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Reinsurers view diversification as strategy to grow in tough market

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Reinsurers view diversification as strategy to grow in tough market

Reinsurers that want to move away from weak property catastrophe pricing are looking to the U.S. casualty reinsurance market.

“Diversifying into areas other than short-tail property or property catastrophe has been a focus of reinsurers for the past two to three years,” said James Eck, vice president and senior credit officer at Moody's Investors Service Inc. in New York.

Reinsurers' deployment of capital “has gone to other areas of the market, whether it be specialty lines, casualty, (or) professional lines,” he said. “They've been looking for areas where the returns have held up a little better, and U.S casualty has been one of those areas.”

Those coverages include general casualty, professional and financial lines, and surplus lines, sources said.

“Companies are trying to find niches where they can still find some attractive business and continue to grow,” said Taoufik Gharib, a director and reinsurance specialist at Standard & Poor's Corp. in New York.

Casualty niches

As reinsurers have moved away from property catastrophe business, “you are seeing some diversification into casualty,” said Brian Schneider, senior director of insurance at Fitch Ratings Inc. in Chicago.

“When you get to general casualty and ultimately specialty lines, in that order, you are gravitating to an end of the spectrum where pricing is not as commoditized” compared with some property catastrophe sectors, said Mike Goldman, a partner at law firm Sidley Austin L.L.P. in Chicago and co-leader of the firm's global insurance and financial services group.

“I suspect these companies are looking for a way to diversify away from that business or just broaden their product offering to be more relevant to their customers,” said Chris Buse, managing director and head of casualty reinsurance in North America at XL Catlin in Stamford, Connecticut.

“U.S casualty has held up better than U.S. property” in terms of the prices insurers can charge, said Bruce Ballentine, vice president and senior credit officer at Moody's in New York. “U.S. business in general has held up better than some other markets like Europe and some emerging markets where economic growth has been slower.”

“We see casualty reinsurance growing in pockets,” said Mr. Buse. “We tend to focus on specialty lines — environmental, directors and officers, excess and surplus lines casualty business.”

“Our view has been that casualty in the U.S. as a long-term proposition is a good business,” said Mr. Buse. “So I understand others wanting to come in to it.”

He described U.S. casualty reinsurance pricing as “softening but still adequate.”

“Motivations to escape pressures in the property catastrophe segment and diversification gains have been important considerations for many reinsurers in moving into the U.S. casualty market,” said David Flandro, New York-based global head of analytics at JLT Re, a unit of Jardine Lloyd Thompson P.L.C. “As catastrophe pricing has fallen rapidly, casualty has become a relatively more attractive diversifying play in some instances.”

With falling prices the past 30 months, some dropping below traditional markets' targets, reinsurers can increase shareholder dividends, conduct share buybacks, merge “or they can try other lines of business,” said David Dee, head of casualty underwriting for national clients at Munich Reinsurance America Inc. in Princeton, New Jersey.

Reinsurers' moves also have increased competition for underwriting talent in the casualty space.

“The intellectual capital is probably the toughest thing to acquire these days,” said Mr. Buse. “Finding the people who know the business and can navigate through a soft market are probably a little harder to find.”

“What we've been seeing is in some cases people thinking, "If we don't have the people currently, let's go hire some,' so you see some of the teams moving around the business,” said Mr. Dee.