Asbestos, the weak equity markets and Sept. 11 have indirectly claimed another victim. Gerling-Konzern Globale Ruckversicherungs—AG (GKG), the reinsurance arm of Germany’s Gerling Group, announced at the end of October that it has given up on the survival of its P/C reinsurance operations and on merger efforts to save them. It plans to put more than $4.5 billion worth of P/C reinsurance business into run-off, and to restructure its reinsurance operations to concentrate on life business, hopefully with a new partner.
That such a large company could fail (Gerling was ranked as the seventh largest non-life reinsurer in the world in 2001, based on net premiums written of $3.462 billion), shows the extent of the crisis in the equity markets. It also wrote life net premiums of $1.037 billion, and even though its premium income has increased since Sept. 11, GKG still couldn’t find a way to survive in the P/C reinsurance business.
Not that it didn’t try. As recently as September, Gerling was in talks with France’s SCOR Group concerning the sale of its life and some of its non-life reinsurance activities. However, the talks went nowhere, as SCOR’s CEO Jacques Blondeau insisted that any acquisitions would have to provide additional earnings immediately. When this seemed unlikely, SCOR withdrew from the talks. It also removed Blondeau from his job a month later in the midst of SCOR’s own losses.
GKG’s troubles began even before the Sept. 11 attacks. Many analysts trace them to the purchase of Constitution Re in 1998 by the group’s U.S. subsidiary, Gerling Global Reinsurance Co. of America (GGRCA). Gerling’s flagship U.S. operation was ranked as the 11th largest reinsurer in the U.S. in 2001-02, with $744 million in net written premiums. However, according to statistics compiled by Demotech Inc. from data provided by Thompson Financial Services, it had posted net income losses of over $21 million for the first half of 2001.
After Sept. 11, the trickle turned into a flood. GGRCA ended up with net underwriting losses of around $227 million last year, and the Group posted a net loss of around $500 million. Its paid up capital and surplus dropped by over 50 percent to $613 million, as reserves had to be strengthened, while its combined ratio ballooned to 135.1 percent. With its capital depleted, Gerling was unable to write enough new business to compensate for the losses.
It also faced two additional problems in finding new capital. The Gerling Group is not a public company. It’s a series of interlocking and interrelated companies that are controlled by the Gerling family, descendants of the company’s founder. Dr. Rolf Gerling controls 65.5 percent of the main holding company GKB. Due to its structure, not to mention the loss figures, the company couldn’t all of a sudden offer shares on the capital markets, nor could it make a rights offering, as Zurich Financial and other troubled public companies have done.
The other problem the company faced was with Germany’s Deutsche Bank (DB), who acquired a 34.5 percent stake in GKB in 1992.
Last March, in exchange for supplying €300 million (at the time around $297 million) in additional capital, DB required Dr. Gerling to agree to give up his majority stake in the holding company, and, more dramatically, let it be known that it was “looking for a strategic partner” to acquire the majority share. In other words DB wanted out.
Although the bank has its own problems, its action illustrates a fundamental difference between banks and insurance companies. “[Commercial] Banks have no appetite for insurance or reinsurance risks,” said Paul Walther, the head of Reinsurance Directions in Heathrow, Fla. “They are reluctant to assume underwriting risks.”
Even if Gerling had opportunities in the current hard market, DB wasn’t prepared to accept the risks by supplying additional funds. Apparently neither was anyone else. Walther also pointed out that the “extreme volatility of the [P/C] reinsurance market scares a lot of people, not just banks.”
In a press release issued shortly after the announcement Karin Clemens, a director of Standard & Poor’s (S&P’s) in Frankfurt, noted that, “A potential sale of Dr. Gerling’s stake in GKB is contrary to Standard & Poor’s previous expectation, and creates a significant degree of uncertainty regarding Gerling’s future ownership structure and strategic direction.”
All of the rating agencies took note, and, as the months went by, and no “strategic partner” emerged, began putting Gerling under review. S&P’s downgraded GKG to triple “B” in September. A.M. Best followed suit on Oct. 18, downgrading GKG’s financial strength rating to “B++” (Very Good) from “A-” (Excellent). The announcement also stated that in its opinion “GKG is likely to cease writing new non-life reinsurance business as there is only a remote possibility that it will be able to find a buyer prior to the 2003 renewal season.”
Gerling withdrew its participation from the reinsurance conference in Baden-Baden that began that weekend, noting that it still hadn’t found a buyer. According to reports, its withdrawal set off a feeding frenzy among its competitors as they fought to take over business previously written by GKG.
On Oct. 28, Gerling issued the announcement that it would restructure its worldwide life reinsurance business into a new company, Gerling Life Reinsurance GmbH, and would discontinue its non-life reinsurance business. It added that the company would continue to fulfill existing contractual commitments.
Gerling and DB are currently seeking to make a deal with mutual insurer Haftpflichtverband der Deutschen Industrie V.a.G. (HDI), Germany’s third largest insurer, which has a very healthy balance sheet. They’re hoping for a deal before the end of the year, when regulators will reassess Gerling’s financial condition. If some additional cash can be provided to restore Gerling’s battered capital position, they may avoid having to make any new capital infusions, but they’re unlikely to be in a position to receive any cash for their interests either.
While GGRCA’s life reinsurance operations will apparently continue more or less under new management, the P/C operations will be part of the run off process. According to 2001 figures the company had $2.26 billion in technical reserves, which should cover its portion of the run off. For the moment the rating agencies have held their fire. S&P’s is maintaining its triple “B” ratings, which “is the highest that may be assigned to an entity that is unlikely to write any new business.” Paul Walther, who recently described the current reinsurance picture as a “crème brûlée” market, meaning that “once you crack through the surface, you can do anything,” indicated that in his view there is enough capacity in the P/C reinsurance market to enable cedants to find coverage, “but the rates may go up.” In other words life goes on.