New Bermudians May Move More Slowly Into M&A

Industry executives point out, however, that the new companies in the "class of 2001″ may not be sold off as readily because they dont fill a specific niche.

As multi-line companies, with some involved in the writing of both insurance and reinsurance, the 2001 companies could find it difficult to find their place within a larger corporation, Bermuda sources say.

The new Bermudians that formed in 2001 are Arch Capital Group, AXIS Capital, Allied World Assurance Company (AWAC), Endurance Specialty, DaVinci Reinsurance, GosHawk Reinsurance, Montpelier Re and Olympus Re, followed in 2002 by Platinum Underwriters.

These companies also may be slow to begin an acquisition strategy, at least on any significant scale, because of an unwillingness to take on an older companys legacy issues, according to Donald Kramer, the vice-chairman of ACE and founder of one of the "class of 1993″ companies, Tempest Re (now ACE Tempest Re).

Mr. Kramer said: "The new companies have billed themselves as fresh capital with no legacy issues that could lead to reserve deficiencies."

Further, stringent corporate governance legislation, under the Sarbanes-Oxley Act 2002, now requires a companys board of directors to be more involved in managements business decisions, he said.

"Boards are not going to want to acquire any company with legacy issues. This is because, under Sarbanes-Oxley, there is a real burden on directors, and boards are being more risk averse," Mr. Kramer said.

Instead, some of the new companies are buying books of business, he said, citing Endurances agreement last year to take over LaSalle Res in-force business from financially troubled Bermuda-based company, Trenwick (which is now in run-off).

As for the possibility of the companies being acquired themselves, Mr. Kramer said that could happen. "It is possible that they could be taken over, but what do they really bring once prices become more competitive in the soft market? I think we are going to see a different outcome for these players than what happened with the [1993] cat companies," he said.

"What will the outcome be for these companies? They could be successful, but it will depend on how they run their business. If they are disciplined, they have a chance. Well see," Mr. Kramer said.

When asked if there was room for all of the companies to succeed, he said there was, but he didnt think all would. "They wont all succeed because they will make mistakes or take the wrong strategy," Mr. Kramer said.

"There were different outcomes for each of the 1993 companies. This is exactly a [reprise] of that; there will be different outcomes, and I think some may shoot themselves in the foot," he added.

Others in the market said the fact that the companies were writing across lines of business, in contrast to the monoline cats of 1993, could also lead to lower acquisition activity than seen for the Hurricane Andrew companies.

IPCRes Chief Financial Officer John Weale said the new companies, as multi-line companies, werent an obvious buy.

"The difference between this recent crop of companies and the cat companies is that the 93 reinsurers were focused on one line of business," he said. "That made it easier for them to be absorbed into a larger multi-line corporation. But in this case, what would they really add?" he questioned. (IPCRe was one of the companies in the class of 1993.)

IPCRe CEO James Bryce felt some of the 2001 start-ups were trying to replicate the American International Group model with their multi-line approach, but he cautioned that such an attempt could doom them to failure.

"AIG set up in China in 1919. You cant replicate 80 years in three years, not on a global basis. It is the role model of the ideal company, but you cant build a culture like that overnight," he said.

Meanwhile, RenaissanceRe CEO James Stanard thought some merger and acquisition activity was likely for the 2001 companies: "I think there will be some consolidation. It is a natural process, but as to when, that is the question."

Mr. Stanard did, however, agree with others on the point that as multi-line companies, they may be a harder sell. "One of the differences with the class of 1993 is that there were some pretty obvious buyers then, namely ACE and XL. They werent in that [catastrophe] business and these were natural acquisitions," he said.

"I dont see obvious buyers today, and that could slow down the process," he said, although he did speculate that there could be consolidation among the 2001 companies themselves.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 1, 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.