PRIMARY BENEFICIARIES

U.S. reinsurers continue to enjoy respectable results, despite the ongoing soft market's pressures.

Higher retentions, combined with a focus on excess-of-loss rather than pro rata business, continue to insulate reinsurers from any turbulence in the primary market, though both cedents and reinsurers benefited from the first quarter's relatively low catastrophe losses.

But, some reinsurance observers see signs of smaller retentions by primary insurers, as well as a move to write more pro rata business, which generates more premium but ties reinsurers more closely to the fortunes of the primary business.

Despite good results in the quarter, reinsurers still feel the impact of the soft market.

"The marketplace is fiercely competitive, as everybody knows, but we are not optimistic that the marketplace will change in any positive way," said David Tritton, senior vp in charge of treaty underwriting and marketing for the Western half of the country for Princeton, N.J.-based American Re Corp.

The market "continues to be very, very competitive, as competitive as I've seen it," said Richard E. Cole, chairman and CEO of Stamford, Conn.-based Chartwell Re Corp.

"We expect market conditions to continue to be very competitive, both domestically and in international markets as well as in the property cat market in Bermuda," said Susan Spivak, vp with Donaldson, Lufkin & Jenrette Securities Corp. in New York.

"The casualty hard market of the mid-'80s and the property hard market of the mid-'90s are over, and the low ebb of the underwriting cycle has taken over the reinsurance market, which means that the party's over," said Dennis Zettervall, CEO of Hartford, Conn.-based Hartford Re Co.

"I think the market maybe got a little drunk on the idea that it was easy to grow in the reinsurance business, and I think many reinsurers now are waking up to the fact they have to work twice as hard to accomplish half as much," said Mr. Zettervall.

The 46 reinsurers surveyed by the Reinsurance Assn. of America reported a 100.9% combined ratio for the first three months of 1997, compared with a 101.3% combined ratio for a similar group in the year-earlier quarter.

The Top 20 reinsurers, based on net premiums written, reported a 99.4% combined ratio. This compares with a 102.9% combined ratio for the 19 reinsurers that reported 1996 results.

Business Insurance has combined the 1997 and 1996 RAA results of American Re Corp. and Munich American Reinsurance Co. operations. Although the two are now operating as one company, the merger of the two legal entities will not be complete until the third quarter, according to Mr. Tritton. When combined in this way, American Re inches ahead of General Re Corp. to the No. 1 spot based on net premiums written.

Business Insurance's survey includes results for the Berkshire Hathaway Group, which does not participate in the RAA survey.

The Top 20 also includes results of the Gerling Global Reinsurance Corp. of America, a unit of Germany's Gerling Group that was just formed in January and did not report 1996 results. Its $92.1 million in net premiums written includes about $45 million written by Gerling Global, with the remaining premium reflecting an unearned premium portfolio transaction from Gerling's U.S. branch, which is no longer writing new business, according to president and CEO Charles Troiano (BI, Jan. 27).

The 46 reinsurers in the RAA survey reported a 9.4% increase in net premiums written, to $5 billion from $4.57 billion.

Excluding Gerling, the Top 19 reinsurers posted a 7.1% increase to $4.64 billion from $4.33 billion.

Results were "certainly respectable," with no major property catastrophes and no great amount of emerging losses from any new mass torts on the casualty business, said Mike Schell, senior vp of North American underwriting for St. Paul Re.

The 100.7% combined ratio is "totally unexpected at this time in the cycle," said Bard E. Bunaes, chairman and CEO of Constitution Reinsurance Corp. in New York. "Obviously, the first quarter was basically catastrophe-free, and that impacted the results."

"I think at the end of the day we're all tied to natural catastrophes," said John Berger, president of USF&G Re Inc., a Morristown, N.J.-based unit of USF&G Corp.

"One thing that struck me is how good the numbers look. A lot of companies are showing strong growth, with low combined ratios, and given today's competition on the rating front, I wonder how that can be and how long that can continue," he added.

"I think the reported experience always lags the calendar accident year results," and when we look back at the business actually written in 1996 and 1997, it will not be "super profitable," said Mr. Berger.

"It seems that the one thing that the industry has in its favor, which doesn't help the marketplace, is that the investment returns continue to be very good, and most of net income is really dependent upon the investment returns that companies have been able to realize over the last couple of years," said Adrienne W. Reid, senior vp and chief treaty underwriting officer for Zurich Reinsurance Centre Inc. in New York.

Reinsurers are reporting better results than primary insurers because "business is done on an excess-of-loss basis, and with the retention increases that we saw in the last several years, reinsurers are more removed from the inadequacy of day-to-day pricing, said American Re's Mr. Tritton.

He noted, however, that "what we're seeing today for the first time in a while is some ceding companies getting quotes on lowering their retentions, which means that they think maybe the price of reinsurance is more attractive than keeping it net, and for companies to start thinking that way, in an environment where net premium growth is difficult to achieve, that tells you something about their view of the price of reinsurance."

Some observers also see an increase in pro rata business.

"We're seeing proportional business creep back," though on a controlled basis, in response to the demand of primary companies, particularly those who need capacity, said Craig Elkind, a director at Standard & Poor's Corp. in New York. This business, which earns higher premiums, helps explain reinsurers' net premium growth, he noted.

However, Hoyt H. Wood Jr., senior vp-property and casualty reinsurance division at Employers Reinsurance Corp., said, "My suspicion is a lot of reinsurers are going looking" for quota-share business so they can show some growth.

"We aren't doing that," said Mr. Wood, who noted Employers Re's net written premiums are down 13.6%, to $401.4 million, principally because it has moved some aviation business from Employers Re's U.S. operation to its Frank-ona Re subsidiary in Germany.

Pointing in particular to the premium growth among the lower-tier reinsurers based on net premiums written, which in some cases was more than 40%, Mike Smith, an analyst with Salomon Bros. in New York, said, "My guess is you're looking at the effect of some insurance companies laying off some business, probably on a quota-share basis, business that those ceding companies know is underpriced, and they are laying it off on a segment of the reinsurance market that is hungry for premiums."

"You might say that it could be an example of cynical demand meeting naive capacity," said Mr. Smith.

"But I think overall, we do have a situation where insurance companies have recognized that they have extensive levels of risk exposure on their books and they're seeking to relieve some of their stress through the reinsurance mechanism," he said.

"What we're seeing now, I think, really, is the realization of the changes that came into the reinsurance market 10 years ago, the movement away from quota shares to excess-of-loss contracts that put most of the underwriting and pricing decision-making ability into the hands of the reinsurance underwriter," he said.

"That wasn't designed to do anything in 1986. That move was designed to protect this group in 1997, when primary pricing really started to fall apart, when underwriting discipline in the primary market started to collapse, and we're now seeing the beneficial effects of all that. That's why the underwriting results remain so stable," he said.

Nevertheless, "we continue to have an industry that is way overcapitalized," said Jerome Karter, president and CEO of SCOR U.S. Group in New York. If one projects first-quarter net premium and policyholder numbers forward, he said, there would be a premium-to-surplus ratio of "somewhere between 0.5- and 0.6-to-1, which obviously has an impact on the competitiveness of our market conditions," he said.