Re program.
The company will not consider writing variable life and annuity, accident and health, or international business. It has also outsourced its asset management to Black Rock.
Some observers believe more players, enticed by rising prices, will follow Wilton Re into the life run-off market. Property/casualty insurers suffering price decreases in some of their lines of business may be tempted to setup life reinsurance operations. But Stroup does not expect many new entrants.
“I would be surprised if there is an influx of new players, ”he says.“ The life reinsurance market is reasonably small – it is about 10% the size of the property/casualty market. It is a long duration business that requires capital. It is my understanding that capital is available but how much has been given? AM Best has said it has seen about 12 business plans for new life reinsurers but only WiltonRe has been funded.”
Stroup also says it would be hard to form a management team with the necessary experience of the market. “It is a challenge finding management teams that are available and willing to take on the risk of a start-up. Somebody from Swiss Re or Reinsurance Group of America, for example, would take a lot of convincing,” he says.
Wilton Re is eager to find more run-off deals. Stroup says the company has plenty of capital to use. “We raised more than $600 million. The Annuity & Life Re transaction was less than $25 million. It has no impact on our ability to do more transactions. We are able to consummate a transaction of that price or a transaction of hundreds of millions of dollars,” he says.
Stroup believes there is large untapped potential in the life run-off market. He says less than $5 billion has been invested in run-off deals. This is tiny compared with the amount of life insurance in run-off. And Stroup believes Wilton Re can help enable small life insurers with small run-off portfolios to use this tech nique. Up to now, it has mainly been bigger firms that have used this approach.
“What is important is there is a professional company such as Wilton Re that is able to serve companies with a smaller amount of reserves," he says. "Swiss Re and Protective target larger transactions, whereas we can do deals where there is $200 million, $300 million and $400 million of reserves. The Annuity & Life deal wouldn't have made much sense for those two because it is too small to warrant the time and effort."
Stroup believes this focus on smaller deals sets Wilton Re apart in the run-off market. He is also confident that it can carve out as niche for itself in the traditional life reinsurance market. The company's success, he says, will depend on it making good progress in both of these areas.
One part of our plan is that we want a meaningful share of the US life reinsurance market. For the next couple of years we want to add a couple of percentage points to our market share each year. The other part of the plan is to consummate run-off solutions transactions. If we do both these things we would consider our first three years successful," he says.
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