LIBERTY RE AIMS TO CARVE NICHEPosted On: Feb. 16, 1997 12:00 AM CST
LONDON-What can a new reinsurance company, particularly one that has already delayed its start-up by more than a year because of unfavorable market conditions, hope to offer by entering an already competitive marketplace?
John Engestrom, recently appointed chief executive of Liberty Re Ltd., a company being set up in London by Liberty Mutual Group of Boston, has a ready answer to that question. The new company will provide service, expertise and expanded choice, rather than contribute to cut-priced competition.
"We don't want to provide commodity capacity, which is price led," says Mr. Engestrom, who is credited with having spearheaded the return to profitability of Mercantile & General Reinsurance Co. P.L.C. during his four-year tenure there as chief executive.
Reinsurance brokers also say that a new player in the London market may be a good thing.
Mike Hernandez, a director of London-based Willcox Johnson & Higgins Reinsurance Brokers Ltd. said, "We don't feel negative about it at all. In a way, as brokers, we feel that anything that adds to London's capacity is a good thing."
While acknowledging that the market is "tremendously" soft as a result of oversupply, he said he welcomes Liberty Mutual's faith in London by choosing it over fast growing markets in Bermuda, Europe or the United States.
And it's highly unlikely that one more company will have any weakening influence on reinsurance rates, according to Callum Stewart, managing director of Heath Reinsurance Brokers Ltd.
Prefacing his remarks by pointing out that Liberty Mutual is a major client of his parent company, C.E. Heath P.L.C., Mr. Stewart said his understanding is that Liberty Re will go after a small number of accounts in a big way, which should hardly affect rates. He added that with the right people and the right amount of capital-"both of which Liberty Re has probably got"-any time is a good time to set up in London.
At M&G Re, Mr. Engestrom introduced underwriting teams that provided flexible multiline programs to clients on a global basis and charged what he believed to be economic rates. It was largely his success with these policies that led Swiss Reinsurance Co. to decide to acquire M&G Re last August (BI, Sept. 2, 1996) from its U.K. parent, Prudential Corp. P.L.C.
Although Mr. Engestrom publicly supported the merger and was promised a place within the Swiss Re group when his position was eliminated, he made it clear that he was examining his options.
He now believes he has found his niche at Liberty Re. Mr. Engestrom says he hopes the company will start writing business in the fourth quarter. To do that, he must appoint the senior members of his team and secure a license from the U.K. Department of Trade and Industry.
So far Mr. Engestrom is the sole representative of Liberty Re in London. Liberty Mutual Chairman Gary Countryman also will chair the London company but will remain in Boston.
Mr. Engestrom hopes to select other core members of his team, including underwriters, by March. He envisions a staff of about 40 by the end of the year and of 80 to 100 by the end of 1998. These numbers should be fairly evenly split between three areas: property/casualty; life/health; and support, including information technology, finance and administration.
He stresses that his underwriting team will be "flexible, non-hierarchical, very non-bureaucratic." Furthermore, "it's going to be a team-oriented, customer-focused approach, where we all pitch in, we all have fun, we all work very hard. But there should be this sense of entrepreneurial spirit and even ownership." The latter will be developed through a reward system to include annual bonuses based on bottom-line results, rather than premium volume, he said.
Liberty Mutual shelved plans for Liberty Re in late 1995, claiming market conditions were not right for a launch.
In April 1995, the insurer hired James M. Payne, former vice chairman of Sedgwick Group P.L.C., to be CEO of Liberty Re (BI, May 29, 1995). Graham Potter, who was then managing director of Copenhagen Reinsurance Co. (U.K.) Ltd., joined several months later as chief operating officer. However, Mr. Potter then resigned a few months later, and rumors circulated in the London market that Liberty Re may have problems obtaining a license from the Department of Trade and Industry because of Mr. Payne's alleged prior involvement with the H.S. Weavers line slip, a major source of U.S. casualty coverage, which collapsed in 1990 (BI, Nov. 20, 1995).
Mr. Payne retired from Liberty Re at the end of 1995, and plans to launch the reinsurer were suspended, Mr. Engestrom said.
The initial DTI license application process was halted when the first plan was shelved. As a result, the DTI never reached a decision on either that application generally or more specifically on Mr. Payne's involvement, according to Mr. Engestrom.
So why resurrect plans now when the market does not look much better, and Mr. Engestrom has been quoted as saying Liberty Re will "sit on its hands" if market conditions have not improved by start-up time?
Mr. Engestrom says the quote referred to the soft property and casualty market, which he acknowledges still presents uncertainties for the rest of the year. "If it gets worse, we will be very reticent to write business. We would have to be extremely selective. That means we would write very little or no business come year-end 1997 for '98," he said.
However, Liberty Re would still pursue business in the health and life areas, he said. It also will be involved in tailor-made alternative risk transfer mechanisms.
While aware that Liberty Re will be criticized by other reinsurers for adding to the reinsurance market's capacity and thereby possibly delaying any hardening of rates, Mr. Engestrom said the current market players quote rates that "get softer and softer and they provide larger and larger capacities."
"If we don't get our margins and if the structure of the deal is not right, we will let somebody else do it," he insisted.
The world may not need another reinsurance company, but it "does need a different reinsurance company-and that's what we hope to be," he said.
With its "strategic partnerships" with clients and its management of interrelated risks, Liberty Re will find its niche in the market, he said.
While he maintains that other reinsurers commonly talk of partnership arrangements, they do not always deliver.
"You need to respect the commercial reality of the relationship, and you need also to give something with value added beyond the commodity of reinsurance," he said.
This means fully understanding the client's strategy, objectives and lines of business so that Liberty Re can analyze the insurance risks and assess how they affect areas like investment strategy and foreign exchange, Mr. Engestrom added.
Liberty Re's aim will be to take lead positions in business it knows-property, casualty, life and health. "We will certainly be repricing and re-underwriting every proposal that comes to us, even if it has to be led by somebody else. So, with that kind of capability, we would expect to be asked to lead quote," said Mr. Engestrom.
The company also aims to help clients with operational risks, such as ventures into new products or geographic territories, by providing support in understanding the marketplace, distribution techniques, support systems and regulatory environment.
For these reasons, Liberty Re's staff will have a core expertise in these areas, he said. In addition, it will maintain contacts with a network of external suppliers ranging from investment bankers to information technology consultants. The Liberty Re team will include the "financial wizards who can construct unconventional deals to suit the client's needs," said Mr. Engestrom. And, it will employ every distribution channel, ranging from direct relationships to brokered business.
Liberty Mutual has committed (British pounds) 250 million ($409.3 million) of initial capital to its new reinsurance unit, but is letting Mr. Engestrom determine when to begin operations and to set his own initial revenue targets.
Liberty Mutual takes a very long-term perspective, Mr. Engestrom said. They're looking at success in five to 10 years' time, not in one or two years, Mr. Engestrom said.
The parent is also prepared to inject more cash if Liberty Re sees opportunities for expansion. This could include any opportunity to secure additional business on favorable terms or to acquire blocks of business, or even a possible company acquisition, he said.