Transatlantic Holdings chief executive Robert Orlich saw a silver lining when AIG sold its majority stake in the reinsurer. He talks about what the group plans to do with its new-found freedoms
By his own admission, Transatlantic Holdings chief executive Robert Orlich is an optimist. It would have been easy to get disheartened about majority shareholder AIG’s decision to sell its 59% stake in the company, but Orlich insists the divestiture has done nothing but good news for his firm.
After being bailed out by the US government in the fourth quarter of 2008 to the tune of $180bn, AIG embarked on a fire sale of assets, including Transatlantic, to help pay it back.
The Transatlantic sell-off took place over two secondary stock offerings. The first, which closed on 10 June 2009, cut AIG’s stake to 13.9%, although this was held by AIG subsidiary American Home Assurance Company rather than AIG directly. The second, on 15 March 2010, reduced the stake to 1.1%. It now stands at between 0% and 1%.
There’s little doubt that AIG’s ownership of Transatlantic has benefited the reinsurer. “A lot of where the company is today is a result of our long-term relationship with AIG,” Orlich admits. “We would not have been able to build such a strong global franchise without its assistance. It was very helpful in getting us licences and giving us credibility – long before we would have been able to achieve it on our own.”
As a subsidiary of AIG, Transatlantic could take advantage of its parent’s reputation and global reach. It now has offices in 23 countries and has been able to move in on some countries long before its peers. While global operators waited years for the Brazilian reinsurance market to allow foreign entrants to compete with state-owned reinsurer IRB?Brasil Re, Transatlantic had been in the country 10 years.
But as Orlich points out, the AIG connection quickly turned sour amid the group’s financial woes. “Clients and brokers were questioning whether Transatlantic would be affected by AIG’s financial condition,” he says.
He sent letters to clients in September 2008, reassuring them any insolvency at AIG would not affect Transatlantic as the group could not access its assets without the board’s approval.
Orlich believes the letters cleared up a lot of uncertainty. Of the first secondary offering of AIG’s stock in June 2009, he recalls: “We didn’t have to spend the first 20 minutes of a 30-minute meeting explaining how Transatlantic would or would not be impacted by AIG.”
Now that it is no longer part of the AIG group, Transatlantic has much more control over its destiny – particularly capital management. “We are able to access the capital markets on our own, as opposed to being lumped in with AIG and being subject to group credit exposure,” Orlich says. “And while we could have bought back shares in the past, every share we repurchased would have meant AIG would own more of us.”
Accordingly, on 21 December 2009 Transatlantic authorised a $200m share repurchase programme.
Transatlantic can now explore avenues that were closed when AIG controlled almost 60% of the firm’s voting rights. It can consider redomestication, which Orlich says AIG did not favour. It can also explore setting up its own insurance division should it need to issue policies to clients from an admitted US insurance entity.
“When we were affiliated with AIG, we had access to primary insurance paper,” Orlich says. “Now we are independent, we still enjoy a strong relationship with AIG, but we are keeping our options open.”
Orlich says that although reinsuring AIG and its subsidiaries once accounted for about 70% of Transatlantic’s business, it now only makes up 6%. But he adds: “The business we do with AIG tends to be longstanding programmes. We continue to pay our claims and they recognise we can do that. We anticipate we will be able to maintain our business relationship with AIG.”
AIG could choose to do less business with Transatlantic – insurers generally are trying to reduce the reinsurance recoverables exposure they have to individual reinsurers – but business lost from AIG could be replaced by new clients.
Orlich says one of the biggest changes since the sale of AIG’s stake has been an increase in submissions from clients. He attributes this to potential clients’ concerns about ceding business to a reinsurer owned by a major rival. “There were Chinese walls between ourselves and AIG; they received no information from us,” he says. “But AIG is the biggest competitor to the rest of the industry. Early statistics indicate some of our clients were not showing business to us because they were concerned we would share information with their competitor.”
The changing relationship with AIG is not the only challenge Transatlantic faces. Rating agency AM Best downgraded the firm’s financial strength rating to A from A+ in September 2008, following the downgrade of various AIG subsidiaries after the US government’s initial $85bn bailout.
Standard & Poor’s followed in January 2009, cutting Transatlantic’s rating to A+ from AA-, then Moody’s in September 2009, amid concerns about exposures in the 2009 hurricane season.
Orlich believes the downgrades partly reflect agencies’ view of the industry. “We didn’t like the downgrades, but there haven’t been many upgrades,” he says. “The ratings we currently enjoy are certainly sufficient, if not high, for the marketplaces we deal with. I’d argue there was no impact from the downgrades in 2009.”
Challenges remain. Like many reinsurers, natural catastrophe losses have given the firm a shaky start to the year. Its first-quarter 2010 net income of $15.9m was 78.9% down on 2009, and pricing in most lines of business remains soft.
But Orlich is determined Transatlantic will maintain underwriting discipline. “We never go into a deal with the expectation that it is going to produce an underwriting loss.”
He is equally determined that discipline should not be an excuse for stagnation. “I chalk up a lot of growth opportunities by having a broad, diversified book of business and a global franchise. In some years growth is difficult, but as long as airlines fly and people walk, they can find ways to grow premium income and book value.”
Transatlantic aims to set up new branches as needed. It is planning a Bermuda office to tap the local business there. Orlich believes an international network is key as the business is written by locals who understand the market. “That tends to give you better information. Information is always going to be paramount in our business,” he says.
The catastrophe losses suffered by the reinsurance market in the first quarter have failed to push up rates at the 1 June and 1 July renewals. But Transatlantic’s strong foundations should ensure Orlich’s optimism is not unfounded. IT