American Re Corporation

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American Re Corporation

555 College Rd. E.
Princeton, New Jersey 08543-5241
U.S.A.
(609) 243-4200
Fax: (609) 243-4257

Public Company
Incorporated: 1992
Employees: 1,200
Sales: $1.44 billion
Stock Exchanges: New York
SICs: 6331 Fire, Marine and Casualty Insurance; 6719 Holding Companies Nee

American Re Corporation, through its subsidiaries, is a leading international property and casualty reinsurer. It was the third largest U.S. reinsurer going into the mid-1990s, operated main offices in Chile and Great Britain, and provided reinsurance and consulting services on every populated continent in the world. A holding company formed by Kohlberg, Kravis, Roberts & Co., American Re Corporation’s principal subsidiary is American Re-Insurance Company (American Re). American Re and four other American companies provide more than 50 percent of all reinsurance in the United States.

Reinsurance companies, while operating in relative obscurity compared to insurance establishments, play a key role in insurance markets. They provide stability by insuring the insurers. A company that primarily insures homes in California, for example, would likely be bankrupted by a major earthquake. By purchasing reinsurance, the company can protect itself from such catastrophes.

The property/casualty insurance industry, which American Re serves, was largely a corollary of the Great Fire of London (1666), after which fire insurance was established. In the United States, it was not until early in the 20th century that the hazards of wind, water, damage, personal accident, and explosion were added to established lines of fire insurance. Major British companies, such as Lloyd’s of London, provided most reinsurance for American insurers during the early- and mid-1900s.

The American Re-Insurance Company, the first U.S.-owned reinsurer, was founded on March 15, 1917 in Huntington, Pennsylvania. Seven families in that coal mining region formed the enterprise as a vehicle to provide a workers’ compensation program for local miners. Because of a dire need by mining families for protection from risks associated with dangerous mining occupations, the company grew quickly. In 1921 the company moved its headquarters to Philadelphia, allowing it to better serve its geographically expanding business. Likewise, the organization transferred its headquarters to New York City in 1933, using the temporary title New York Re-Insurance Company.

American Re continued to expand during the 1930s and 1940s, as property and casualty insurance increased in popularity. During that period, insurance companies were regulated solely by state governments. Therefore, insurance practices varied by region. In 1944, however, the federal government, in United States v Southeastern Underwriters Association, made the insurance industry subject to Congressional powers. Growth was particularly brisk after 1948, when states began allowing insurers to write multiple lines of insurance rather than limiting them to just one segment of the market. These changes, combined with strong demand for all types of insurance by burgeoning U.S. corporations, generated an influx of reinsurance activity.

American Re broadened its scope in the 1950s by acquiring American Reserve Insurance Company, of New York. In 1963, moreover, it purchased Inter-Ocean Reinsurance Company, of Cedar Rapids, Iowa. The company continued to boost its assets and services throughout the mid-1900s by focusing on customer service, cultivating long-term client relationships, diversifying its products and services, and emphasizing a conservative approach to investing its assets and reserves. Besides its acquisition activities and straight-forward management style, the company broadened its operations through international expansion beginning in the 1950s.

A fundamental goal of the company’s overall business strategy during the mid-1900s (and into the late 1900s) was a reduction of the effect of underwriting cycles on its financial performance—the insurance industry, in general, is heavily impacted by inevitable downturns in new insurance underwriting activity. By diversifying globally and across markets, and by securing long term relationships with healthy clients, American Re was able to weather industry downturns with few financial problems compared to many other reinsurance industry participants. Going into the 1990s, for example, American Re continued to serve clients enlisted shortly after it was founded.

Aetna Life and Casualty Insurance Company, of Hartford, Connecticut, purchased American Re in 1969 in an effort to diversify its holdings. Under Aetna’s ownership, American Re continued to attract new clients, boost its reserves, and expand geographically. Indeed, during the 1970s and 1980s the company opened offices across North America—in San Francisco, Kansas City, Chicago, Dallas, Atlanta, Montreal, Minneapolis, and several other cities. It also initiated operations in Mexico City; Bermuda; Bogota, Columbia; Santiago, Chile; Tokyo; Singapore; Melbourne and Sydney, Australia; London; Brussels; Vienna; and Cairo, Egypt.

Although Aetna paid only $340 million for the reinsurer, its new subsidiary proved, over time, to be a major boon to its bottom line. By the early 1980s, in fact, American Re was underwriting about $400 million in reinsurance premiums annually, despite a cyclical industry recess that lingered through 1984. And during the mid-1980s, a cyclical upswing propelled American Re-Insurance’s underwriting revenues to more than $1 billion by 1987, providing a healthy addition to Aetna’s aggregate earnings during that period.

Relatively healthy reinsurance underwriting activity, combined with relaxed regulatory oversight of insurance industry investment practices, induced several new companies to enter both the reinsurance and insurance industries during the mid-1980s. Despite unspectacular profits from insurance underwriting activity during that period, many insurance companies were able to generate fat profits by placing their assets in lucrative, yet risky, investment vehicles, such as real estate and junk bonds. Reinsurers benefitted.

In the late 1980s, however, the insurance industry suffered from numerous setbacks. Sloppy management and investment practices caught up with many insurers in the late 1980s, as interest rates and investment returns plummeted during the U.S. economic recession. Worse yet, record losses from catastrophes jolted property/casualty insurers in 1989, 1991, and 1992. Hurricane Hugo, the San Francisco earthquake, the Oakland fires, and hurricanes Andrew and Niki stressed insurance industry reserves with billions of dollars in damage. As property/casualty insurers filed record claims, many reinsurers suffered a significant depletion of their reserves.

Despite general industry turmoil, American Re profited from the conservative investment and management approach that it had practiced throughout most of the century. As the number of establishments competing in the U.S. reinsurance industry plummeted from about 130 in the mid-1980s to approximately 60 by 1992, American Re managed to increase its underwriting revenues, boost its reserves, and increase its annual operating income. For example, American Re-Insurance’s combined ratio (a standard industry statistic reflective of financial stability) was the best (lowest) in the reinsurance industry in the early 1990s, and had remained significantly below the industry average throughout the 1980s.

American Re-Insurance’s stability became increasingly important to the Aetna organization during the U.S. recession. In 1989, for example, the subsidiary contributed $128 million of Aetna’s total $676 million in earnings. As Aetna’s insurance company investments plummeted in value during the early 1990s, moreover, this ratio ballooned. In 1991, in fact, Aetna’s earnings had slipped to $505 million, of which $133 million, or 26 percent, came from American Re Company. Despite its reliance on the reinsurer, Aetna decided to sell the operation in 1992 in an effort to generate much-needed cash to shore up its lagging insurance divisions.

Kohlberg Kravis Roberts & Co. (KKR), in the largest leveraged buyout in history of the U.S. insurance industry, purchased American Re Company in 1992 for $1.43 billion. KKR formed a new entity, American Re Corporation, to act as a holding company for American Re-Insurance Company (American Re) and related subsidiaries. While KKR was taking ownership of the company, it planned to leave direct control of American Re in the hands of existing management. “We’ll be a stand alone, separate company and will be totally unrelated to other KKR companies,” said Edward Jobe, American Re CEO since 1987, in the June 24, 1992 issue of Business for Central New Jersey.

American Re’s management strategy following the KKR takeover entailed a four-pronged approach complementary of the organization’s legacy of stability and conservatism: Client focus, financial strength, global reach, and commitment to innovation. Client focus was achieved by taking a specialist, or “Whole Account Concept,” approach to service and by seeking long-term relationships. Every American Re client gets a multi-disciplined team of specialists to brainstorm needs and opportunities. “We then respond with customized products and specialized services,” explained Jobe in the July 5, 1993 issue of National Underwriter. The company augments its client focus with direct underwriting, long practiced by American Re. By underwriting reinsurance directly, rather than through independent brokers, the company believes it is able to establish better relationships and attract a more stable client base in comparison to most of its competitors.

American Re’s second management guideline, financial strength, was accomplished through an ongoing emphasis on exceptional cash reserves to back its potential liabilities; high asset quality, which is the result of cautious investments and a conservative asset mix; and a lack of dependence on underwriting cycles. Indeed, in 1993 American Re retained its distinction as having the lowest combined ratio in the industry. In addition, it maintained one of the three largest surpluses in the nation, 94 percent of which was invested in cash and bonds.

Global reach, American Re’s third corporate focus, was extended during the early 1990s by providing specialized services to overseas clients and by promoting a reputation for stability. The latter earmark was particularly pivotal in attracting overseas business. “Every client in the world has access to all of our corporate resources,” Jobe told National Underwriter, “including our multi-disciplined client teams... which partially accounts for the substantial growth in international premium writings we’ve been experiencing. [We have] an international network of direct relationships.” American Re operated ten overseas branches on five continents going into 1994, in addition to its 17 U.S. offices.

American Re was exhibiting its commitment to innovation, its fourth corporate tenant, in the early 1990s through automation, managing environmental risks, and rethinking its catastrophic risk policies. It established computer links among its international offices during the 1980s and early 1990s, for example, allowing the company to efficiently integrate global accounting and currency efforts. The company had also implemented the use of advanced risk analysis software to help it accurately predict damage from natural catastrophes. And the company had taken a leading role in the management of environmental risks, such as pollution and indoor air quality—an increasingly important sector of the industry in the 1990s.

In addition to its four-pronged management strategy, the company continued to achieve stability through market diversifi-> cation following the KKR acquisition. The company began decreasing its reliance on conventional underwriting and investment revenues in the early 1990s, instead seeking profits from related fee services. By 1993, in fact, American Re Corp.’s new subsidiaries were contributing a significant portion of earnings growth. Am-Re Services, Inc., for example, was established to provide clients with various reinsurance-related services. Likewise, Am-Re Brokers, Inc., provided client access to worldwide reinsurance resources. Similarly, the Becher + Carlson (B + C) subsidiary specialized in risk management consulting and brokerage for commercial and public entities. Finally, Am-Re Managers, Inc. provided a variety of underwriting and consulting services to non-insurance businesses.

KKR’s acquisition of American Re began to pay off in 1993. Company assets grew from $5.89 billion in 1992 to more than $6.23 billion in 1993, a 5.5 percent increase. And total revenue climbed from $1.1 billion in 1992 to an impressive $ 1.4 billion in 1993, resulting in net 1993 earnings of $75 million. Although company growth slightly lagged some industry statistical averages for larger reinsurers, those figures failed to reflect American Re’s stability and growth potential. For instance, the company’s international division boosted its gross premiums 39 percent in 1993, to $279 million. Furthermore, American Re’s debt was significantly reduced and its combined ratio improved a healthy three percentage points.

Going into the mid-1990s, American Re Corp. expected to continue to benefit most from overseas expansion and growth in fee services. The decline of competing European reinsurers, particularly Lloyd’s of London, boded well for international gains. Furthermore, American Re was striving to establish itself in many fast-growth developing markets, such as Russia, China, and Eastern Europe. B -f C, for example, secured a consulting contract in 1993 with one of Russia’s largest companies, which was also one of the world’s largest truck manufacturers. It also forecasted steady growth in several high-profile niche markets, such as environmental risk management and advanced catastrophe analysis. Another area of expansion in the mid-1990s was expected to be “treaty” business, whereby blocks of coverage are sold to clients.

“The new ownership will create an environment that will make it easier for us to work,” said Paul H. Inderbitzin, executive vice president of American Re, in the September 16, 1992 issue of Business Central New Jersey.” We will be aggressive in alternative markets... there are no barriers for the future growth of our activities.”