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Reinsurers vie with insurers for business

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Reinsurers are pushing to create or expand their specialty and other insurance operations as ongoing competition dampens growth prospects in traditional reinsurance lines.

While many reinsurers have offered insurance for years, several — including Everest Re Group Ltd., Berkshire Hathaway Inc. and Munich Reinsurance America Inc. — are looking more to insurance to grow and diversify.

“Generally speaking, returns and growth prospects are better for insurance at the current time given the more challenging conditions in reinsurance,” said Tony Kuczinski, Munich Re America's president and CEO, who said he sees opportunity in both segments.

Some insurance units are new launches: Bermuda-based Watford Re Ltd. late last month received an A.M. Best Co. Inc. credit rating of A- for Watford Specialty Insurance Co., a new U.S. subsidiary focusing on small- to medium-size commercial casualty and noncatastrophe property programs written through managing general agents, Watford Re CEO John Rathgeber confirmed.

“We see this trend continuing in 2016,” said Brian C. Schneider, senior director at Fitch Ratings Inc. in Chicago. “Pricing in primary lines is better than it has been in reinsurance lines.”

“There is probably more opportunity in the near term to (expand insurance offerings) than to figure out ways to grow their reinsurance business,” said Steven Webersen, managing director and head of insurance research at Conning & Co. in Hartford, Connecticut.

In a February conference call with analysts, Everest Re Group President and CEO Dominic J. Addesso noted the value of diversifying from volatile lines such as catastrophe-exposed property reinsurance.

“The insurance sector is much more stable from that perspective,” Mr. Addesso said.

Bermuda-domiciled Everest Re is aggressively building its specialty property/casualty insurance operations following a major revamp. It has hired several new senior managers to run the business, including Jonathan M. Zaffino, a former Marsh & McLennan Cos. Inc. executive who's now president of Everest Re's North American insurance division.

Everest Re's insurance volume jumped 25.8% last year to $1.53 billion in gross written premiums, while its U.S. and international reinsurance premiums declined.

Its mix of insurance risks has shifted dramatically. Long-tail casualty risks, 63% of its insurance business in 2010, were down to 36% last year, while property and other short-tail lines were 42% of its business last year versus 10% in 2010, according to company filings.

Brokers generated a majority of Everest Re's insurance business last year versus 2010, when 77% was produced by managing general agents.

“We are primarily driving the underwriting as opposed to an MGA driving the underwriting,” Mr. Addesso told analysts.

He said Everest Re still has partnerships with MGAs, but expects future growth from surplus lines property, directors and officers liability, accident and health, inland marine, excess casualty and environmental risks, workers compensation, and sports and entertainment insurance. The company also launched a Lloyd's of London syndicate last year to write international insurance business.

Meanwhile, Berkshire Hathaway Inc., long a major reinsurer, is quickly becoming a major specialty insurer. Boston-based Berkshire Hathaway Specialty Insurance Co. has grown from 82 employees when it was formed in 2013 to 636 at the end of 2015, and already has hit $1 billion in annual premium volume, according to company reports.

Berkshire also has formed Berkshire Hathaway Direct Insurance Co., which is expected to write workers comp and small business owners policies through an online portal, according to Best..

Both are part of Berkshire's primary group, which includes several other workers comp and commercial property/casualty underwriting units. The primary group's revenue has jumped $1 billion a year for the past three years, rising to $5.39 billion last year. Like Everest Re, Berkshire's reinsurance premiums — written through General Re Corp. and Berkshire Hathaway Reinsurance Group — declined 19.5% last year to $13.2 billion.

On a smaller scale, Bermuda-based Hamilton Insurance Group Ltd., which began as a reinsurer in 2013, is building out a long-planned U.S. insurance operation. Based in Princeton, New Jersey, Hamilton USA will insure small commercial policyholders with revenue under $25 million, using U.S.-based surplus lines and admitted insurance subsidiaries acquired in 2014, said Bob Deutsch, the unit's acting CEO. Hamilton aims to use information technology resources, such as property loss databases, to drastically streamline underwriting, he said.

The story is similar for other companies.

Bermuda-based Endurance Specialty Holdings Ltd. has added 150 specialty underwriters and dramatically built its U.S. and London insurance operations over the past three years. Insurance premiums of $2.1 billion last year were 41.4% higher than 2013, while reinsurance premium volume has changed little, company reports show.

'Hardscrabble business'

Munich Re America has allocated more capital to insurance underwriting in line with premium growth, though its mix of business “depends heavily on market conditions and need in each segment,” Mr. Kuczinski said.

Munich Re's primary insurance units, Hartford Steam Boiler Group and American Modern Insurance Group, also grew last year, and “our strategy of combining insurance and reinsurance activities remains on a successful track that we will continue to pursue in the future,” the parent company said in its 2015 annual report.

Alternative reinsurance capital and insurance-linked securities, which have affected reinsurers' pricing and returns, have been a factor in pushing reinsurers into insurance said John L. Ward, CEO of Loveland, Ohio-based private equity firm Cincinnatus Partners L.L.C.

Reinsurance “is a real hardscrabble business right now,” said John Wicher, principal of investment banking adviser John Wicher & Associates Inc. in San Francisco. “Growth is very difficult to achieve, and profitable growth, even more difficult.”

Beyond offsetting the volatility of property cat reinsurance, insurance allows underwriters to better balance “tail risk” among shorter- and longer-tailed lines, improve companies' positions with rating agencies that favor diversification, and build closer relationships with policyholders, experts said.

The new capacity may soften insurance pricing and conditions “at the margins,” in the specialty and excess lines being targeted, but will likely not “move the needle for the overall industry,” said Catherine Seifert, an equity analyst at Standard & Poor's Corp. in New York.