Re Startups, IPOs Face Uphill Climb

London Editor

London

Converium, Ltd. was created by the first reinsurance initial public offering after Sept. 11, and in retrospect, it was perfect timing, given the problems that other planned IPOs are experiencing, according to Converium's group chief executive officer, Dirk Lohmann.

Indeed, despite the number of companies that would like to go public, the window for IPOs actually appears to be closed for the time being due to a lack of investor appetite, said Mr. Lohmann, who was interviewed by National Underwriter recently about market trends while he was in London to discuss his companys results.

Converium's net premiums written for the first half of 2002 grew 33 percent to $1.7 billion. Its combined ratio was 101, compared to 111.2 in last year's first half, when it was known as Zurich Re.

One area he addressed was the number of startup carriers in Bermuda. The big issue for the Bermuda startups is whether theyll be able to build leverage within their balance sheets that will generate the returns on equity that investors are looking for, he noted.

“Its easy to start a company, pour in one-and-a-half billion dollars of equity, and say Im open for business,” he said. “But then you have to have premiums and reserves on the balance sheet that generate earnings to support the equity, and the reality is that they wont get there that fast.”

He noted that this takes a couple of years, which is one of the reasons that St. Paul had to postpone its IPO of Platinum Re (see NU, July 8, page 5). There are no reserves, so theres no investment income on those reserves to help carry the results, he explained. He noted that investment income can tip a company into profitability, despite the lower investment returns available in todays market.

“We have a current investment return before the movements in capital gains and losses of 5.3 percent,” he said.

There is one difference between Platinum and the Bermuda startups, which is in Platinums favor, he said.

“Platinum has a pipeline of business, which is the business that St. Paul Re wrote,” creating a somewhat better story than a pure startup that has to go out and get business from scratch, he explained.

“The negative side of having the pipeline is you might have to explain how your results were in the past, and if they werent good, it doesnt give a great pitch for equity markets,” he added.

Although insurance rates are up, the question investors ask is how long will that last, and how will the company perform when the market again turns softer, he noted.

The question being asked by industry observers is whether reinsurers provide an appropriate fit inside a reinsurance conglomerate. The Zurich-based Converium was formerly Zurich Re, the reinsurance arm of Zurich Financial Services, and was spun off in part because it did not represent a core business.

“The problem with being part of a large conglomerate is that our industry is not understood,” Mr. Lohmann said.

If its mostly non-reinsurance people who are running the conglomerate, they often “dont understand the dynamics of our business. So from that standpoint, Im a lot happier in the situation Im in now. I have a board of directors that understands what industry and what business Im in. I have shareholders who understand Im in the reinsurance business, not in some other business that happens to have insurance in it.”

Discussing the problems that U.S. carriers appear to have with under-reserving, Mr. Lohmann said it is a function of the remuneration of U.S. executives as well as a function of the market in the United States. “The U.S. is infamous for having reserve cycles where they overshoot and they undershoot, and theyve undershot for a couple of years, and now were getting the big adjustments, like the $2 billion [reserve boost] at American Re,” he said.

“In Europe, you have similar types of phenomena, but perhaps not as pronounced, and one of the reasons is because of differing compensation cultures,” he said. With remuneration attached to earnings per share, executives sometimes are more optimistic about reserving, he explained.

“Thats not just in insurance,” he said–noting, however, that a big percentage of insurer and reinsurer balance sheets rely on estimates, such as incurred-but-not-reported claims. “There are a lot of estimates, so there is a lot of room for interpretation,” he said, which leads to cyclical reserve adjustments to clean up the problems of the past.

There historically has not been as much share-based compensation within European companies, at least on the Continent, he said.

The other difference between Europe and North America is the greater predominance of casualty revenue in the U.S. than in Europe. There are more long-tail reserves in the U.S., which are harder to calculate, he explained.

“So you have more room for interpretation as to what the ultimates could be, and then when they finally do come out, you have the situation that it can be more severe in the United States than in other marketplaces,” he said, noting that in the litigious culture of the United States, its a bigger challenge to get the numbers right.

“So its not just the compensation. Its also the nature of the business in the different markets,” he contended.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, August 5, 2002. Copyright 2002 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.

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Re Startups, IPOs Face Uphill Climb

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