ERC'S Calhoun: From the Outside In.

Amid the challenge and change of today's reinsurance industry, new CEO David L. Calhoun of GE subsidiary Employer's Reinsurance Corp. brings to bear his financial expertise--and his outside-the-box experience at GE.

From the outside looking in, reinsurance may appear to be a maze of ancient and arcane business practices and traditions that fit no ordinary corporate mold. But as a new industry insider, David L. Calhoun sees the field as a powerful engine of financial service innovation--subject to all the rules of corporate management and discipline.

"Reinsurance can seem arcane at times and overly complicated at times," says Calhoun, the new president and chief executive officer of Employer's Reinsurance Corp. (ERC). "But despite its sophistication and complexity it is also a business that has a lot of room for creativity. That's what I look forward to the most."

Tighter financial discipline in traditional reinsurance lines, more creative financial reinsurance products and a broader array of risk management services for corporate risk managers are all on the agenda of this industry executive.

And as he directs his company through the first year of the new millennium, Calhoun hopes to explore new worlds of risk, including the burgeoning field of electronic commerce, which he believes may be the biggest new business issue of 2000.

"We're going to go where premium is. And even though I'm coming from outside the insurance industry, I've got the advantage of working with people that have a long-term perspective on the industry and know it a little better than anyone else," he says. "By combining this experience with good research and development, I know there is a lot of growth potential in this company."

One of the largest reinsurance organizations in the world, ERC is a General Electric Co. subsidiary and division of GE Global Insurance Holdings Corp., which is part of GE Capital Services. It is based in Overland Park, Kan.

Employer's Reinsurance, which was acquired by GE in 1984, previously underwrote property/casualty and life reinsurance directly with commercial insurers. But in the past several years, the company has expanded its business to include health insurance services, brokerage reinsurance sales, and commercial property insurance for industrial companies.

Calhoun, 43, joined ERC last July as a rising star in the GE corporate world, often cited as a potential heir to GE chairman Jack Welch. He is also a senior vice president of the parent corporation and is a member of the GE corporate executive council.

A 1979 graduate of Virginia Polytechnic Institute, Calhoun has virtually no formal training in commercial insurance or reinsurance, but has a strong financial background. He completed the GE internal financial management program in 1979 and joined the corporation's corporate audit staff in 1981.

Announcing his appointment, GE's Welch cited Calhoun's financial expertise and his "enormous leadership talents" as qualifications for his new position. Most recently, Calhoun was president and chief executive officer of GE Lighting, the corporation's light bulb manufacture and distribution division. He succeeded Kaj Ahlman at ERC.

Calhoun takes over leadership at ERC at a time of turmoil in the commercial insurance and reinsurance business. After years of intense price and market share competition combined with free-flowing capacity for large and complex risks, industry analysts are predicting higher rates and more cautious underwriting.

A reinsurance industry report issued late last year by Standard & Poor's in New York identified market conditions that are working against premium growth and profitability--even without the catastrophic events such as hurricanes or earthquakes that usually trigger reinsurance losses.

"Soft pricing driven by excess capacity within the global reinsurance industry will cause U.S. reinsurers to post the worst underwriting results of the 1990s," the report noted. "Although no single event wreaked the devastation of Hurricane Andrew in 1992 or the Northridge Earthquake in 1994, myriad events will cause insured property losses to aggregate in excess of $15 billion in 1999."

Reinsurers have probably under-reserved for this level of losses, the report says, as reinsurers have attempted to prop up financial results and continue to compete for new business. "Despite the level of property losses, competitive market conditions are a large factor pushing the U.S. nonlife reinsurance sector to post underwriting losses with a combined ratio of 110 percent," the report says.

The S&P report also said that the reinsurance price increases that are likely to result from the losses will be a silver lining for reinsurers. But the analysts expect that the increases will be too little to late to improve the overall financial condition of reinsurers this year.

"Standard & Poor's retains its negative outlook on the reinsurance industry, with the expectation that the cumulative stress of price reductions, contract extensions, and under-reserving will keep earnings at depressed levels for at least the next two years."

S&P analyst Grace Osborn would not return calls to comment on ERC's financial condition in the context of the reinsurance industry. The company, however, continues to earn the highest ratings from S&P and two other rating services, Moody's and Duff & Phelps. The company also has a history of conservative pricing and disciplined underwriting.

ERC's annual 10-K filing with the Securities and Exchange Commission reported nearly $6 billion in net written premiums for domestic and international operations, up from about $4.5 billion in 1997. Statutory net premium written including volume from acquisitions as reporting in the 1998 corporate report totaled $8.2 billion. Net earnings for this period increased 20.2 percent to $779 million from $648 million in 1997 and shareholder equity rose 11.1 percent to $6 billion.

In November, Duff & Phelps Credit Rating Service (DCR) cited ERC's "large market share and excellent competitive position, strong capital position and ability to access external capital through its parent company," when it renewed a "AAA" credit rating.

The service also noted good underwriting results characterized by better than industry average combined ratios of 104.5 percent compared with an industry average of 105.9 percent. "DCR believes that underwriting discipline and market presence are critical in this type of environment and thus we feel ERC is well-positioned," the service reported.

Calhoun agrees that the reinsurance industry has been undisciplined for a long time--too long for its own good. "Industry executives should have been pressing for pricing changes, but instead they have been competing on price to acquire market share. As a result, we are probably about a year behind where a price upturn should have been," he says.

The race for market share has been a mistake, he adds. "Market share should not be an issue in reinsurance and financial services and ERC can't be caught up in any market share game. If you can't make a buck underwriting a risk, it probably shouldn't have been written at all. What counts is the fundamental understanding of risk. That's where our profitability lies."

ERC took a first step in reining in competition in October when the company announced an exit from the property facultative reinsurance business in North America and Latin America. Property faculty coverage usually involves single risks requiring large amounts of reinsurance that are particularly vulnerable to catastrophic losses.

The first reinsurer to announce withdrawal from a highly competitive line of business, the company cited continuing low prices in the property reinsurance market, the abundance of property facultative competition and market capital and loss volatility from catastrophic events as factors in the decision.

"We had limited success in the segment, so we are going to focus resources on segments where we see more appropriate returns," explained Bill O'Donnell, North American property and casualty segment leader. "We will concentrate on our treaty customers and our casualty facultative customers."

Calhoun says the announcement was not intended to send a broad signal to the reinsurance industry that the era of wild competition was over--even if it may have been interpreted that way by other companies. He believes, however, that rates may be going up this year as costs mount up for the competition.

Calhoun says ERG can continue to grow within traditional reinsurance lines with tighter underwriting and broader marketing. In 1998, ERG acquired Kemper Reinsurance Co., a large U.S. broker-oriented reinsurer, and Eagle Star Reinsurance Co. Ltd., a London market reinsurer.

The acquisitions expand ERG's reach in the traditional reinsurance business and make the company's expertise available to a broader range of industry buyer, Calhoun says. He anticipates more acquisitions as the company pursues growth in new domestic and international markets.

Calhoun also predicts more growth in risk management services, working directly with corporations and their risk managers in risk retention and alternative risk transfer.

In 1998, ERG began to penetrate the corporate marketplace when it acquired Industrial Risk Insurers in Hartford, Conn., a large insurer of highly protected property risks. ERG now operates the company in association with Hartford Steam Boiler as HSB Industrial Risk Insurers. The property insurer serves as a platform for the delivery of a wide spectrum of commercial property risk management services, according to the ERG 1998 annual report.

Calhoun says research and development will be a priority. He plans to take the company deeper into financial insurance and reinsurance and explore opportunities in managing business enterprise risk, strategic and operations risks and various financial risks, including balance sheet guaranties. He says his experience within other divisions of GE will play a positive role in providing expertise in managing these new risks.

"Not only do we have the expertise of one of the oldest and largest reinsurance companies in the United States, but we also have the capital and experience of one of the largest corporations in the world at our disposal. By combining our resources, I expect we can open up many significant opportunities."

One new area ripe for development is the rapidly expanding world of e-commerce, he says. "E-commerce is the single most exciting development in business today and it remains virtually unexplored in the insurance and reinsurance industry.

"E-commerce technology may open up for us the most efficient method of transfer of risk and create new opportunities to structure programs in totally new ways that bring together finance, capital and reinsurance," he says.