Going it alone: in an age when most life reinsurance is sold by multiline companies, and the number of pure life reinsurers serving the U.S. market has shrunk, the few remaining players are going strong and a new player has joined them.Pure life reinsurers are a rare breed. RGA RGA Reinsurance Group of America RGA Return Goods Authorization RGA Republican Governors Association RGA Residual Gas Analyzer RGA Royal Garrison Artillery RGA Restricted Growth Association (UK) RGA Rate Gyro Assembly Reinsurance The contract made between an insurance company and a third party to protect the insurance company from losses. The contract provides for the third party to pay for the loss sustained by the insurance company when the company makes a payment on the original contract. Co. and Scottish Re (U.S.) Inc. were joined in September 2004 by Wilton Reassurance REASSURANCE. When an insurer is desirous of lessening his liability, he may procure some other insurer to insure him from loss, for the insurance he has made this is called reassurance. Co. as the only companies to sell the product line exclusively. Most life reinsurance in the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. is sold by large, multiline companies, with Swiss Re Swiss Re is the world’s largest reinsurer, now that it has acquired GE Insurance Solutions (Ligi 2006). Founded in 1863, Swiss Re now operates in more than 30 countries. General Electric owns 8.9% of the firm. holding the largest market share by far, but RGA Re and Scottish Re rank second and third, according to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. the Munich Re/Society of Actuaries Life Reinsurance Rankings. The pure life reinsurers like their positions today despite significant change the past few years in the life reinsurance market and a difficult year for many in 2005. Several life reinsurers have sold their businesses, concentrating 75% of market share among the top five reinsurers, according to an A.M. Best Co. report in November 2005. The consolidation has made it harder for direct writers to diversify diversify To acquire a variety of assets that do not tend to change in value at the same time. To diversify a securities portfolio is to purchase different types of securities in different companies in unrelated industries. their reinsurance risks. And while A.M. Best has reported that it expects more new life reinsurers this year and next, competition for capital has risen as property/casualty reinsurers recapitalize re·cap·i·tal·ize tr.v. re·cap·i·tal·ized, re·cap·i·tal·iz·ing, re·cap·i·tal·iz·es To change the capital structure of (a corporation). re·cap following last year's devastating dev·as·tate tr.v. dev·as·tat·ed, dev·as·tat·ing, dev·as·tates 1. To lay waste; destroy. 2. To overwhelm; confound; stun: was devastated by the rude remark. hurricanes. Adding to industry change was the fact cession The act of relinquishing one's right. A surrender, relinquishment, or assignment of territory by one state or government to another. The territory of a foreign government gained by the transfer of sovereignty. CESSION, contracts. rates fell last year as reinsurers tried to raise prices. Finally, life reinsurers and direct writers are trying to rebuild relationships that deteriorated in recent years. Wilton Re, formed in 2004 and named after the Connecticut town in which its U.S. operations are headquartered, is taking advantage of the industry trends, said Don Araldi, chief sales and marketing officer. Many direct writers had agreements in past years with seven or eight reinsurers, "which gave them good comfort and a nice risk profile for the pool," he said. For some direct writers, that number has dropped to three or four, and when Scottish Re bought ING Re's individual business, direct writers began to think their risk profiles were unacceptable, Araldi said. "That's when it seemed like an ideal time for an experienced management team to raise an appropriate amount of capital and offer to solve that problem," he said. Scottish Re (U.S.) Inc., headquartered in Charlotte, N.C., is part of a group with operating companies operating company A business that engages in transactions with outsiders. in the United Kingdom, Ireland, Cayman Islands Cayman Islands (kā`mən), British dependency (2005 est. pop. 44,300), 100 sq mi (259 sq km), comprising three islands in the West Indies. and Bermuda. Its primary business is to underwrite To insure; to sell an issue of stocks and bonds or to guarantee the purchase of unsold stocks and bonds after a public issue. The word underwrite has two meanings. life and annuity annuity: see insurance. annuity Payment made at a fixed interval. A common example is the payment received by retirees from their pension plan. There are two main classes of annuities: annuities certain and contingent annuities. risks. Formed in 1998, it currently reinsures about 14 million lives and $1 trillion of face amount in North America North America, third largest continent (1990 est. pop. 365,000,000), c.9,400,000 sq mi (24,346,000 sq km), the northern of the two continents of the Western Hemisphere. and is one of the three largest life reinsurers in the U.S. market with 15% of market share. RGA Reinsurance Co., Chesterfield Chesterfield, city (1991 pop. 73,352) and district, Derbyshire, central England. An important industrial center, Chesterfield produces mining equipment, railroad cars, metal products, glass, and pottery. , Mo., ranked second as of June among North American North American named after North America. North American blastomycosis see North American blastomycosis. North American cattle tick see boophilusannulatus. life reinsurers, according to an A.M. Best report on the company. At year end 2005, RGA insured $1.2 trillion in face amount, which equates to about a 15% share of the U.S. market. Wilton Re: Starting from Scratch As a newcomer to the marketplace, Wilton Re has adopted some unusual strategies. One is that Chris Stroup, president and chief executive officer, hired Araldi to head up sales and marketing rather than someone with a traditional actuarial ac·tu·ar·y n. pl. ac·tu·ar·ies A statistician who computes insurance risks and premiums. [Latin or accounting background. Araldi brought 24 years of sales and marketing experience with some of the larger software companies in the world. The strategies also include a capitalization capitalization n. 1) the act of counting anticipated earnings and expenses as capital assets (property, equipment, fixtures) for accounting purposes. 2) the amount of anticipated net earnings which hypothetically can be used for conversion into capital assets. structure that Araldi said is unique to the insurance world. The company acquired $628 million in three-year irrevocable Unable to cancel or recall; that which is unalterable or irreversible. IRREVOCABLE. That which cannot be revoked. 2. A will may at all times be revoked by the same person who made it, he having a disposing mind; but the moment the testator is calls from the private equity investors that make up its investment group. As it writes business, incurs expenses and forecasts opportunities, it draws down capital against that fund-raising effort Noun 1. fund-raising effort - a campaign to raise money for some cause fund-raising campaign, fund-raising drive crusade, campaign, cause, drive, effort, movement - a series of actions advancing a principle or tending toward a particular end; "he supported . "So we don't have $628 million invested somewhere at 3% burning a hole in our pockets," Araldi said. "Investors aren't standing over our shoulders wondering why we're not closing more business faster. The money is still in their hands. That has been a great thing for our investors and our board. It takes pressure off the organization and allows us to maintain our pricing discipline." Wilton Re also benefits from a clean balance sheet Clean Balance Sheet Refers to a company whose balance sheet has very little or no debt. Notes: A company is told to "clean up" its balance sheet if they are exposed to large amounts of debt. . "We don't have legacy issues that have an effect on how we evaluate risk and price business today," Araldi said. "It is a common belief ... that a number of reinsurers who have priced too aggressively have been attempting to raise rates over the last year or two in an effort to raise their returns to offset losses from poorly priced business. Of course, that doesn't make direct writers very happy. We don't suffer from any of that. We have the opportunity to either execute well or create our own legacy issues." Every new piece of business, in fact, grows the company's portfolio. Araldi said many competitors struggled last year to keep recurring re·cur intr.v. re·curred, re·cur·ring, re·curs 1. To happen, come up, or show up again or repeatedly. 2. To return to one's attention or memory. 3. To return in thought or discourse. business as cession rates industrywide in·dus·try·wide adv. & adj. Throughout an entire industry: sales that have decreased industrywide; industrywide cooperation. plunged to 48% in April 2005 from 59% in 2004. "Most large players in the reinsurance industry took a beating last year," said Araldi. He predicted the cession rate would drop again in 2006, probably to 40%. "So while they are struggling to keep their boat afloat, we're still building our boat," he said. A variety of issues is causing cession rates to drop. Many direct writers changed from a coinsurance A provision of an insurance policy that provides that the insurance company and the insured will apportion between them any loss covered by the policy according to a fixed percentage of the value for which the property, or the person, is insured. basis to a yearly renewal-term basis, which Araldi estimated cuts premiums to the reinsurer re·in·sure tr.v. re·in·sured, re·in·sur·ing, re·in·sures To insure again, especially by transferring all or part of the risk in a contract to a new contract with another insurance company. by about half. Some moved from quota share For This article is about quota shares (shares of the quota). For other usages of quota, see, see . A quota share is a specified number or percentage of the allotment as a whole (quota), that is prescribed to each individual entity (see Non-tariff barriers to trade). to reinsurance in excess of $1 million per policy. For example, Wilton had priced a particular block of term-life business for which it estimated its share to be worth about $1.5 million as a coinsurance product, Araldi said. But the direct writer switched to YRT YRT York Region Transit (Ontario) YRT Yearly Renewable Term (insurance) YRT Yale Repertory Theatre YRT Year Round Training (military) , dropping premiums to $750,000. Finally, the direct writer added a change in its retention so as to cede amounts only over $1 million per policy. In the end, the business was worth only $35,000 to $40,000 in premiums to Wilton Re. Finally, Wilton Re employs a very unusual strategy in which it offers full transparency to clients on how it has priced a book of business or a pool and what assumptions have been used to model the business. Even expected internal rates of return are disclosed so that the customer has comfort with the Wilton Re pricing process. While ratings organizations will not give their highest ratings to start-up companies start-up company A new business. , Araldi said this practice has not hurt Wilton Re. "We have been able to overcome hesitation by some direct writers who otherwise would require a higher rating, by explaining our capitalization, offering a competitive price and demonstrating our transparency process." Under this disclosure process, Wilton shares all data with the client as long as the client provides all information that Wilton requests. Araldi also said that Wilton may benefit from relations that soured last year, when some of the large reinsurers were raising rates, rewriting re·write v. re·wrote , re·writ·ten , re·writ·ing, re·writes v.tr. 1. To write again, especially in a different or improved form; revise. 2. treaties and structuring much more strict language into their treaties. "A lot of direct writers were displeased dis·please v. dis·pleased, dis·pleas·ing, dis·pleas·es v.tr. To cause annoyance or vexation to. v.intr. To cause annoyance or displeasure. with the way In which it was done," he said. "That actually drove a number of people to call us before we called on them, so it was a great opportunity for us." To diversify its business, Wilton has developed Runoff Runoff The procedure of printing the end-of-day prices for every stock on an exchange onto ticker tape. Notes: If the "tape is late" then it can take a long time to print off all the closing prices. Solutions as its other major business. In effect, the company buys closed blocks of business and administers them until they no longer exist. "Many direct writers have old closed blocks that are currently being administered on old legacy technology," said Araldi. "These blocks can represent a substantial amount of trapped capital for the direct writers, and continuing to maintain the legacy platforms can be very costly. We can take the burden of those closed blocks off their hands and deliver the value of that trapped capital today." Wilton has partnered with a number of tech companies to migrate runoff business off of old legacy systems and onto a new system that can manage the business at a much lower cost per policy, Araldi said. The company intends to maintain a balance between the growing balance sheet that comes from a portfolio of traditional treaties and the declining balance sheet that comes from the Runoff business. RGA Re: Fully Focused In 2005, a year in which many life reinsurers struggled to keep up premiums from business written, RGA Re actually more than doubled its U.S. market share to 21%, the highest in the industry, and slightly increased its in-force business. Greig Woodring, president and chief executive officer, said 65% of RGA business is out of the United States, 8% out of Canada, and the rest outside of North America. The company opened an office in China, and it raised $400 million in capital in the form of junior subordinated debentures subordinated debenture An unsecured bond with a claim to assets that is subordinate to all existing and future debt. Thus, in the event that the issuer encounters financial difficulties and must be liquidated, all other claims must be satisfied before to support continued growth. Woodring said that if there is an advantage to being a pure life reinsurer, it is that management is able to focus on the business. RGA is a subsidiary of MetLife Inc., which has helped in its ratings, but Woodring said they remain separate companies with no sharing of resources or "any real" information. Reinsurers and direct writers have had many intense discussions to work out problems, but when they can't, they go to arbitration. There have been more arbitrations recently than ever before, Woodring said. Typically, disputes revolve around Verb 1. revolve around - center upon; "Her entire attention centered on her children"; "Our day revolved around our work" center, center on, concentrate on, focus on, revolve about systemic breakdowns of the underwriting Underwriting 1. The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt). 2. The process of issuing insurance policies. process. While reinsurers have much at stake, direct writers also want to know in the future that reinsurers will stand behind their business, said Woodring. Some direct writers are actually pleased that reinsurers had "cracked down" on their competitors because those companies had hurt their businesses, too, he said. "So it's just getting back to what makes the whole business work well, and that's understanding on both sides and integrity on both sides," said Woodring. He said new contracts are becoming more specific and detailed. RGA Re specializes in a number of services, but Woodring said the most important is facultative facultative /fac·ul·ta·tive/ (fak´ul-ta?tiv) not obligatory; pertaining to the ability to adjust to particular circumstances or to assume a particular role. fac·ul·ta·tive adj. 1. reinsurance. He believes the company is the largest facultative writer in the United States, with about 100,000 cases a year averaging more than $1 million each. On a worldwide basis, it currently writes about 250,000 cases a year. An A.M. Best Co. report on the company states, however, that despite strong operating fundamentals and profitable operations, A.M. Best's outlook is negative due primarily to concerns about weakened weak·en tr. & intr.v. weak·ened, weak·en·ing, weak·ens To make or become weak or weaker. weak  en·er n. operating performance. "In recent reporting periods, the company
experienced increases in death claims in both the U.S. and the U.K.,
pressuring overall results in 2005," the report said.Scottish Re: Acquisitions Key Two recent acquisitions have propelled Scottish Re into the third-largest U.S. life reinsurer. In December 2003, the company bought 95% of the capital stock of ERC (database) ERC - An extended entity-relationship model. Life, then a subsidiary of General Electric's Employers Reinsurance Corp., for $151 million. In late 2004, it acquired the individual life reinsurance business of ING Re, which more than doubled its reinsurance portfolio. Scott E. Willkomm, president and chief executive officer, agreed that a pure life reinsurer is a rare breed and noted there were many more in the past. "The scale of your balance sheet that drives ratings and Financial flexibility is probably more efficiently achieved being part of a much larger ... financial-services enterprise," he said. "That's one of the reasons there are so few of us." But specializing in life reinsurance is an advantage because life liabilities are much longer in duration than those of nonlife reinsurers, and the focus and discipline about capital allocation is a lot more precise than one might find in composite companies that move capital back and forth between the life and nonlife sides of the house, he said. A disadvantage to being a pure life reinsurer is the "profit signature" is a lot more predictable. "In nonlife, you could have today a 35% return on equity, but it could all be wiped away in the next quarter or next year," he said. "If you get it wrong in the life reinsurance business, it's the difference between say 13% to 14% ROE A fictitious surname used for an unknown or anonymous person or for a hypothetical person in an illustration. A lawsuit is generally named for the persons who are parties to it. and 10%. It's not lights out." That may sound like an advantage, but Willkomm said shareholders and investors like the chance of achieving "robust ROEs," even though the stocks of life reinsurance companies have outperformed nonlife companies over the past 15 years by two to one. The two recent major acquisitions were of great benefit to Scottish Re because in life reinsurance, the profitability of a firm is dependent on the efficiencies provided by a large scale of operations, Willkomm said. That scale has allowed the company to develop capabilities it probably couldn't have afforded as a smaller company. One such capability, he said, is its mortality and morbidity morbidity /mor·bid·i·ty/ (mor-bid´it-e) 1. a diseased condition or state. 2. the incidence or prevalence of a disease or of all diseases in a population. mor·bid·i·ty n. research center, manned by about a dozen professionals who constantly analyze experience. ING Re actually paid Scottish Re about $600 million to take its business, which reinsured wealth-accumulation products. (Wilton Re also bid on that block.) The payment was necessary because "of our view of their reserves and our view of the profitability of the book of business," said Willkomm. But Willkomm would not say ING Re made mistakes. "Our view of the profitability was that we didn't have some of the internal financial efficiencies that ING may have been able to achieve throughout their enterprise," he said. Scottish Re's mortality business is primarily term life and is called Traditional Solutions. Its other main business segment, Financial Solutions, is principally for the reinsurance of fixed annuities Fixed annuities Contracts in which an insurance company or issuing financial institution pays a fixed dollar amount of money per period. and similar types of products, which carry risks that tend to be shorter in duration. "It allows us to diversify our risks," said Willkomm of the Financial Solutions segment. "These risks are somewhat inversely in·verse adj. 1. Reversed in order, nature, or effect. 2. Mathematics Of or relating to an inverse or an inverse function. 3. Archaic Turned upside down; inverted. n. 1. correlated cor·re·late v. cor·re·lat·ed, cor·re·lat·ing, cor·re·lates v.tr. 1. To put or bring into causal, complementary, parallel, or reciprocal relation. 2. , and the business creates some incremental Additional or increased growth, bulk, quantity, number, or value; enlarged. Incremental cost is additional or increased cost of an item or service apart from its actual cost. capital efficiency on a [regulatory] basis, and they have different profit signatures." The National Association of Insurance Commissioners' Risk-Based Capital model gives a reinsurer credit for diversification Diversification A risk management technique that mixes a wide variety of investments within a portfolio. It is designed to minimize the impact of any one security on overall portfolio performance. Notes: Diversification is possibly the greatest way to reduce the risk. of risk, he added. Scottish Re is also the leading securitizer of life insurance risks through its Capital Markets team, Willkomm said. Securitizations help optimize the balance sheets of both Scottish Re and its customers, he said. "Securitization Securitization The process of creating a financial instrument by combining other financial assets and then marketing them to investors. Notes: Mortgage backed securities are a perfect example of securitization. May also be spelled as "securitisation. is clearly an emerging area of technology for financing the life reinsurance business," said Willkomm. "That will significantly change how the whole life industry finances itself. We've tried to be on the leading edge of that trend, and we're only at the tip of the iceberg tip of the iceberg n. pl. tips of the iceberg A small evident part or aspect of something largely hidden: afraid that these few reported cases of the disease might only be the tip of the iceberg. ." Key Points * Wilton Re, a pure life reinsurers start-up in 2004, is using unusual strategies to build its book of business. * Cession rates are dropping from the highs of 2004 and earlier. * Life reinsures and direct writers are struggling to re-establish strained relationships. Learn More RGA Reinsurance Co. A.M. Best Company # 09080 Distribution: Direct negotiation Scottish Re (U.S.) Inc. A.M. Best Company # 08785 Distribution: Direct negotiation Wilton Reassurance Co. A.M. Best Company # 60560 Distribution: Direct negotiation For ratings and other financial strength information about these companies, visit www.ambest.com.
Life Reinsurance Assumed
(for United States in $ millions)
The year 2005 was turbulent for life reinsurers and direct writers,
with the amounts of reinsurance assumed falling by half industrywide
for a variety of reasons.
Company Ordinary Reinsurance Assumed
2004 2005 Percentage
Total Total Change
Ace Tempest 0 $4,200 0.00%
Annuity and Life Re 0 0 0.00
Axa Equitable $6,009 4,180 -30.44
Canada Life 38,223 61,324 60.44
GE Ins. Solutions (ERC-US) 36,019 1,276 -96.46
General Re Life 15,675 21,559 37.54
Generali USA Life Re 48,483 61,584 27.02
Guardian 36 142 294.44
Hannover Re 8,442 7,842 -7.11
Manufacturers Life 13,481 19,569 45.16
Munich American Re 131,537 105,615 -19.71
Optimum Re (Canada) 0 0 0.00
Optimum Re (US) 2,202 8,681 294.23
Pacific Life 861 601 -30.20
Revios Re 19,772 17,247 -12.77
RGA Re 173,914 194,308 11.73
Scor Life Re 32,275 27,796 -13.88
Scottish Re (US) 711,488 130,974 -81.59
Sun Life 10,351 17,858 72.52
Swiss Re 521,727 97,392 -81.33
Transamerica Re 130,000 132,700 2.08
Wilton Re 0 10,192 0.00
TOTALS $1,900,495 $925,040 -51.33%
Company Market Share Percentages
2004 2005
Total Total
Ace Tempest 0.00% 0.45%
Annuity and Life Re 0.00 0.00
Axa Equitable 0.32 0.45
Canada Life 2.01 6.63
GE Ins. Solutions (ERC-US) 1.90 0.14
General Re Life 0.82 2.33
Generali USA Life Re 2.55 6.66
Guardian 0.00 0.02
Hannover Re 0.44 0.85
Manufacturers Life 0.71 2.12
Munich American Re 6.92 11.42
Optimum Re (Canada) 0.00 0.00
Optimum Re (US) 0.12 0.94
Pacific Life 0.05 0.06
Revios Re 1.04 1.86
RGA Re 9.15 21.01
Scor Life Re 1.70 3.00
Scottish Re (US) 37.44 14.16
Sun Life 0.54 1.93
Swiss Re 27.45 10.53
Transamerica Re 6.84 14.35
Wilton Re 0.00 1.10
TOTALS 100.00% 100.00%
Source: Munich Re/Society of Actuaries Life Reinsurance Rankings
Life Reinsurance in Force
(for United States in $ millions)
The year 2005, while difficult for life reinsurers and direct writers,
had only minimal effects on life reinsurance in force.
Ordinary Reinsurance in Force
Company 2004 2005 Percentage
Total Total Change
Ace Tempest 0 $3,700 0.00%
Annuity and Life Re $2,256 0 -100.00
Axa Equitable 42,267 40,598 -3.95
Canada Life 129,469 183,307 41.58
GE Ins. Solutions (ERC-US) 418,312 384,417 -8.10
General Re Life 128,442 136,341 6.15
Generali USA Life Re 229,837 269,715 17.35
Guardian 4,186 3,557 -15.03
Hannover Re 61,515 63,375 3.02
Manufacturers Life 94,905 101,918 7.39
Munich American Re 603,297 660,379 9.46
Optimum Re (Canada) 7 7 0.00
Optimum Re (US) 9,424 16,771 77.96
Pacific Life 1,612 2,127 31.95
Revios Re 139,403 143,295 2.79
RGA Re 992,446 1,098,869 10.72
Scor Life Re 94,523 110,338 16.73
Scottish Re (US) 995,139 1,025,660 3.07
Sun Life 67,378 75,638 12.26
Swiss Re 1,887,966 1,809,981 -4.13
Transamerica Re 600,832 691,401 15.07
Wilton Re 0 10,192 0.00
TOTALS $6,503,216 $6,831,586 5.05%
Market Share Percentages
Company 2004 2005
Total Total
Ace Tempest 0.00% 0.05%
Annuity and Life Re 0.03 0.00
Axa Equitable 0.65 0.59
Canada Life 1.99 2.68
GE Ins. Solutions (ERC-US) 6.43 5.63
General Re Life 1.98 2.00
Generali USA Life Re 3.53 3.95
Guardian 0.06 0.05
Hannover Re 0.95 0.93
Manufacturers Life 1.46 1.49
Munich American Re 9.28 9.67
Optimum Re (Canada) 0.00 0.00
Optimum Re (US) 0.14 0.25
Pacific Life 0.02 0.03
Revios Re 2.14 2.10
RGA Re 15.26 16.09
Scor Life Re 1.45 1.62
Scottish Re (US) 15.30 15.01
Sun Life 1.04 1.11
Swiss Re 29.03 26.49
Transamerica Re 9.24 10.12
Wilton Re 0.00 0.15
TOTALS 100.00% 100.00%
Source: Munich Re/Society of Actuaries Life Reinsurance Rankings
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