Cat losses leading many to diversify their exposures

MONTE CARLO, Monaco—Many cedents and reinsurers that suffered large losses during the record catastrophe year in 2005 are looking to diversify their exposures, reinsurance industry executives said at the Rendez-Vous de Septembre.

That means many are looking to write risks other than North American property catastrophe, and the increased competition may push rates down in noncatastrophe lines of business, the executives said.

Many Bermuda-based companies have been diversifying into U.S. casualty lines, in particular, which in all likelihood is accelerating the softening of rates in that area, said Michael Zboron, managing senior financial analyst at A.M. Best Europe Ltd., the London-based arm of A.M. Best Co. Inc.

The large, multiline reinsurance groups also are continuing to grow the life reinsurance portions of their business, noted Mr. Zboron, as another way of diversifying. Life business tends to provide fairly stable earnings, he noted.

Over the past year, the buzzwords for the reinsurance industry have been "diversify, diversify, diversify," according to Charles Cantlay, deputy chairman of Aon Re UK in London.

"Even non-U.S. catastrophe business is getting looked at," said Bruce Ballentine, vp and senior credit officer at Moody's Investors Service in New York. "Asia catastrophe business has been fairly competitive" as a result, he said.

Companies' motivation to increase their spread of risk generally stems from the catastrophe losses following last year's hurricanes. "With the development of improved internal risk management and modeling, companies are seeing a spike in their loss exposure and want to flatten that," said Timour Boudkeev, vp and senior analyst at Moody's.

Not all diversification is viewed as positive, however.

"I don't believe that diversification for diversification's sake is an appropriate goal," said John Berger, chairman and CEO of Pembroke, Bermuda-based Harbor Point Ltd. "Well-priced diversification happens if the market allows that. If you write an underpriced book of diversified business, you're guaranteed to have a bad result," he said.

"Diversification is predicated on a desire to avoid volatility," said Ken LeStrange, CEO of Pembroke, Bermuda-based Endurance Specialty Holdings Ltd. "In my view, diversification only works if it supports your return goals."

Reinsurers attempting to diversify their portfolios can become a matter of concern for rating agencies if the companies do not have proven expertise in the areas into which they are diversifying, noted Matthew Mosher, group vp at Best in Oldwick, N.J.

"We'd be concerned by inappropriate or poorly controlled diversification," noted Chris Waterman, senior director at Fitch Ratings in London.

Whether diversification has a positive or negative influence on a company largely depends on whether the company is diversifying from a position of strength or of weakness, noted Mark Rouck, senior director at Fitch in Chicago.

Most of the Bermuda-based companies currently are fairly well diversified from a product perspective, according to Mr. Rouck. "You almost have to be countercyclical," he added.

Caroline Foulger, a partner at PricewaterhouseCoopers L.L.P. in Hamilton, Bermuda, agreed. "One of Bermuda's challenges is infrastructure. There's no need for Bermuda companies to diversify their products more than they're already doing," she said. "A company in one platform shouldn't try to diversify too far because it doesn't make sense. Stick to what you're good at," she said.

Endurance's Mr. LeStrange said he generally has not seen Bermuda's class of 2005 startups moving to diversify away from their business plans to write specific lines.

"The struggle for diversification will have its limitations," said Hans Rohlf, managing director and chief underwriting officer of North American treaty reinsurance at Hannover Reinsurance Co. in Hannover, Germany. "There clearly is a desire among investors for a diversified book," he said, noting Hannover Re will increase "significantly" its securitization of worldwide property cat, aviation and marine business--a program it calls K-5--on Jan. 1.

Investment returns are improving for many companies, and this could prompt some to rely more heavily on that income stream--especially if they have difficulty in buying retrocessional cover (see story, page 18) for property business, said Seymour Matthews, managing director at Heath Lambert Group in London. And this also may prompt companies to diversify into longer-tail lines, he said.

With the exception of U.S. wind-exposed business, the reinsurance market likely has all the capacity it needs, said Hans-Peter Gerhardt, CEO of Paris-based AXA Re, the reinsurance arm of AXA S.A. And it's likely that some underwriters will diversify and attempt to compete on price in other areas, such as Europe, he said.

There is a "demand to diversify," said Robbie Klaus, CEO of Pfaffikon, Switzerland-based Glacier Reinsurance A.G., and because property catastrophe business is in many ways a worldwide business, that diversification is likely to be seen into other areas.