Capital Pouring Into Insurance Ventures

London

Capital continues to pour into the insurance and reinsurance industries to take advantage of the business opportunities in the post-Sept. 11 market. However, some observers are getting worried that too much capital might create another era of overcapacity or at least substantially reduce the size and length of the hard market.

Other executives are less concerned, stating that the World Trade Center disaster created a capital crunch, coming after several years of bad industry results.

Among the capital raising announcements, in the order of the most recent:

A proposed Bermuda property-casualty insurer and reinsurer, Endurance Specialty Insurance Ltd., which is seeking capitalization of some $1.2 billion. Aon is due to supply $200 million of capital to the venture, with another $200 million supplied by Zurich Financial Services and an independent investment company called Cap C, in which Zurich has an interest. The remainder of the capitalization will be supplied by private equity, a Zurich representative said.

The formation of a new Bermuda holding company, Talbot Holdings, established by the management team of Alleghany Underwriting Ltd., a Lloyds managing agency, and investors led by Heidi Hutter and Jay Novik from Black Diamond Group LLC, a recently formed New York-based merchant bank and advisory company specializing in insurance company restructurings. (Among her prior positions in the industry, Ms. Hutter was director for the Equitas project at Lloyd's, as well as CEO of Swiss Re's U.S. and Canadian operations.)

Talbot Holdings was created to facilitate a management buyout of Alleghany Underwriting Ltd. from Alleghany Corp., which wanted to exit the Lloyds business. AUL plans to have premium income of 140 million ($204.4 million at current exchange rates) for the 2002 year of account, compared with premium income this year of 220 million ($321.2 million), said Michael Carpenter, chief executive of AUL in London.

“The Lloyds operations of Talbot Holdings are expected to form part of a more broadly based insurance group which will include insurance and reinsurance activities based in Bermuda,” according to a Nov. 6 announcement discussing details of the sale.

American International Group has formed a new Lloyds syndicate, managed by Ascot Underwriting Ltd., to write general insurance. The syndicate, which will be capitalized by 100 million ($146 million), was already in the process of being formed before the World Trade Center disaster.

Alea Group Holdings AG, a global reinsurance enterprise, announced a $100 million capital injection from Kohlberg Kravis Roberts and Company LLP, the U.S.-based private equity firm, which is Aleas parent company.

A proposed Bermuda-based p-c reinsurer with expected capital of at least $1 billion will be formed by White Mountains Insurance Group Ltd. The company intends to focus initially on property business through the broker market. The Bermuda-based White Mountains will be a founding shareholder and is expected to invest at least $200 million in the venture.

Folksamerica, a broker-market reinsurance company headquartered in New York City, announced on Oct. 29 that it will receive additional support from its parent company, OneBeacon Insurance Group, which is owned by the White Mountains Insurance Group Ltd. The injection will boost Folksamericas capital to the $1 billion level, doubling the size of the company.

The influx of capital is “rather alarming, actually,” according to Martin Reith, chief executive and active underwriter with Ascot Underwriting Ltd., the managing agent of the new syndicate being set up by AIG. “The fact that weve got all this mammoth capacity coming in, it doesnt look good to me.”

The market was hardening steadily prior to Sept. 11 because of a realization among insurers that they had to return the business to profitable levels, said Mr. Reith. “Then Sept. 11 comes along and not unsurprisingly everything accelerates dramatically,” he said. “What youre going to find now is that there is going to be a huge surplus of capacity, all trying to–and its awful to say it this way–exploit the opportunity that Sept. 11 creates.”

Mr. Reith said the previous disciplined hardening of the market is disappearing, “and its just becoming a frenzy of activity to get your pole in the ground and start taking the business.”

He emphasized that Ascot was in the works well before Sept. 11. “We are making a controlled and disciplined entry into the market,” he said. “Weve got arguably the best capital in the market backing us. Were not coming in with a $500 million or a $1 billion syndicate to really go to town. Were coming in at a good medium-sized level, and I think that sends out very positive messages about us that were not looking to come in and undermine a lot of the good work that is being done in the market.”

Looking at the situation from a different perspective is Heidi Hutter at Black Diamond, who said: “There is certainly a level of capital that needs to be replaced, and I think to some extent, some of the capital thats coming is to enhance companies abilities to accept the exposures.” She added that companies are also “looking at their exposures quite differently than they did before Sept. 11, and certainly capital is needed for that.”

“I think its right to be concerned,” said Mr. Carpenter at AUL. “But on the other hand, I would point out that if the World Trade Center loss is of the order $30-50 billion, I think so far weve only had talk of maybe $10-$15 billion of new capital coming into the insurance sector.”

As a result, he didnt think there was reason for too much concern. “It still sounds to me as though theres going to be a net reduction of capital,” he said. “Lets not forget that this event has followed two to three years of some pretty heavy losses in many property-casualty insurance companies. So I would say there has been a fairly significant reduction in capital and were still expecting the upturn in the cycle to be pretty strong and pretty long.”

Although there is a lot of talk about fundraising, Mr. Carpenter said his impression is that “quite a number of insurers are not finding it easy to raise capital. Thats not to say they wont raise the money–I think they will–but its not been easy. A number of companies that wanted to have rights issues have not yet emerged with them. I imagine shareholders are expressing some reluctance. So just because people are talking about $10-$15 billion entering the market, it doesnt automatically follow that that amount of money is going to be forthcoming.”

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 12, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

Contact Webmaster

Special Reports /

Capital Pouring Into Insurance Ventures

Related Stories

Recommended For You