Bermudas New Legacy

Bermudas New Legacy

During a first-quarter earnings conference call, Chris O'Kane, chief executive of Aspen Insurance Holdings, said that for reinsurance clients, his company is “winning at the expense of legacy-laden competitors.” His comment was the boldest declaration of a common theme expressed by leaders of the newest insurers to set up shop in Bermuda.

Whether it's Mr. O'Kane referring to Aspen's ability to increase its share of preferred reinsurance business at the expense of existing competitors, or John Charman, CEO of Axis Holdings, saying his global insurance segment benefited from “increasing concerns over the financial strength of legacy players,” or Kenneth LeStrange, CEO of Endurance Specialty, asserting his firm is “free of legacy liabilities, legacy infrastructures and legacy thinking,” the message is clear. To have a legacy is to be saddled with problems, and to be free of one means having a competitive edge, they believe.

The theory sounds convincing. Who hasn't thought of what it would be like to start our businesses over with a clean slate? We would avoid mistakes we made before, we'd like to think.

After just two or three years of operations, the theory remains untested. Will new leaders truly set their own courses, improving on what they did in past insurance lives where they gained the experience that, for many, supports ratings bestowed on their companies?

The numbers for the new Bermudians are impressive so far. While ACE and XL still outdistance the upstarts in rankings of premiums and capital by wide margins, many newer competitors reported lower combined ratios than their older counterpartsroughly eight points lower as a group in first-quarter 2004, according to NU estimates.

The differences, however, weren't solely attributable to the absence of legacy issues. A greater proportion of property business in a mild loss quarter also had an impact. And while the proportion of property business for the newer companies was roughly 40 percent (compared to 33 percent for older ones as a group), many new companies plan to write more casualty.

It may well be that the absence of a legacy will become a disadvantage as books of business shift in this direction. The recent history of PXRE, forced to revert to its property roots after a brief but unsuccessful foray into the casualty world, is a cautionary tale.

There's also an overarching question of how the new carriers can make accurate predictions of ultimate casualty losses for pricing and reserving without loss-information legacies to rely on. They cannot, executives freely admit when analysts prod them to describe loss reserving processes, replying with creative variations of the true answerwe guess.

There is educated guesswork inherent in all future loss estimates. But an existing company that has a record of how estimates by its claims professionals and actuaries played out over time is in a better position to make accurate guesses than one relying on industry benchmarks.

Whether initial estimates turn out to be fat or thin on growing books of long-tailed business will impact the reported income of the new competitors in future years. But it won't be the only news to watch as they build their legacies. How will they manage capital? How will they respond to market changes? How will they react to even newer challengers, like specialty insurer Quanta Holdings?

We invite you to read the profiles of five new competitors (beginning on page 12) to develop your own initial guesstimates.

Susanne Sclafane

Managing Editor

Reproduced from National Underwriter Edition, June 4, 2004. Copyright 2004 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.