In another life and another century, J. Eric Brosius spent part of his days pondering the nature of vector bundles on algebraic surfaces.
Today, as senior vice president and manager, reinsurance, for Liberty Mutual Insurance Co., Brosius' slightly less esoteric concerns center on protecting the carrier from the financial ravages of catastrophes from both God and man.
The soft-spoken former mathematics instructor at the Massachusetts Institute of Technology and Wellesley College balances the dual role of chief reinsurance buyer for the sixth largest property/casualty insurer in the nation with that of purveyor of the same product to carriers around the country.
In that regard, he remains something of an anomaly as most of the current large property/casualty reinsurers have gotten out of the reinsurance business.
Travelers, The Hartford, CNA and Chubb are among the big names that have decided to cede the secondary business to the giants of Europe such as Swiss Re and Munich Re and the relative upstarts of Bermuda.
"In those companies one person may have had both the buyer and seller role, but today, since most reinsurance is sold by reinsurance companies, it is no longer the case," Brosius says.
If you want to try and find the reasoning behind Liberty's approach to risk, you don't have to look much further than the name of the company emblazoned in gold letters on its Art Deco headquarters near Boston's Copley Square.
For Brosius and all the powers that be, "liberty" is just another word for not having to answer every three months to Wall Street analysts, who sometimes take a dim view of earnings that fail to maintain an upward trajectory.
"Many of these companies just got tired of answering questions about reinsurance on their analyst calls," he says. "People talked about the unwanted volatility that they just did not want to have to explain."
Rob Jones, London-based director for Standard & Poor's, agrees that the reinsurance business leaves a lot to be desired as a lure for investors.
"Its record of long-term profitability lags that of the banking sector and has been prone to much greater volatility," he says. "Furthermore it is both poorly regarded and poorly understood relative to other sectors by investors."
Among the negative factors for the industry include opaque financial reporting, poor risk management, limited capital market disciplines and regulation unresponsive to risk that Jones says has been synonymous with the industry.
But Brosius feels that Liberty's long-term view of profitability will keep it in the reinsurance business for the foreseeable future.
"Liberty Mutual seems to have a different mindset in that, if I run my business in a way that controls risk with the long-term expectation of a profit, my company management is going to keep me in business," he says. "As soon as I can't control risk or assure a long-term profit, then I myself would say I ought to change what I am doing."
Freedom from quarterly-reporting challenges, along with a concentration on core competencies, appear to define the essence of the Liberty operating philosophy.
"I observe other companies only from a distance. But it seems like 10 years ago everybody was interested in joining banks with insurance companies. Remember Travelers joined with Citicorp and that was the rage," he says.
He contrasted that philosophy with that of Liberty Chief Executive Officer Edmund "Ted" Kelly, who he says instead maintained the goal of becoming the premier property/casualty insurance company with expansion into other countries as its means of growth.
Brosius may be too polite to stress the point, but with the life operation of the vaunted Citigroup behemoth ending up swallowed by MetLife, the property/casualty operation by St. Paul's and the entire company itself the target of derisive headlines as it travels the world looking for bailout, it is hard not to grasp the value of the Liberty philosophy of sticking to and expanding your knitting.
Brosius says forays into Latin America and Asia, including China and Vietnam, have served the company well over the past decade.
The company entered the Latin American market in 1995 when it acquired the majority interest in a 50-year-old Venezuelan property insurance carrier. The following year it set up its own company in Argentina specializing in workers' compensation products, which was followed three years later with the establishment of a unit there specializing in personal-lines products. The company also has operations in Brazil, Colombia and Chile.
In 2004, Liberty set up the first major outpost in Western China when it opened an office in Chongqing. Two years later, Liberty opened for business in Vietnam.
"Ten years ago, that was not the flavor of the day, but this is what makes sense to me," Brosius says, referring to Kelly's thinking.
Sticking to the surety business despite the severe losses it experienced at the beginning of the decade is another example. "So I don't think reinsurance is unique as a business that management has confidence in. They don't seem to worry about the fact that other people are all running away from the business," he says.
AT LIBERTY TO LOSE
As reinsurance buyer, Brosius must ensure that a repeat of 2005, or even worse, 1906, does not wipe out the balance sheet in toto. But taking the task to an extreme can also present pitfalls. "It almost seems that some companies in the industry expect that even with a very large catastrophe that they will still make a profit," he says. "While we don't like to lose money, if you are in the property insurance business, if there is an earthquake or hurricane, you have to face the fact that you might lose money one year."
Brosius' charge from the top brass mandates that purchasing reinsurance must take into account "thinking about the earning power of the company, about the capital that we have and recognizing that if we have one of the giant storms--we call them one in 100--we are going to lose some money."
That philosophy may not go down so well at other companies.
"You hear a lot of people lobbying for the government to intervene in scenarios where we are still making money," he says. "I think that pressure to always show profit, even when serious events happen, comes partly out of being a public company, and I think partly it is quality of management."
While not mentioning any names, it is hard not to think of Allstate, which reacted to its record 10-figure 2005 third-quarter loss by not only announcing an ambitious reinsurance buying program, but spearheading a movement for a federal catastrophe fund to shore up the industry in the event of a megacatastrophe on the scale of 2005's Katrina-Rita-Wilma triple whammy.
The industry remains sharply divided with Allstate and State Farm supporting the concept while Liberty Mutual remains opposed. The issue also appears to have driven Allstate out of the Property Casualty Insurers Association of America, where it clashed with Liberty.
"I think we will be better off if we say that we as an industry will lose some money if a bad year happens, and we should make some money in the good years," he says.
(For the record, both Liberty and Allstate made money in 2005 with the former reporting net income of just more than $1 billion and the latter earning $1.8 billion.)
The fund appears to face a rough road in Congress and even in Florida. Voters in the presidential primary earlier this year reacted with a yawn to former New York Mayor Rudy Giuliani's effort to ride the issue to victory along with Allstate's newspaper campaign to drum up support for the fund before the voting.
Ed Collins, who serves as both an in-house counsel for Allstate and national director of the lobbying group Protecting America.Org, responded that the issue is not about individual companies or even the industry as a whole.
"They will always find a way to take care of themselves," he says. "Rather, what we need to do is work collectively to keep the focus on better preparing the consumer for any eventual megacatastrophe."
Corporate governance structure cannot tell the whole story, obviously, when it comes to catastrophic risk because the nation's largest mutual insurer, State Farm, has backed the federal fund, although not in as vocal a fashion as Allstate.
Liberty resisted the full demutualization craze at the turn of the century to settle on a mutual holding status, a structure that permits greater access to capital markets but does not have the accountability aspects of a public company.
Critics such as David Schiff, editor of Schiff Insurance Observer, have criticized the MHC concept and takes issue with the idea a public company cannot profitably operate a reinsurance operation. "All you have to do is look at Berkshire Hathaway to see that is not true," he says.
The Warren Buffett-led, consistently profitable conglomerate has both General Re and GEICO under its umbrella.
Fitch Ratings analyst Mark Rouck says the agency recently upgraded Liberty to a single-A status after years of improving overall and underwriting profitability. But he noted the carrier still does not have the double-A status of what he considers its peers, such as The Hartford and Chubb, which are public entities.
While agreeing that the closely held status presents a lot more operating freedom, "the flipside is the only real way to raise money is through debt."
As for any new reinsurance buying strategy in the aftermath of KRW, Brosius sees the question from a different perspective.
"What we are trying to do is think about reinsurance buying from a corporate wide standpoint, rather than have each business unit make their own decisions," he says. "There may be risks a small-business unit cannot afford to take but that Liberty Mutual, which announced more than $14 billion of capital, can afford to take."
For example, a $50 million loss from an earthquake in Chile could knock a Liberty subsidiary in that country for a loop, but nonetheless present a tolerable risk for the group as a whole. "We need to look at risk from a corporate standpoint, both to make sure we do protect ourselves from risks that are big and to make sure we don't protect ourselves against risks that we can perfectly afford to take," he says.
Brosius says the reinsurance question is only part and parcel of the transformation the company has undergone over the past decade from one with a commercial lines emphasis and, more specifically, workers' compensation emphasis, to an international enterprise that today has personal-lines auto coverage as its largest component.
"This has come about because a lot of what we sell in these foreign countries is personal auto," he says.
The growth of personal auto in turn has lead to a growth in homeowners, which in turn has increased the company's natural perils exposure. In addition, Liberty's commercial-property book has grown tremendously over the past decade.
And, of course, the events of Sept. 11, 2001, have added manmade to the natural perils Brosius must protect against, and which in turn have brought the workers' compensation exposure into the catastrophe risk mix more than ever before.
Liberty has taken a leading role, Brosius says, in pushing for passage and extension of the Terrorism Risk Insurance Act. "We think we can handle natural-CAT risk. I am not so sure that all terrorism risk is as easily handled," he says.
Brosius has also kept a sharp eye on the controversy over whether non-U.S. insurers should have to put up 100 percent collateral on their liabilities to operate in this country.
He cautions that any attempt to do away with the requirement should be proceeded by careful study of some elements of foreign law that in even the United Kingdom, for example, could wipe out reinsurer obligations in the blink of an eye or the pounding of a judge's gavel.
Protecting the integrity of $14 billion might seem like a pretty heady, as well as grounding, responsibility for someone who started out his career not by doing, as the cliché goes, but by teaching.
After earning a doctorate in mathematics from the University of Pennsylvania in 1982, Brosius spent nearly two decades in academia, but eventually decided that the private sector offered more opportunities for personal and professional growth.
He found his work in mathematics research a singularly solitary pursuit and likes to joke that he became an actuary 18 years ago when he joined Liberty for the sociability it would bring to his life. "Being an actuary, you do get to talk to a lot of people in claims, underwriting and loss prevention," he says.
With the benefit of 20-20 hindsight, the transition from the not-for-profit to the profit world proved the right move at the right time. "As I gain experience and influence, it is nice to have an opportunity to affect things," he says.
And just how does Brosius influence things at Liberty Mutual?
"That's a good question," he says. "I guess I would like to be the idea that, when decisions are made, we are going to look at it in a logical way, consider the evidence and do the right thing."
STEVE TUCKEY lives in New Jersey.
April 1, 2008
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