Bermuda Start-Ups, Emerging In Time For 1/1 Renewals, Grow Up In A Hurry

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VALIDUS RE: Close-Knit Group Doing Reinsurance Exclusively

Incorporated: Oct. 25, 2005

Initial Investors: Aquiline Capital Partners, a private equity firm headed by Jeffrey Greenberg, along with other private equity funds.

Initial Capital: $1 billion

Ratings: "A-minus" from A. M. Best

People To Know:

o Edward Noonan, chair and CEO, has 26 years in the business, most recently as acting CEO of specialty insurer United America Indemnity Ltd. Before that, he spent 19 years at American Re-Insurance, ending up as CEO from 1997 to 2002.

o George Reeth, president and deputy chairman, has 30 years experience. He was a senior executive with Willis Group Ltd. from 1992 to 2005.

o Conan Ward, chief underwriting officer, was previously executive vice president and deputy CEO of the Global Reinsurance division for Axis Capital. Prior positions were at Everest Re and Guy Carpenter.

Business Strategies/Competitive Advantages: Mr. Ward sees Validus' competitive advantages in its seasoned management team and in the depth of experience of its underwriting and analytical teams–which, according to information on the company's Web site, now have a dozen people.

While competitors may have only one or two folks on board, "we've got line-of-business heads all in place," he said. In addition, the entire marine team is in place, and the analytical team, headed by Chief Risk Officer Steve Mercer, includes Lixin Zeng–"a bit of a legend in the portfolio optimization area," according to Mr. Ward.

He noted that Mr. Zeng–who holds a doctorate in atmospheric science and has held senior positions at Benfield, Willis Re and ACE–is "a great recruiting tool to bring in more analytical people who really want to work with him."

As for the business Validus will write, "our focus is first-party products," he said, noting that some workers' compensation catastrophe and high-level marine and aviation liability are the only deviations. But even that is "CNN-driven type stuff. There's not going to be any latency in what we do," he said.

"We're going to be quite conservative in how we manage capital," Mr. Ward said, explaining that the company will focus on metrics such as "overall-event TIV," or the total insured value exposed to a given catastrophe event, and the maximum foreseeable loss. "Those metrics give us a sense of what can happen, as opposed to a straight probabilistic analysis," he said.

Mr. Ward expects Validus to invest conservatively also. "Where we'll take risk is in the reinsurance market," he said. "We don't have great plans to be all things to all people. We want to keep the unit small and the decision making close here in Bermuda…and not to just be some large, fast-growing reinsurer."

Indeed, the vision of a small company of experts devoted solely to reinsurance–rather than a behemoth straddling the insurance and reinsurance sectors–is what attracted Mr. Ward to sign on at Validus. "Everything just gets too big, too fast," he said, and having insurance and reinsurance in the mix often "leads to arguments over who gets the capital and who doesn't."

Key Challenges: Putting together the "right mix of people"–with expertise, the right attitude, "and who are smart" key ingredients. "For us, being a small-knit group, chemistry is very important. Not only does someone have to have all the qualifications on paper, they also have to be the right fit," he said, noting that ultimate staffing between 35 and 50 people is likely.

HARBOR POINT: It's All About Execution

Incorporated: Oct. 25, 2005

Initial Investors: Trident III, L.P., a private equity fund managed by Stone Point Capital, a Greenwich, Conn.-based global private equity firm, The Chubb Corp. and J.P. Morgan Partners are lead investors.

Initial Capital: $1.5 billion

Ratings: "A" from A.M. Best, "A-minus" from S&P

People To Know: John Berger, president and CEO, has 28 years of experience in reinsurance, serving as president and CEO of Chubb Re since 1998. Prior to Chubb Re, he was president of F&G Re, and before that worked at General Re and Prudential Re.

Business Strategies/Competitive Advantages: Mr. Berger emphasizes that Harbor Point is not a brand new company, but one in transition. "We are an existing company with a new name and new capital. But we had a previous life known as Chubb Re," he said.

"We basically moved all the people and we're in the process of moving all the business over. Every single Chubb Re employee is now a Harbor Point employee," he said, describing a "well-seasoned group" of senior people averaging somewhere between 20 and 25 years in the business.

Part of the transition will include slight changes in the book of business, he said, noting that catastrophe-exposed property was a very small piece of Chubb Re's book–about 5 percent. At Harbor Point, "it will still be a minority of the business," but bigger than at Chubb Re, he said, noting that 15-to-20 percent of the portfolio will now be property-catastrophe. Of the remaining 80 percent, 50 percent will be U.S. casualty, and the rest will be made up of marine, aviation, crop and credit, he said.

About 75 percent of Harbor Point's business will be U.S. business.

There will be some hires in the property-cat area, he confirmed–noting, however, that the "nuts and bolts of that operation" were already in place. "They were relatively underutilized" because of constraints on how much property-cat risk the group could write under the Chubb banner.

Harbor Point will operate on a dual front from offices in Bernardsville, N.J., and Hamilton, Bermuda, and the existing liabilities of Chubb Re will remain with Chubb. Importantly, the Harbor Point team will continue to manage the existing liabilities, he said. "You're not going to have a runoff company…handling claims. It's about as seamless as possible to our customers."

Asked about distinguishing business strategies, Mr. Berger focused on execution. "At the end of the day, our business is not real complicated. We're going to try to keep it simple and to have good execution."

"People will talk about being very disciplined, [asserting] that when rate levels go down, they'll write less. Everybody says that; almost nobody will voluntarily reduce," he said. "And people say they don't overly rely on models, but they tend to write more aggregate than they probably should" based on model outputs.

Harbor Point officially opened its doors on Dec. 15, and renewed most of the existing book that came up for renewal on Jan. 1, Mr. Berger reported. "On the short-tail property side, we were a smaller player and trying to become bigger. But it was okay."

How does Harbor Point convince customers to place property-catastrophe business with a company that was more focused on casualty in its prior life? "We have people who have been in this business for a long time, and we plan to stay in the business for a long time. We operate in a very disciplined way, so that when needed, we are there," Mr. Berger said. "We never really have to sit down and sell ourselves. The worldwide market of supply and demand governs how much you can do."

Key Challenges: "Everybody's talking about long-term, short-term or medium-term weather pattern changes and an extraordinary period of frequency and severity, and who knows what might happen in the world? The political climate is fragile. It wouldn't take much–an event in the Middle East or a terrorist attack–to be pretty upsetting to the financial markets."

"The biggest challenge for everybody in our market is the discipline–to construct a platform where you're shooting for the appropriate margins for the risks you're taking, and trying to stick to that," he added.

ARIEL RE: Third Time's The Charm

Incorporated: Nov. 4, 2005

Initial Investors: Private investors–The Blackstone Group, Texas Pacific Group, Thomas H. Lee Partners, Oak Hill Capital, Olympus Partners, and others.

Initial Capital: $1 billion

Ratings: "A-minus" from A.M. Best

People To Know: Donald Kramer, chair and CEO, is former vice chairman of ACE Ltd. He was also founder and chairman of NAC Re, founder of Tempest Re, and later president of ACE Tempest Re. In addition, he was director and chairman of Assured Guaranty. Mr. Kramer brings with him a team of senior executives hailing from ACE and ACE Tempest, as well as from Rosemont Re–the predecessor of Ariel.

When asked for a measure of team experience in terms of years, Mr. Kramer replied without hesitation: "It's more than that. I have been able to recreate the team," referring specifically to George Rivaz, who worked with him at Tempest, originally as co-president, and Mark Herman, who was president of ACE Bermuda. At Ariel, Mr. Rivaz will head up underwriting for the reinsurance business, and Mr. Herman will serve as co-president, leading direct (insurance) business activities.

Business Strategies/Competitive Advantages: Asked to identify characteristics that set Ariel apart, Mr. Kramer modestly declined. "I'm not going to make an adverse comment on competitors. They're smart guys."

And they've grown smarter over time, he noted. Mr. Kramer said the class of Bermuda companies born in the wake of Hurricane Andrew "didn't have the same level of risk model sophistication" that exists now. "We really have stronger metrics" and have gotten "more sophisticated. That's not just us. That's our competitors…."I'm generally upbeat about the whole class [of 2005]."

Rosemont Re–a member of Bermuda's Class of 2001–and its U.K. parent, Goshawk Insurance Holdings, announced a deal involving Mr. Kramer and other investors back in late October, making the operation (later to be named Ariel Re) the first launch announced in the wake of Hurricane Katrina. Heavy Katrina losses and an A.M. Best downgrade had impaired Rosemont's ability to write new business.

While original terms of the deal included the payment of a commission percentage on renewals, Mr. Kramer noted the deal structure ultimately changed. "I didn't purchase the renewals. What I purchased was infrastructure," he said. "We had given them a proposal on certain renewal issues," but later modified that to pay "a flat fee straight away. At the end of the day, we basically just bought it out," he said.

Buying the infrastructure of an existing Bermuda company without taking on any of the existing liabilities gave Ariel a huge leg up. "We got capitalized on Dec. 15, and I'd like to tell you that by Jan. 1, we were fully mature in terms of operations, systems and everything else," Mr. Kramer said. "And it really is true. I genuinely believe that."

Beyond that, "I can't say we're doing anything so innovative that it's different from everyone else. A lot of this is just blocking and tackling," he said, describing the business being targeted as "plain vanilla."

As for business mix, he said, "our mission from Day 1 was to be a diversified company. We're not going to be a one-trick pony," he said, explaining that Ariel will write insurance and reinsurance, property and casualty. "I don't believe the property-cat monoline is a good model."

Mr. Kramer said he's always looking to increase staff, although Ariel has done well so far, recently hiring a chief risk officer and new underwriters. "I need to get someone who is really super at modeling," he added.

"We offer a good opportunity" as a start-up, he said, noting the attraction of joining a company that may one day become public. "For a lot of people, it's a chance to get new equity."

For Mr. Kramer, personally, the sheer thrill of starting up another company, and the sense of purpose it instills, coaxed him out of retirement. "This is the third large reinsurance company I started from a blank piece of paper. So I want this to be my best."

What about the name? Given that Ariel is a character in Shakespeare's "The Tempest," might there be a chance that Ariel Re, and one of Mr. Kramer's prior start-ups–Tempest Re, formed in the wake of Hurricane Andrew (now ACE Tempest Re)–might someday come together? The question draws a chuckle, but then some more serious reflection.

"What you have zeroed in on is my sentimentality about the whole thing," he said, noting that Bermuda and Shakespeare and "The Tempest" have a very close relationship. Mr. Kramer explained that while the site of "The Tempest" is a mythical place, it is believed that Shakespeare really was describing Bermuda.

FLAGSTONE REINSURANCE LTD.: Technical Ability Reigns

Incorporated: Nov. 10, 2005

Initial Investors: West End Capital (Bermuda) Ltd.

Capitalization: $750 million

Ratings: "A-minus" from A.M. Best; Awaiting S&P

People To Know:

o David Brown, who was CEO of Centre Solutions until 1998. Mr. Brown, who is chair of the Bermuda Stock Exchange, was also involved with a short-lived start-up, Gemini Re Holdings, in the late 1990s

o Mark Byrne, founder, chair and CEO of hedge fund manager West End Capital Management. Mr. Byrne–the son of John J. Byrne (former chair of Montpelier Re Holdings and White Mountains)–co-founded Rockridge Reinsurance Ltd. during second-quarter 2005, which assumed high-layer business from Montpelier.

o Gary Prestia, who formerly held senior positions at Converium North America and Alea North America.

o Guy Swayne, most recently served as chief underwriting officer of ACE Tempest Re.

Business Strategies/Competitive Advantages: Brenton Slade, who is responsible for capital markets activity and business development for West End, highlighted the extensive backgrounds of Mr. Brown and Mr. Byrne in insurance and reinsurance as a competitive advantage, also noting that Mr. Swayne and Mr. Prestia each have more than 20 years in the business.

West End is an investment management firm involved in both fixed income management and the management of reinsurance vehicles, he said, noting that the firm's experience with Rockridge (Montpelier's sidecar vehicle) revealed a catastrophe market that was attractively priced. "When the opportunity came this fall to put together something a little more involved–a standalone reinsurance company–we sought to take advantage of the market conditions," he said.

"I don't necessarily see us competing against other local firms or other newer entrants in 2005," he added, taking the view that "this is very much a global business." Flagstone will be as diversified as possible internationally, but will focus on short-tail lines–property, specialty risks and some casualty. "We're not spreading ourselves too thin," he said, noting that even casualty will be short-tail–casualty clash, or workers' comp cat (covering, for example, an earthquake taking down an office building with 100 employees).

Flagstone also has no plans to delve into structured or finite business, even though that was a specialty of Centre toward the end of Mr. Brown's time at that firm.

Mr. Slade said while the investment expertise of West End does not necessarily have a lot of crossover to Flagstone, an emphasis on quantitative technical analysis is common to both. "We're very focused on data-driven risks," he said. "We would like, very much, to have hard data and understand and model the risks we write," putting the build-out of systems, technical excellence and proprietary models high on the agenda of the new reinsurance company.

"We had a lot of the infrastructure in place already going into December, so for us to be ramped up completely with a fully integrated team was not really an issue," he said. "West End was already on the ground here" in Bermuda, he noted, with roughly 40 people as well as "the hard infrastructure"–office space and systems.

"The greatest challenge we thought we would face was thorough market acceptance, but that hasn't been an issue," Mr. Slade reported. "That's testament to [market] relationships of our senior executives," he said, adding that Flagstone was placed on almost all the programs it had targeted. "We're right on target, if not a little tiny bit ahead of where we thought we were going to be at this point."