EMPLOYERS RE ENTERS PRIMARY MARKET WITH PURCHASE OF IRI FROM POOL MEMBERS

HARTFORD, Conn. -- Employers Reinsurance Corp. is moving into the primary property market with the purchase of highly protected risk insurer Industrial Risk Insurers for an undisclosed sum.

But the purchase will not lead to ERC competing significantly with its existing clients for primary business, said Kaj Ahlmann, chairman, president and chief executive officer of ERC.

Other reinsurers have strained relations with clients as they searched for premium growth by writing more primary business (BI, Nov. 10).

But few existing ERC clients write HPR business, so there will be little overlap of interests with the purchase of IRI, Mr. Ahlmann said.

IRI will give ERC a specialty in primary HPR property insurance, said Mr. Ahlmann.

"As a leader among HPR carriers and with its skilled workforce, IRI will permit ERC to expand the scope of services it provides for its global clients," he said.

The purchase will bring certainty to IRI, an association writing HPR coverage for more than 20 insurers that only commit to the pool for a year at a time, said Gail P. Norstrom, president and CEO of IRI in Hartford, Conn.

The sale also will give the member companies the opportunity to cash out of IRI, which has shrunk its premium base and turned significant losses into small profits over the past two years, he said.

GE Capital Services Inc., which owns ERC in Overland Park, Kan., will buy the assets of IRI and transfer them to ERC, which will reinsure the in-force policies and assume the renewal rights of IRI.

IRI will remain an association, but 99.5% of the underwriting capacity will be provided by ERC and 0.5% by the Hartford Steam Boiler Inspection & Insurance Co. in Hartford. HSB will provide inspection services for IRI clients, Mr. Norstrom said.

ERC and HSB will establish a joint venture management company to run IRI.

Mr. Norstrom will remain president of IRI, but no determination has been made as to who will be chief executive officer, he said.

ERC will use the expertise of IRI to offer specialized loss prevention services to all its clients and particularly in Asia and Latin America, where there is high demand for those services as the regions develop, Mr. Ahlmann said.

The combination of the business of the companies will enable ERC and IRI to offer new products and services, Mr. Ahlmann said.

"The combination of IRI's property underwriting expertise, HSB's technical insurance and loss prevention capabilities, and the financial and underwriting resources of ERC will make it possible for us to bring an array of new products and services to the large commercial property market," he said.

The purchase will be ERC's biggest foray into the primary insurance market. Currently, the reinsurer's only primary business is a small amount of errors and omissions insurance for insurance agents, and some media liability business.

But the HPR business is more akin to large facultative reinsurance than traditional property insurance, Mr. Ahlmann said.

Consequently, IRI is a good fit for ERC, a large liability reinsurer seeking to increase its property business, he said.

"There is a lot of talk about consolidation in the reinsurance industry, but most of the time it is reinsurers buying other reinsurers and at a high price. What we try to do is find something that is supportive of our overall business and adds value for our clients," Mr. Ahlmann said.

ERC often has been part of the speculation about further consolidation in the reinsurance business as some observers think it does not meet the earnings expectations of its parent, GE Capital.

But ERC has consistently met GE Capital's expectations, said Mr. Ahlmann. "Employers Re has met its targets and will continue to meet its targets," he said.

The purchase marks the continuing trend of reinsurers to move outside of their traditional business in search of premium growth in a soft market, said Jay Cohen, insurance analyst at Merrill Lynch & Co. Inc. in New York.

"The reinsurance market is highly competitive, and it is difficult to grow reinsurance premiums. At the same time, many reinsurers have ample or excess amounts of capital, so they are looking to expand into other areas," he said.

The purchase of IRI will allow the HPR insurer to better plan for the future, said Mr. Norstrom.

"We've been talking for some time about governance issues at IRI and the difficulties they presented when we had to think strategically. At the same time, this was an opportunity for members of IRI to recognize the value of IRI," he said.

IRI has been through some troubled times over the past several years.

In 1994 it lost $163.3 million, and in 1995 it lost $438 million. In an effort to turn around its fortunes, the association shrunk its book of business. For example, it cut back on oil and petrochemical risks and primary coverage for power generation business.

The strategy seemed to work; in 1996, IRI made a profit of $11 million, and in 1997, the insurance pool made a profit of $25 million.

With the change in strategy, IRI became significantly smaller. In 1995 it had gross premiums of $643 million; in 1996, that dropped to $500 million; and in 1997, its gross premiums fell to $400 million.

The composition of the underwriting capacity also has changed, and fewer companies made up the bulk of the capacity recently (see chart, page 1).