It’s a rare occurrence, like a comet, but a life reinsurance company launched into the Canadian marketplace in August and, its CEO says, it aims to go global within a few years.
“We’re now in business,” says Alan Ryder, president and CEO of Toronto-based Aurigen Reinsurance Co. “Although we have hard work to do in helping customers see the value in our offering, we’re convinced they will welcome us and give us a fair chance in the market.”
Within the same week that the Office of the Superintendent of Financial Institutions granted Aurigen Re regulatory approval, A.M. Best Co., the New Jersey-based rating agency, branded Aurigen Re’s financial strength an A- (excellent) rating.
The US$173-billion global reinsurance industry — there is US$48 billion in life reinsurance alone — operates more or less away from advisors’ and consumers’ eyes. In Canada, more than 70% of life insurance is insured subsequently by reinsurers. Massively capitalized companies such as Zurich-based Swiss Re AG and Germany’s Munich Re AG back their Canadian subsidiaries’ policies, providing insurance for Canada’s largest insurers.
Aurigen’s global arm, Bermuda-based Aurigen Rein-surance Ltd., was launched with the same rating and a medium-term focus on establishing businesses in Britain, Continental Europe and the U.S., says Ryder. Five- to 10-year plans, he adds, almost certainly involve an initial public offering to raise cash to fund growth.
The immediate plan, however, is to persuade major life insurers in Canada — Manulife Financial Corp., Sun Life Financial Inc. and Great-West Life Assurance Co. — to give Aurigen a share of their life reinsurance business.
“We have been talking to customers for two years about whether they would be interested in a company such as Aurigen,” says Ryder. “You might think that the marketplace is well served by three global giants. But there’s a significant desire on the part of Canadian insurers to diversify their counterparty exposure. And, of course, nobody says there’s too much competition among suppliers. In a marketplace with three choices, the story we heard was there’s not enough choice.”
Munich Re, Swiss Re and New York-based Reinsurance Group of America Inc. each run Canadian subsidiaries that dominate the business here. But Aurigen believes that some of the large Canadian players will like Aurigen’s offering.
“Roughly two-thirds of the individual life insurance in Canada is written by the Big Three,” he says. “We won’t be successful if we don’t penetrate at least one and, hopefully, two or three of those companies.”
Medium-sized players — Trans-america Life Canada, AIG Life of Canada and the big banks’ life insurance subsidiaries are also likely to be interested.
The challenge for insurers, just as it is with individual investors, is to spread their risk, explains Ryder. With just three major reinsurers, the chances of any one player in the market having financial difficulty leaves the insurers at risk.
“There’s a flow of business here,” says Ryder. “The question is: can we win the share from our competitors. In other businesses, you would be worried about whether you can sell your product, but we have natural buyers here.”
In its opening coverage note, A.M. Best says that the market in Canada will be receptive to the additional capacity introduced through a new reinsurer. “Offsetting factors,” the note reads, “include the uncertainties surrounding the successful execution of Aurigen’s business plan as well as its lack of operating history.”
Apart from the nuances of the Canadian market, the fundamentals of the business are “steady as she goes,” says Ryder, and guided primarily by demographics that are, on balance, not totally positive.
On the positive side, the insured population is tending to live longer. Early in the century, medicine made large leaps in lowering maternal mortality during childbirth; today, drug intervention, research and health education have deferred the leading causes of death: cancer and heart disease.
On the negative side, the oft-discussed large, statistical bulge of baby boomers has lived out the years during which life insurance makes the most sense. From their 30s through to their 50s, this cohort, generally speaking, was married with kids and holding big mortgages. If the breadwinner died, there was a large financial liability to be assumed. True, there may be estate plans to be managed partly with high-value life insurance policies, but generally the growth rate for the Canadian life insurance industry has dropped to 3%- 4%.
@page_break@Likewise, the Canadian reinsurance industry — which grew by 15%-20% in the years after several Canadian insurers demutualized — has seen growth slow to 4%-5%. “[Publicly owned insurers] now were concerned about return on equity and other financials,” says Ryder, “and reinsurance can help them in that respect.”
Not only can reinsurance literally help insurance companies meet their liabilities, he adds, but from an operational perspective, the life manufacturers are better off financially by letting this second layer of insurers take on the capital risks.
Ryder’s institutional knowledge and understanding of the industry is such that Aurigen Re bought a $10-million policy to insure the reinsurer against his death, and he’s integral to the launch of Aurigen.
An industry veteran who began his career as a pricing actuary with Munich Re in 1980, Ryder is among a clutch of owner/managers with Aurigen Re who had been senior executives with Employers Reinsurance of Canada, which was owned by GE Corp. Ryder was president and CEO of ERC.
ERC’s market share in the reinsurance business was about 20% before parent GE decided to exit it shortly after 9/11, says Ryder. ERC’s directors persuaded GE to hive off the Canadian unit and take it public, but GE gave up that effort in 2006.
With Scotia Capital Inc. pushing Ryder and the former ERC managers, the group pitched the Aurigen Re concept to at least 15 private-equity firms before they landed with a syndicate comprising EdgeStone Capital Partners Inc., Englefield Capital LLP, Pine Brook Road Partners LLC and Soros Strategic Partners LP. The deal closed in September 2007, with Aurigen Re raising $500 million in equity.
Aurigen has always had three hurdles: funding, regulation and customer acceptance. “We were always focused on No. 3,” says Ryder, “because there was no point in going through the first two without the third hurdle jumped.”
As such, Aurigen Re plans to build slowly. Unlike the property and casualty market, reinsurance on life products only happens on new policies. The firm will approach Canadian life insurers, and ramp up its sales and administrative team to 40 from about a dozen.
“A small number of smart people can lever capital a long way in this business,” says Ryder, “unlike the primary business, in which you need armies of clerical people.”
Apart from geographical growth, reinsuring annuities and segregated funds is another potential market for Aurigen. Baby boomers are slowly migrating capital to wealth-accumulation and income products such as annuities and variable annuities. The Canadian Life and Health Insurance Association says annuity premiums grew by 17% in 2007, and Toronto-based industry consultant Investor Economics Inc. expects this category of products to reach between $28.5 billion and $53.6 billion in assets within the next three years.
“As volumes grow, the companies might find that they have longevity risk. They may be concerned by portfolio balance, which is the essence of what reinsurance is all about,” says Ryder. “We want to crawl, then walk, then run. We could find ourselves in the market in two or three years.”
Ultimately, the private-equity firms will want an exit, but they’re committed for five to 10 years, says Ryder: “We think an IPO is likely, but, obviously, the world can change. What I can tell you is that it’s not a short-term plan.” IE