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MORE CROWDING ONTO REINSURANCE TRAIN

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A spate of new reinsurers has some market observers shaking their heads in puzzlement, while others say the new companies have a good chance of success if they have well thought-out marketing plans focused on narrow niches.

Although not all of the recently announced new reinsurers may

be successful, still more entrants can be expected.

The recent reinsurer formations, one of which is expected to begin operations this month (BI, Sept. 22), include:

Bermuda-based Resource

Underwriters Ltd., a multiline reinsurer with $300 million in capital.

Hamburg, Germany-based ESG Re Ltd., which will offer coverage for accident, health, life, credit life and disability and non-appearance risks in sports and entertainment and have offices around the world. ESG Re's planned capitalization is 380 million deutsche marks ($220.3 million).

Bermuda-based Latin American Reinsurance Co., which will provide mainly short-tail multiperil property reinsurance in Latin America, with $100 million in capital.

Liberty Re Ltd., a London subsidiary of Liberty Mutual Group in Boston, which will write property, casualty, life and health reinsurance. Liberty Re will have 250 million pounds ($418.6 million) in capital and was authorized to begin underwriting this month.

Some market observers question the need for any new reinsurers at all.

"If you ask me, it's a form of insanity, considering how much capacity's already there and how everybody's already scrambling for a limited number of ceded dollars and how the industry's (returns on equity) are in fact declining," said Jerry Karter, president and chief executive officer of SCOR U.S. Group in New York.

"How can anybody in his right mind justify coming up with more capital for this market unless, of course, they've got the ultimate niche that nobody else has discovered yet? But in any of the new companies that I've seen, I don't recognize that characteristic," Mr. Karter said.

"It defies logic," said John Berger, president and CEO of F&G Re, a Morristown, N.J.-based unit of USF&G Corp. "It must be a marvelous write-up," he said of their business plans.

Weston M. Hicks, an analyst with Sanford Bernstein & Co. in New York, said: "Clearly they're not being started because there's some immediate market demand. It's not like a catastrophe shortage in the market.

"I'm puzzled, frankly, and it kind of illustrates the basic problem in the business in that the barriers to entry are very low," said Mr. Hicks.

"I would have thought it's a very difficult sell," said Jeremy Wallis, president and CEO of Florham Park, N.J.-based Chat-ham Reinsurance Co. "I wouldn't have expected there would be much in the way of new companies being formed."

"I think I'd leave it to them to explain their business strategy," said Heidi Hutter, chairman, president and CEO of Swiss Reinsurance America Corp. in New York. "Why would you want to do it?" she asked. "Obviously, there's a belief that there's business to be done and it's a good place to use capital."

Steven J. Bensinger, president of Stamford, Conn.-based Chart-well Reinsurance Co., said: "Our view is that there is no need for new capacity in this business at this point in time."

"The majority of these haven't brought anything really new to the table that we've seen, so our view is that it's just adding more capital to what is probably a generally overcapitalized market," Mr. Bensinger said.

Others, however, are more sanguine about the reinsurers' pros-pects.

"I think you have to deal with each one individually," said Steven Bolland, senior vp with reinsurance intermediary Gill & Roeser Inc. in New York.

"The interesting thing is in each of these they've gone out with a plan, and there are very savvy investors involved, so each of them believes there's an area or a niche in the market that's not being fully utilized at the moment," he said.

"I think the problem nowadays is somebody comes along and wants to be a 'me, too' reinsurer with $100 million, $150 million of capital in the U.S.," Mr. Bolland said. But that is not the case here, Mr. Bolland said. "You may or may not agree" with their marketing plan, "but at least they're focused."

John Wicher, managing director of San Francisco-based investment firm Russell Miller Corporate Finance Inc., pointed to newly formed Latin American Reinsurance Co. as a new company in a niche with potential.

"Latin America represents one of the greatest single opportunities outside Asia for reinsurance companies," he said.

"Traditionally, Latin American insurance companies purchased significant amounts of reinsurance, and the liberalization and deregulation throughout Latin America is creating tremendous opportunities for long-term players," said Mr. Wicher.

"Now is the time to get in, and that is why reinsurers are looking to Latin America, making important commitments there," Mr. Wicher said.

The new reinsurance companies "have not been U.S. operations," pointed out Gary Ransom, senior vp at Conning & Co. in Hartford, Conn.

Now that the situation has

improved at Lloyd's, "some more companies want to participate in what's really a global market right there in London," he said.

As to the likely success of the new reinsurers, Mr. Wicher said: "I think there are some very clever people who put together these businesses. They're using new techniques of managing risk, of hedging risk, and we'll see how it plays out. On the surface, it's very exciting."

Others say the new reinsurers' record is likely to be mixed, however.

"Some will be successful. A lot won't," summed up William L. Munson, chairman, president and CEO of the Morristown, N.J.-based Toa-Re Insurance Co. of America.

While some new reinsurers will be very successful, "I think there are others that are being caught up in the 'me, too' frenzy and hence may be the result of a deficient planning process," said Philip W. Mitchell, senior vp at Towers Perrin Reinsurance in Philadelphia.

Chartwell Re's Mr. Bensinger said he cannot predict the new reinsurers' likelihood of success. "Maybe their timing is great, maybe their timing is terrible," he said.

As to whether more can be expected, Mr. Wicher said, "I think the issue's one of capacity." If there continues to be excess capacity, "there'll be continued pressure on the part of players in the reinsurance industry to think about out-of-the-box ways they can deploy capital and gain rates of return that in many cases they are not realizing on their traditional lines of business."

"As long as there's plenty of capital around, I think you will see new players come onto the market," agreed Kaj Ahlmann, chairman, president and CEO of Overland Park, Kan.-based Employers Reinsurance Corp.

More start-ups are a natural reaction to the consolidation in the industry, with new reinsurers focusing on niches in the market, said John L. Ward of the Cincinnati-based Ward Financial Group.

"I see a lot more of that," he said.

"I think you may see more of this, but mostly by existing entities who will be setting up organizations to specifically appeal to individual marketplaces," said John N. Gilbert Jr., president of reinsurance intermediary Holborn Corp. in New York.

"There probably will be" more reinsurers, said Conning's Mr. Ransom.

If the market deteriorates, "it means demand for reinsurance will probably go up sometime in the future, and you can be sure whenever that happens a bunch of reinsurers will pop up and start writing business," Mr. Ransom said