New Bermudians Fill Market Holes; Two Newbies Top $1 B

That $45 billion figure for new capital includes the nine new Bermudian companies which set up shop after Sept. 11, raising a little over $8.1 billion.

(The companies included in the nine-company group are Arch Reinsurance, Endurance Specialty, Montpelier Re, Allied World Assurance, Axis Specialty, DaVinci Re, Goshawk Re, Olympus Re and Queens Island Reinsurance.)

More capital came out of the global insurance market than went in, for a variety of reasons, such as the stock market, reserve adjustments, and demands for new business," said Don Kramer, vice chairman of ACE Limited in Bermuda.

Capacity has withdrawn from the global insurance market due to the World Trade Center losses and the need to increase reserves, he said, estimating that reserving has taken as much as $10 billion out of the entire marketplace in fourth-quarter 2002.

Then the European stock market declines have taken $20 billion, possibly $30 billion out of the market, he said, citing required retrenchment taken by many European companies as a result of drops in their equity holdings.

Further, he said, a number of companies are withdrawing from markets because of bad prior-year results.

Mr. Kramer said an indication of the need for capacity is shown by the fact that two of the new start-upsAxis Specialty and Arch Capitalhave written over $1 billion in net written premiums

"Whats happening is that the new capital, at least for the companies that have seasoned management teams, veterans like Arch and Axis, are getting access to the market," he said.

The need for capacity is exacerbated by the fact that the industry is in its second year of exceptional growth, Mr. Kramer said. "In the United States, the property-liability market grew 13.6 percent last year," he said.

In its early-bird forecast for 2003, the Insurance Information Institute predicts a 12.3 percent growth for the industry, he said. "Those two growth rates13 and 12amount to $90 billion of new premium," he said. "How much capital is needed to support that? So if Arch does $1 billion of business, they are just a drop in the bucket."

Jim Auden, senior director for Fitch Ratings in Chicago, agreed that market dislocations have created a lot of new opportunities for Bermuda companies.

"There are a number of U.S. commercial lines companies that are having trouble or are cutting back; and also in Europe a number of companies have been hit pretty hard in the last year by underwriting losses and investment losses," he said.

"There has been a big decline in capital or capacity in the market," he said, noting that Swiss Re in a report issued late last year said that non-life capacity has dropped by 25 percent.

The new Bermudians have acted to fill the void following the decision by a number of companies to back off from writing business, he said, pointing to Axa, Gerling and Kemper, which have all pulled out of the U.S. market.

Karole Dill Barkley, director and segment specialist for the Bermuda market at Standard & Poors in New York City, said a year ago, the new markets in Bermuda seemed "awfully speculative."

"But, now, I would think that the primary markets are very happy to have these markets available to them for reinsurance," she said.

"In a number of cases, the new companies have taken over franchises from other companies that needed to raise capital or get out of businesses. So I think that the impact on the market from the new Bermuda companies is a positive one," she said, citing Endurance Specialtys purchase of LaSalle from Trenwick and Axis purchase of the renewal rights to Kempers directors and officers liability insurance business.

Further, she said, the existing Bermuda companies, by and large, "feel their new compatriots are being generally responsible," she said. "I dont think they [the new Bermudians] would have the amount of business they have if they werent adding value to their clients."

The new Bermudians are also finding that their clean balance sheets, with no baggage from the past, are providing marketing advantages, she noted.

"In an economic market where we have weak fundamentals and a large amount of stress in the credit markets, the advantages of having a clean capital base and no prior investment portfolio actually outweighed the negative of having no past business position and having to develop that position," said Ms. Dill Barkley.

"Most of the new management teams [of the new Bermudian companies] will argue that they do have prior relationships from their individual experience in the market," Ms. Dill Barkley said.

"They would say that they have long-standing relationships and thats what has driven the significant growth of business that theyve been able to put on the books in 2002," she said.

Some analysts in the past have stated that the new start-ups could be slightly disadvantaged due to more limited funds to invest resulting in slightly lower investment income. "In reality, the European reinsurance market was hit heavily because they did have large equity portfolios," said Ms. Dill Barkley.

Ms. Dill Barkley said the new Bermudians have pursued initial public offerings because access to capital is an important equation for the future of these companies. "They want the currency of their own stock, in terms of providing valuation tools and also to diversify their capital sources," she said.

They dont want to be as dependent on the interests of the private investors, she said, noting that more IPOs can be expected in 2003. (Axis Specialty recently filed with the Securities & Exchange Commission for a planned IPO.)

"Having a share price for the stock gives you a better valuation and it allows you to have access to public market capital. So its a good thing for the companies and the private investors to be able to value what they have on a market basis," she said.

The IPOs conducted by Montpelier Re last year broke a 2002 drought in IPOs, she said. "Its clear that the appetite from the capital markets for new companies pulled back in the second quarter of 2002," she said. So there were companies that were trying to form that did not get capital last year.

"The one caveat to that statement is that the markets are pretty unsettled right now," she said. "So in terms of timing of an IPO, thats a different issue that theyll have to consider."

Will the new Bermudians maintain their discipline when market pressures start turning downwards?

"I cant predict the future, but its in their interests to be responsible," she said. "Theyve got a base to work from now, and I think weve just seen the cost of undisciplined underwriting in the market, especially in longer-tailed lines."

The goal is to build a successful, profitable franchise to generate significant returns, she said. "Most of the management teams are highly invested personally in the companies and are highly motivated."

"There is too much bad news that has been experienced too recently for them to not be cognizant of the downside risk in the business," she said. "When the market softens, youve got to know what is going to be profitable and whats not going to be."

Reproduced from National Underwriter Edition, March 17, 2003. Copyright 2003 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.