Bermuda Bound

Bermuda is quickly becoming crowded with new insurers, which will need strong management, good underwriting and a little luck to reap long-term success.

by David Hilgen

Bermuda: Insurance Oasis In the Atlantic The New Bermudians Bermuda Insurance Premiums and Assests--1996-1999

Not since 1992--when Hurricane Andrew battered Florida--have so many insurers and reinsurers flocked to the island nation of Bermuda. Then, as now, the new insurers and their financial backers looked at a bad situation for the industry--record insured losses--and saw the potential for good--that is, profits.

The second wave of new insurers and reinsurers hit the shores of Bermuda in the North Atlantic soon after the Sept. 11 terrorist attacks in the United States. Within weeks after the attacks, insurance broker Marsh & McLennan and Bermuda-based Renaissance Reinsurance each announced it would set up new reinsurers on the island in response to the industry's capacity shortage. MMC Capital, Marsh's private equity subsidiary, formed Axis Specialty. And Renaissance started DaVinci Reinsurance.

Several other new companies were created in the ensuing months--Allied World Assurance, Endurance Specialty Insurance, Arch Reinsurance, Montpelier Reinsurance and Goshawk Reinsurance. New insurers were still cropping up in Bermuda in late January--Olympus Reinsurance and Queens Island Reinsurance were the latest to set up shop.

These new companies and their backers--equity firms, existing insurers and brokers--are trying to take advantage of a hardening insurance market with rates that have risen 50% to 100% or more.

"It comes down to rate--rate and term conditions," said Matthew Mosher, group vice president in the property/casualty division of A.M. Best Co. "They feel there's a profit to be made."

With nine new insurers moving to Bermuda, the market is becoming crowded with companies seeking riches in a post-Sept. 11 world. While established and start-up insurers and reinsurers say there is room for more competition, some analysts wonder how many will survive and for how long.

A variety of factors may determine which of the new companies will reap long-term success, experts say. They include, but are not limited to, strong management, a clear exit strategy, alliances with other insurers, good underwriting, ability to pay claims, ability to change with market conditions, timing and luck.

"Clearly, you're going to have some winners come out as a result," said Robin Albanese, an equity analyst with Lehman Bros. "You're going to have some losers."

Drawing Parallels

For clues to what may happen in the property/casualty market in the coming years, one might look to Bermuda in the years following Hurricane Andrew. At that time, several new Bermuda-based insurers opened for business to take advantage of that hardening market. Marsh was a player then, too. It led the formation of Mid Ocean, a property catastrophe reinsurer. Renaissance Re was formed at this time, also, by insurer USF&G and equity firm Warburg, Pincus.

Many in the industry see direct parallels between the property/casualty market after Hurricane Andrew and the market today, six months after Sept. 11.

All estimates suggest the destruction of the World Trade Center in New York will be the largest insured event in history. The most recent estimates range from $30 billion to $35 billion. Hurricane Andrew is now the second-most costly catastrophe, with losses of about $20 billion in adjusted 2000 dollars. Following the August 1992 storm, capital flowed into the Bermuda reinsurance market, just as it is doing today.

"I think you can refer to what happened in the catastrophe market after Hurricane Andrew," Albanese said. "We've already been there, done that."

Robert Steinhoff, presiding chairman of Bermuda's Insurance Advisory Committee, said there was an immediate spike in prices after Hurricane Andrew because of a shortage in capacity. Prices rose significantly above pre-Andrew levels and would have risen higher if not for the large amount of capital that was invested in the industry in Bermuda, he said. Rates increased 20% to 70%, he said.

"If that additional capacity had not come in, those would have been higher," he said.

But James Stanard, chairman and chief executive officer of Renaissance Re and new reinsurer DaVinci, said the parallels between the post-Andrew and post-Sept. 11 periods are not so clear cut. "It's a different situation now than it was in 1993," he said. "You had just a withdrawal of capacity. You couldn't get things done at any price. Now, there is plentiful capacity. There is price discipline."

But discipline is the one thing that was lacking in the years leading up to Sept. 11, 2001. Underwriting became a lost art in the soft market that dominated the late 1990s. The stock market surged in the last decade, and insurers relied on Wall Street investments to subsidize years of underwriting losses.

"We had reached a trough in the market," said Elizabeth Farrell, vice president of global financial services at A.M. Best. "They basically were giving insurance coverage away."

Todd Bault, equity analyst with Sanford C. Bernstein & Co., said the popular view on the current market's price firming is that because there is so much capacity, it has to be deployed to increase rates. Bault, however, contends that pricing is countercyclical to profitability--as profits rise, prices drop; when profits fall, prices climb. "Underwriters don't think, 'I've got this capital to deploy,'" he said. With the economy in a recession now, profits are down, so prices are climbing, he said.

Pricing discipline will be the trend in the industry for a long time, said Albert Benchimol, chief financial officer of Partner Reinsurance Co., one of the Bermuda reinsurers that was formed after Hurricane Andrew. "We have to make money the old-fashioned way, through underwriting," he said.

PartnerRe is well positioned to take advantage of the current market, Benchimol said. The company has plenty of capital, a strong financial rating of A+ (Superior) from A.M. Best, and years of experience in the Bermuda market. In its latest round of renewals, it has taken on attractively priced risks that were unattractive just prior to Sept. 11, such as aviation and large industrial properties.

Lessons Learned

One thing insurers learned after Hurricane Andrew is that good underwriting is the key to profitability, although it's clear from the losses of the last few years that not everyone put this lesson into practice.

"I guess the lesson that I hope we've learned is you've got to maintain your underwriting discipline," said Michael Morrison, CEO of Allied World Assurance.

Another lesson, said Arch Reinsurance Chairman and CEO Paul Ingrey, is the importance of accurate catastrophe models. Everyone started building models after Andrew, he said. "There were models in place before Andrew. Andrew proved those were not good," he said. "Are they good now? They're good based on everything we know now."

Benchimol said the quality of the management teams that led the post-Andrew insurers proved to be more important to their success than the amount of capital raised to back the new companies. Also important are professional relationships and a proven track record, he said.

"Who's going to be on the other side of the phone when I call and have a claim?" he asked.

Today, strong management remains one of the key ingredients for successful start-ups. Investors, equity analysts, ratings agencies and primary insurers all said quality of management is one of the most important factors for investing in, rating or doing business with the new reinsurers.

Draining the Talent Pool

Finding the talent to lead the nine new Bermuda insurers has not been easy. Some of the top executives were lured out of retirement by the challenge of running a start-up insurer in a hardening market. At least one cited loyalty to his former employer as a motivating factor.

"When the chairman calls and asks you to do something, it's pretty difficult to say no," said Morrison, who retired in 1997 after 33 years with American International Group, which is the lead investor in Morrison's Allied World Assurance.

Ingrey of Arch Re had been retired for five years and was spending his days playing golf, tennis and bridge and guiding a 17-foot sailboat across the waters of Lake George in upstate New York. When he retired, he said, he "never looked back. I never wished I was working."

Ingrey said he was drawn back into the business by the opportunity to create a successful company at a very good time for the insurance industry.

Equity analysts and insurance executives have been saying for months that there is a lack of top-level talent. In a speech last year before the National Association of Independent Insurers, Alice Schroeder, an equity analyst with Morgan Stanley, said the shortage of talent is the "single-biggest issue" facing the industry today.

The reason strong management is so highly regarded in the insurance industry is insurance companies are hard to analyze, Bault said. "Good management has to be much better than mediocre management," he said.

Close alliances with other insurers also give new companies an edge over those not strongly allied. Most of the new Bermuda insurers have some relationship with an existing insurer or broker.

Olympus Re, for example, has a quota-share agreement with member companies of White Mountains Insurance Group, such as Folksamerica Reinsurance Co. "We're probably following a slightly different model than some of [the new companies]," said Sheila Nicoll, Olympus' president and chief underwriting officer. "We're not starting completely from scratch trying to build relationships."

Too Much Capital?

The loads of money coming into the industry--estimates extend higher than $9 billion so far--have raised concerns that the industry may become overcapitalized, which could keep rates from rising. Morrison of Allied World and Ingrey of Arch said there is no validity to claims that too much capital has been invested in the industry. They said the $10 billion or so added to the start-ups and existing companies make up just a fraction of the estimated $30 billion to $35 billion lost on Sept. 11.

If overcapitalization is not an issue, these start-up insurers will still have plenty of challenges if they hope to succeed. And success can be measured in many ways, as the post-Andrew market has demonstrated. None of the companies that was started soon after Hurricane Andrew can be classified as a failure, but many are not around today. While RenaissanceRe, PartnerRe and IPC Re remain, Mid Ocean and Tempest Re were acquired by XL Capital and Ace, respectively.

Benchimol of PartnerRe said that existing companies--such as PartnerRe--have the upper hand in the increasingly competitive Bermuda market. Factors that will lead to long-term success in this market include unquestioned ability to pay claims promptly when they come due; developing relationships with insurers based on trust; insuring the right product lines; and maintaining strong underwriting standards.

"In this market, the established players will continue to succeed," Benchimol said. "An insurance company will be much more prone to renew with a reinsurance company with which it already has a relationship."

Many of the new companies are financed in part by noninsurance equity firms, which may be hoping to cash in on their investments in a year or two through an initial public stock offering or a merger. Other investors are taking a more long-term view.

Here Today

The big question, said Mosher of A.M. Best, is, "With the sheer number of new start-up companies, which ones will be autonomous in the long run, and which ones will be swallowed up by other companies?"

John J. "Jack" Byrne, chairman of White Mountains Insurance Group, which launched Montpelier Reinsurance with Benfield Group, is noncommittal about the long-term prospects of the new company. "Montpelier is just an opportunity," he said. "We put $1 billion together very quickly, and we put together--I don't want to call it a temporary company, but an opportunistic company--just in Bermuda just for catastrophe reinsurance and mostly for business that otherwise would have been done at Lloyd's. Montpelier may only be around four or five years if the idea is not a good idea, but the idea is to write a lot of property catastrophe business that might otherwise have gone to Lloyd's."

Allied World Assurance, on the other hand, expects to be a player in the industry for a long time. Morrison said the company's goal is "to grow and be profitable, to be here permanently."

It's impossible to say with certainty what will become of the new insurers. "It's hard to speculate, but I don't think any of these companies are in the market for a finite period," said Steinhoff of the Insurance Advisory Committee. "The type of business these companies do will probably change as the market changes."

Although it is not known which of the new companies will be around a year or two from now, most in the industry, and particularly in Bermuda, are confident that prices in the property/casualty market will continue to harden for the rest of 2002, and perhaps beyond.

"I do not believe the naysayers will be proven right that this will only last a year," Benchimol said.

Source: Best's Review, March 2002
Copyright 2002, A.M. Best Company

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