Looking Ahead: What's Next For Alterra?

If you ask John Berger, chief executive of reinsurance for Alterra Capital Holdings, to describe his vision of Alterra five years from now, part of the answer he'll provide may surprise you.

Despite his three decades of experience in the reinsurance business, Mr. Berger, after expressing the hope that the market will cooperate to provide opportunities for the company to grow bigger through profitable underwriting, will go on to reveal he would like most of the business to come from insurance rather than reinsurance operations.

“The idea would be to have reinsurance be the minority part of it–representing maybe one-third or 40 percent of the company's total gross premiums written–with specialty insurance representing the majority,” he said during a recent interview with NU. “That would be the ideal to me.”

A specialty insurance platform is hard to build, he explained. “But if you build it, we believe it's valued more and is easier to protect from competition,” he said, contrasting the reinsurance world, in which a small handful of people backed by some money can go out and compete.

To be successful in the specialty insurance business, “it's infrastructure. You need offices. You need people around the country. It's hard to build it. But if you build it, it's considered very valuable,” he said.

Mr. Berger, the former CEO and president of Harbor Point Ltd., is also vice chairman of Alterra–a company formed in May 2010 from the merger of Max Capital Group, a global underwriter of specialty insurance and reinsurance business, and Harbor Point, a “Class of 2005″ reinsurer. (See related article at http://bit.ly/9xiA4V.)

Unlike the rest of the “Class of 2005″ created in the wake of Hurricanes Katrina, Rita and Wilma, Harbor Point entered the market with a ready-made book of casualty reinsurance business–taking over what was the Chubb Re portfolio through the purchase of renewal rights.

“When we formed Harbor Point, we were approximately 90 percent casualty,” Mr. Berger recalled. “Quickly, that turned into approximately one-third property, one-third casualty and one-third specialty” he said, reviewing the first major change in the history of the company.

“We didn't want to diversify just for the sake of diversification. It had to be well-priced diversification, but we were pretty happy with the footprint we established in the property and short-tail lines,” he said, noting that the casualty component shrunk as the casualty reinsurance market deteriorated in recent years.

By year-end 2009, Harbor Point's gross premiums written of $600 million were nearly equally split between long- and short-tail lines.

In the intervening years, the reinsurer also opened a four-person branch in London to participate in the specialty markets of aviation and marine reinsurance. While Harbor Point was able to underwrite casualty reinsurance business in a New Jersey-based U.S. operation, and property-catastrophe business from Bermuda, the London team writes business that would come to either existing location, he said.

Separately, Max Capital also chipped away at a casualty reinsurance model, which was originally focused on writing finite contracts when the company launched as Max Re in 2000–first adding traditional casualty reinsurance during the post-9/11 hard market, next a large-account liability insurance book as well as an aviation platform in Dublin, and then a property reinsurance component in 2004 and 2005.

In mid-December 2006, Max Re announced its plan to launch a new U.S. E&S subsidiary–Max Specialty Insurance Company. And in July 2007, Max Capital announced it would acquire Imagine Group (UK) Ltd., a Lloyd's insurance operation.

Last year, Max was engaged in a public battle with two “Class of 2005″ companies–Validus Holdings and Flagstone Reinsurance Holdings–to acquire IPC Re, a monoline property-catastrophe reinsurer that ultimately went to Validus for nearly $2 billion in early June.

Max Capital ended 2009 with nearly $1.4 billion of gross premiums on the books, with only 36 percent coming from the reinsurance segment.

Explaining why Max was a good fit for Harbor Point–or more precisely, why Harbor Point's management and board sought to diversify its book beyond reinsurance, Mr. Berger said the monoline reinsurance model “is clearly not in favor.”

“Although Partner Re seems to be doing quite a good job as a reinsurance-only company, when you look out at the world, it's becoming more and more competitive, more and more sophisticated,” he said. “We started considering what we wanted to look like in years to come, and who would be a good complement for us. You could either try to start to diversify by organic growth, buy somebody, or merge with somebody.”

At Harbor Point, “we basically had U.S. and Bermuda reinsurance. Now Alterra has insurance and reinsurance operations in major markets worldwide”–in the United States, Bermuda, Dublin and at Lloyd's, he said, adding that two offices in Latin America will soon become three, a branch operates in London and that there's also a presence in Continental Europe.

Putting 2009 results of the two companies together, an overall book of $2 billion in gross premiums is heavily weighted toward reinsurance lines–62 percent (including a small book of life reinsurance from Max). The bulk of business comes from North America–78 percent–with Europe making up 15 percent.

“Basically we have every underwriting platform that you would want,” Mr. Berger said, adding that Alterra's small presence in the Far East will likely expand eventually (although not a high priority) as will the footprint in Europe.

Turning to what has not changed at Alterra Re, Mr. Berger pointed to the goal of “being very disciplined on the underwriting side. It was a high priority for us at Harbor Point, as it was at Max, and it is a constant that we plan to maintain at Alterra,” he said

“It is critical at a time like this–in this market, where there's more supply than demand in just about every line of business everywhere in the world. There are still reasonable things to do, but you have to be careful. It's not a time to put the accelerator down and just go for it,” he said.

Viewing Alterra Re against its peers, Mr. Berger listed “a culture of underwriting,” superior personnel, a strong capital position and high credit ratings, including an “A” from A.M. Best.

“But most other companies can tell you a pretty similar story,” he added. “The test is going to be when bad things happen–a catastrophe, financial crisis, under-reserving of casualty business, or all of the above–who is going to come out looking strong?”

Alterra now ranks as the 10th-largest publicly traded Bermuda company, with capital of roughly $3 billion at June 30, 2010–a figure that executives pointed to as critical for a reinsurer in conversations that swirled around the IPC deal. (See related article at http://bit.ly/bSXj5Q.)

“It's what do you do with it” that's important, Mr. Berger said, when asked if $3 billion is the right number. “The $3 billion gives us much greater capital flexibility than Harbor Point or Max had on their own,” he added, noting that Alterra paid a $350 million dividend shortly after the merger was completed.

“At Harbor Point, we ended last year at $1.9 billion, which was really more capital than we needed, but how much did you want to return? Did you want to be a $1.2-to-$1.3 billion reinsurance company? You become marginalized if you're too small,” he said. “With some $3 billion in capital and the ratings we have, we can sit down at the table with anybody and feel that we're relevant.”

Mr. Berger reported that Alterra is still regularly approached with M&A opportunities. “Investment bankers have vivid imaginations and potential acquisition candidates, so we're always looking at that,” he said, but also noting Max's track record of hiring good teams of people and bringing them into the company.

“They've done it many times, and I can see us continuing that strategy,” he said.