Is Pricing Power Translating Into Robust Profits?

“Fundamentals in RGAs business remain favorable,” Bhullar writes. “We are concerned about the recurring unfavorable mortality in the U.S. and are relieved to see a quarter of favorable variance. Longer term, we expect slow growth [high single digit] in RGAs U.S. and Canadian operations to be offset by faster growth [high double digit] in Asian and European businesses.”

The European scene was muddled further by the fall of the German Gerling group and the financial stress suffered by the French conglomerate SCOR.

A new unit was created called Revios after Gerlings placement of its non-life portfolio into runoff to protect its life insurance operations.

S&Ps Clark notes that Revios generally has been successful at retaining its existing business. “However, the extent of Revios internal focus during 2003 and continuing uncertainty surrounding its long-term ownership have constrained its ability to capitalize on opportunities to win new business,” he says.

SCOR was downgraded in 2003 primarily due to weak performance in its U.S. non-life business. The life group that subsequently was formed raised hundreds of millions of dollars through a rights offering.

“SCOR continues to be an important player in certain niche areas, with a very strong presence in mortality and long term care risk in France, as well as strong positions in Southern Europe and Asia,” Clark writes in a recent report on the life reinsurance sector. “However, more intensive capital businesses, such as business financing or level-term reinsurance in the U.S., are now less accessible given the heightened cost of capital at SCORs current BBB+ rating level.”

One of the more recent entrants in life reinsurance and the major Bermuda representative is Scottish Re, which recently closed on its acquisition of ING Res U.S. individual life reinsurance business. Previously it had acquired ERC Life Re from General Electric. This gives the company about $1 trillion of face amount of life reinsurance in-force, $8.8 billion in assets, $2.1 billion in revenues and a capital base of about $1.3 billion.

But such impressive numbers may mask some tough times ahead, according to a UBS research report put out Jan. 18 and authored by Andrew Kligerman.

“Scottish Res risk profile seems to be rising with its recent acquisitions of large blocks in which mortality results will likely deteriorate with further seasoning,” the report states.

Kligerman expresses concern with the pricing of Scottish Res recent acquisitions along with the fact that more experienced entrants did not emerge as buyers of either property at the price Scottish Re paid.

“It is unclear why Scottish Re would have been strategically better positioned to complete these transactions,” Kligerman writes.

And the fact that the company has missed consensus for 4 of the past 5 quarters along with mortality experience that will likely worsen as the companys book ages have led UBS to reduce its price target from $26 to $19.

While the challenges Scottish Re faces may be more extreme than its competitors, they do nonetheless represent those of an industry in transition.

“Life reinsurers are seeing creative new ways to acquire business and transfer risk,” Clark says, citing Swiss Res issuance of the first mortality catastrophe bond in 2003 that raised $250 million in contingent capital, which can be tapped in the event of extreme mortality stress.

But while it provides a new source of capital, it can be replicated easily by its customers in the primary sector.

“The only certainty is that the face of life reinsurance will continue to change at a rapid pace,” Clark says.

Reproduced from National Underwriter Edition, January 27, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.