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COLOGNE, Germany-Gerling-Konzern Globale Ruckversicherungs A.G., the reinsurance arm of the Gerling Group, is reorganizing its North American operations in an effort to strengthen its ratings and introduce new financial products.
The company has pumped $67 million into the reserves of its U.S. branch, which will now focus on running off long-tail casualty business, discontinued since the mid-1980s. Active operations will now be handled by three newly formed subsidiaries under a new holding company.
The three units include a broker market property/casualty reinsurer, a life reinsurer and a company offering financial products.
Gerling's U.S. insurance unit, Gerling America Insurance Co., is not affected by the changes.
Norbert Strohschen, chairman of Gerling Global Re in Cologne, Germany, said the reinsurer initiated the reserve addition and restructuring to ensure it maintains its A rating from A.M. Best Co. in the United States.
Mr. Strohschen added that the changes also will strengthen Gerling's ability to provide alternative risk transfer products in the United States.
The three new companies, which will be under the holding company Gerling Global U.S. Investments Inc., are:
Gerling Global Reinsurance Corp. of America, which will write U.S. property reinsurance business.
Gerling Global Life Reinsurance Co., which will write life reinsurance.
Gerling Global Financial Products, which will focus on "the strong trend to financial solutions outside of traditional insurance," according to Juergen Zech, chairman of Gerling Group.
Charles Troiano, who previously was senior vp and chief financial officer for Munich American Reinsurance Co., will serve as president and chairman of the new Gerling Global Re unit.
Peter Gentile, who previously worked for Swiss Re Atrium Corp. in New York and was responsible for finite risk products, will be CEO of the Gerling Global Financial Products unit.
Asbestos and environmental liability claims have been isolated in the U.S. branch of Gerling Global Re, which will now be a runoff company. The U.S. branch also received a $67 million boost in reserves from Gerling Group that will serve primarily to pay off those claims.
The three new companies will take over Gerling Re's active business, Mr. Zech says.
Several years of subsidizing the branch and equalizing reserves for the long-tail losses depressed the company's earnings and underwriting results, Mr. Strohschen said.
As a result, Gerling decided on its current course.
Mr. Strohschen said the reinsurer had no trouble winning regulatory approval of its reorganization plan.
It gained the insurance commissioner's approval in New York largely because of its ongoing commitment to the U.S. market. "We are not withdrawing," he said.
"On the contrary, we're strengthening our commitment to the U.S. market," Mr. Strohschen said.
In addition, A.M. Best conferred its A rating on the newly formed companies.
Mr. Zech said he sees great potential for U.S. reinsurance business, especially in offering products that involve using the capital markets in risk-financing programs.
Gerling plans to make Gerling Global Financial Products the worldwide center for the company's financial products, according to Mr. Strohschen.
Mr. Strohschen said there is an "international convergence of insurance and reinsurance as well as of traditional and non-traditional products," which motivated the formation of a financial products group.
Overall, the moves will "enhance our U.S. presence, as well as strengthen our ability to compete," Mr. Strohschen said.
To underline its commitment to alternative risk products, Gerling also plans to set up an offshore facility, probably in the Barbados, to support that market, Mr. Strohschen added.
Mr. Zech said that there is growing demand for financial reinsurance and other financial products.
"Some risks are better financed using banking instruments. Bonds, for example, can be an excellent means for clients to finance claims," according to Mr. Zech.
Gerling will develop financial products for its clients as a service but has no plans to provide the capital for such instruments itself. Instead, Mr. Zech said, it will work with major banks.
On other fronts, Mr. Zech said he expects group profits to drop because of the company's 1995 sale of its stake in Frankona Re A.G. to Employers Reinsurance Corp.
Following the sale, net profits fell to 110 million DM ($68 million) for the fiscal year ending June 30, 1996, from 274 million DM ($169.4 million) in the previous fiscal year.
Premium volume in the most recent fiscal year increased primarily due to foreign business, not German domestic business, which fell off dramatically in 1996 due to increased competition in Germany, Mr. Zech said.
In key areas, like property insurance, Gerling lost substantial market share, he said.
However, Mr. Zech said the company outperformed the market overall, with a premium volume increase of 6.5% to 11 billion DM ($6.8 billion) for the year ending June 30, 1996. Foreign business grew 12.9%, while domestic business increased 3.7%.
Foreign business, mostly European, accounts for 32.4% of Gerling Group's total premium volume.
Mr. Zech said he expects this percentage to increase eventually to 40%.
For the current business year, Mr. Zech projects that premium volume will increase slightly by 7.2% and reach 11.8 billion DM ($73 billion), with foreign business increasing 18.9% and domestic business increasing 1% to 1.5%.
Mr. Zech also expects strong growth in reinsurance, which he expects to increase 10% overall in the current fiscal year. For the year ended June 30, 1996, reinsurance premium volume increased 6.7% to 3.3 billion DM ($2 billion).
To maintain its competitiveness in Germany, Gerling plans to offer new insurance products and services.
It will move more strongly into offering package policies-including property, casualty, health and accident coverages-to small and mid-sized business.
In addition, Gerling plans to step up its risk management consulting business, which it thinks will be a factor in policyholders winning better rates.
Gerling's consulting will go beyond such things as highly protected risk procedures to also include corporate safety and security measures that focus on company training of personnel.
Major losses for the fiscal 1996 include the Eurotunnel P.L.C. disaster (BI, Nov. 25, 1996), which cost 120 million DM ($74.2 million) for Gerling, one of the tunnel's main insurers.
Total insured losses from the English Channel tunnel fire, which Mr. Zech said were largely business interruption losses, were approximately 1 billion DM ($618 million).
In addition, in fiscal 1995, Gerling shared in coverage for the Dusseldorf airport fire, which was one of the largest commercial losses in German history. (BI, April 15, 1996).
Losses from the fire cost the company 40 million DM ($24.7 million).