TransRe and Gen Re partner for the future

One of the more eyebrow-raising announcements of 2016 came when General Reinsurance Corporation, bastion of the direct reinsurance relationship, owned by Berkshire Hathaway, revealed it had done a deal with Transatlantic Reinsurance Company, part of Alleghany Corporation, which would give it access to the broker markets and TransRe access to its balance sheet.

The idea of Gen Re being forced to move into the broker markets was seen as inevitable by many, well aware of the challenges of securing growth in a stagnant market in which profitable business can be even harder to come by.

However, the manner of the access, via TransRe’s existing relationships, did make the deal surprising. The deal has, as Ken Brandt, president of North America, Trans Re, explains, been a win-win for both parties.

“It is fair to say that we knew they were coming,” Brandt says. “We have a lot of respect for the Gen Re leadership team but we could see the challenges they were facing and we knew the broker markets had to be an option for them.

“I used to work at a direct player and that is a very different challenge to working with brokers—you need a very different type of expertise. It is a difficult transition if you are not used to deal with the broker channel.

“The seed of the idea of a partnership grew from our side and it was explored and ultimately a deal was done. We see it as a great opportunity for both companies.”

Mike Sapnar, chief executive of TransRe, sees the partnership as creating a unique offering that will give buyers a viable alternative and changing perceptions of what is possible in the market.

“This long-term partnership will deliver a unique combination of service, capacity and security from two reinsurance-focused organisations to the broker market. It’s the sort of deal that changes market perceptions, and gives buyers a viable alternative for one-off, private structures,” he says.

“Buyers can use the highest rated paper in the industry to reduce their counterparty credit concentrations, a compelling opportunity for buyers both large and small. TransRe’s future lies in transformational transactions like this.”

TIME FOR CHANGE

The deal has taken the form of an initial five-year agreement for TransRe to act as exclusive underwriting manager on behalf of Gen Re for US and Canadian property/casualty treaty reinsurance business produced by brokers and intermediaries. Around 80 percent of such business in this region is broker-controlled.

This new arrangement gives brokers and intermediaries access to Gen Re’s traditionally direct-only capacity through a new underwriting platform fully managed by TransRe, which will also provide all the underwriting and claims services for the business.

The idea is that the combined financial strength of the two companies will deliver broader capacity and line size, while providing consistency and assurance in execution. The facility will result in identical terms written on both TransRe and Gen Re balance sheets, giving clients diversification of counterparties and access to greater capacity.

For Gen Re this is a change of tack, giving it access to broker-sourced business; for TransRe it is also a shift in strategy to share risk with a third party in a way that will make it more relevant to brokers and a bigger player in its existing world.

Brandt says that TransRe could have secured extra capacity in other ways. It could have partnered with third party capital and adopted a fund model using collateralised reinsurance contracts, for example. “But by working with Gen Re you are instead getting a very reputable brand and a very big balance sheet with no collateral requirements,” he says.

“The buyer will know of Gen Re and that also means it is very easy to sell this proposition to buyers. Everyone knows us and the concept of also putting Gen Re on their panel will be very appealing,” Brandt says.

Sapnar adds that the definition of third party capital is moot in many ways. “All our capital is third party capital—we are its custodians, and we treat all our capital partners with equal respect,” he says.

“If the Gen Re deal shows anything, it shows our willingness to think more broadly about what we deliver and how best to do it. We will continue to apply imagination and discipline to the benefit of our customers, brokers, and capital providers.”

NO CANNIBALISATION

In terms of the practicality of how the arrangement will work, Brandt says the golden rule is that the arrangement will not cannibalise existing business arrangements. “It will open up a lot of new opportunities for Gen Re. As things stand, if a client works with brokers, they have already voted—that is automatically business Gen Re cannot touch.

“Once this is up and running, however, that broker can access Gen Re, which will be welcomed by everyone. It will diversify panels and offer a very strong balance sheet.

“However, if Gen Re is already working direct with an insurer, we will not offer this facility. TransRe may go after that business in its own right but not via this facility. Equally, we will not take business from our existing portfolio to feed this partnership.

“So if we already have a 25 percent line on a treaty we will offer the same 25 percent line plus another percentage from Gen Re. Would even double the total offer. But the latter could not be instead of what is already in place and we will retain the right to say no. We will not shrink our own book to support the programme.”

Brandt agrees with Sapnar that buyers will have a healthy appetite for the new programme. Apart from its reputation and financial strength, Gen Re also has one other big advantage over many reinsurers: because it is a pure play reinsurer, it does not compete with its clients on insurance lines.

“There are existing holes in some programmes but some clients are ready for a change. Some insurers are tired of their reinsurers competing with them and they are ready for a change. The fact is that for both Gen Re and TransRe, we are not companies that support an insurer on a Monday and then compete with it on a Tuesday, as some companies do,” he says.

“There are some programmes where a lot of smaller reinsurers have smaller shares and are also competing. This will be seen by some cedants as an opportunity to roll a lot of the capacity up and place it with one bigger company which has no conflict of interest, an excellent reputation and a strong balance sheet.”

Sapnar and Brandt were very clear that the arrangement is limited to US and Canadian property/casualty treaty reinsurance. While they are open to discuss expansion opportunities, they both stress potential roadblocks. For instance, Gen Re already works with London brokers via Faraday. “We want to build a lasting relationship, that benefits both partners. We will work to execute our agreement, and see how things develop,” Brandt says.

Brandt is also keen to point out that the new facility has no set targets in terms of the premium it wants to take on. Both companies are more focused on underwriting discipline and profitability, he says.

“We have very similar cultures in that sense. Some have commented that this is simply more capacity competing in an already weak market but we are not changing our risk appetite. We are patient and so is Gen Re. We do not have to execute, we will only write business at rates we believe are adequate.”

ALL REINSURANCE AIN'T EQUAL

Brandt stresses that had Gen Re opted to enter the broker market in another way it may have found it much more difficult. He worked for Employers Re, a direct player, for 15 years and has thus experienced both business models first-hand.

He says the big difference is that a direct player will tend to write very large lines, often 100 percent in many cases, meaning the relationship with a cedant is very deep whereby you know everything about that business and take a full participation. It is a very relationship-driven game.

“In contrast, that sort of arrangement is the exception rather than the rule when dealing with brokers. You may be able to take much smaller participations on treaties, which is a good thing from a diversification perspective, but you will have less of a handle on knowing what the exposures are compared with putting down a much larger line.”

Another difference is that a reinsurer must sell itself in a very different way to brokers. “You have to be more proactive in selling yourself to brokers in terms of marketing materials and value-added services,” he says.

He adds that negotiating with brokers is also a different experience. “While negotiating direct with the client can be complex and challenging, there is a very different dynamic with brokers because you are also discussing multiple accounts. There is often the sense that there is give and take but you access multiple negotiations instead of just one,” Brandt says. “It has a different nuance and requires a different skillset.”

He estimates that had Gen Re attempted the transition on its own, it would have needed to make a significant investment in people and infrastructure, which would have also come with risks. “Had they acquired a smaller player or teams of people you risk a clash of cultures and things not working out,” he says. “You can see why this sort of arrangement looks so appealing.”

HEADLIGHTS OR SUNLIGHT

Turning his thoughts to the wider health of the reinsurance markets in North America, Brandt admits the sector still faces big challenges. He jokes that in a presentation recently he used a graphic meant to show light at the end of a tunnel. “In fact, some people saw it as the light of an oncoming train about to hit!” he says.

In fact, he says both analogies are true. “In a sense there is light at the end of the tunnel but only because there is no longer a place to hide and a crash is coming,” he says. “The reinsurers are weak and there is very little profit left in many contracts when the terms and conditions and ceding commission is taken into account. Many companies are losing money; the math does not work any more.”

Sapnar stresses that TransRe will not seek growth for the sake of it in such tough market conditions. “The only growth I focus on is the long-term growth in our book value. That requires underwriting discipline,” he says.

He adds that he is also open to the pursuit of new opportunities such as the Gen Re deal, and one-off private placements such as mortgage deals the company has done. “There are also new markets we hope to open,” he says.

Brandt says there is anecdotal evidence that a change has started to occur in pricing in the last two quarters in particular. “The market does seem to be finding a pricing floor. Some programmes are getting re-priced and there are positive signs emerging,” he says.

Brandt adds that as well as the pressure of poor investment returns, two other factors are coming into play: reserve releases are running out and there is a growing realisation that the benign loss environment for catastrophe claims cannot last. “People are getting back to underwriting basics,” he says.

He stresses that he does not forecast the start of a hard market, just a more reasonable market that gives reinsurers a chance of making an underwriting profit. To an extent he believes the capital markets investors also increasingly understand that pricing needs to change.

Even if a small improvement in the market does occur, the conditions in the market will still drive consolidation in the industry, he believes, as companies seek the scale that can allow them to better control costs and seek bigger lines for better rates.

“Mergers also come with risks,” Brandt says. “That is why our partnership with Gen Re is so good, it gives us more scale with minimum risk.”

Sapnar predicts the industry will change in other fundamental ways in the years to come. “The only constant is change,” he says. “Re/insurance is the new frontier for technology companies.

“Many will fail to navigate the reputational and regulatory hurdles of our global industry, but they are all focused on improving the customer experience. The incumbents must do that too. We have a number of such initiatives underway, as we adapt to thrive.

“With high capital and low investment returns, we will look to our global network of 25 offices, our 40 years of data and relationships and our integrated operating platform to create new partnerships and revenue streams well beyond the next five years.”