Reinsurance ventures rake in profits in 2002: in its first year of business, the class of 2002 turned a tidy underwriting profit with combined ratios well under 100

Risk & Insurance, July, 2003 by Patricia Vowinkel

It's been a good first year for the new reinsurance ventures that were formed after the Sept. 11,2001 terrorist attacks.

In its first year of business, the Class of 2002 turned a tidy underwriting profit, with combined ratios well under 100. They have written a substantial amount of new business and three of them have gone public in spite of a skittish stock market. A fourth hopes to go public this summer.

They have been helped by the fact that they are unencumbered by liabilities on old business. Because they are not haunted by past underwriting mistakes or bad investments, they are free to focus on building for the future. It also has helped that catastrophe losses were light in 2002.

"Overall, they progressed very nicely for the first year," said Peter Dickey, managing senior financial analyst at rating agency A.M. Best. "Each one has written more than they initially thought they would." Major losses from the terrorist attack as well as losses on old asbestos claims, however, have bogged down competitors who were in business before Sept. 11. A wave of corporate scandals over the past couple of years has also meant substantial D&O losses for established companies.

The new reinsurers, meanwhile, have been winning business because clients view them as secure and don't have to worry about whether they will be around in a few years to pay claims, Dickey said.

All Bermuda based, the new reinsurance ventures include Allied World Assurance Holdings Ltd., Axis Specialty Ltd., DaVinci Re Holdings Ltd., Endurance Specialty Insurance Ltd., Montpelier Re Holdings Ltd., Goshawk Reinsurance Ltd., and Olympus Re. Arch Capital was formed before Sept. 11, but was recapitalized for 2002.

In addition, St. Paul Cos. spun off its Platinum Underwriters reinsurance business in an IPO in October. The company priced 30 million shares at $22.50 each. The shares, listed on the NYSE under the symbol PTP, have been trading around $25.

Two of the other new ventures, Montpelier and Endurance, have gone public. Arch was already a publicly traded company. Axis Specialty hopes to go public this summer, Dickey said, but terms of a possible offering have not yet been announced.

Insurance and Beinsurance

The new ventures are often writing both insurance and reinsurance. The new reinsurers were formed at the end of 2001, at a moment when the insurance industry was on the verge of a dramatic overhaul.

"The catalyst that led to the formation (of Endurance Specialty) was the World Trade Center attack," said Kenneth LeStrange, chairman and chief executive of Endurance. "I was working at Aon at the time and there was a sense that the World Trade Center disaster, apart from being a terrific human tragedy, would be the catalyst for a lot of change in the insurance and reinsurance industry," he said.

The Sept. 11 terrorist attacks wiped out an estimated $50 billion in insurance industry capital.

Capital available to write property and casualty insurance and reinsurance was impaired by an estimated $228 billion to $248 billion in potential and realized underwriting and investment losses in 2002, according to an SEC statement filed by Axis Specialty. That is equal to about 35 percent of the approximately $700 billion in available capital at the end of 2000, Axis said in the filing.

That took a heavy toll on reinsurers, forcing many of them to withdraw from the market or sharply curtail capacity.

"These were companies that had problems for years," Dickey said. "They had problems before Sept. 11, and Sept. 11 pushed them over the edge," he said.

Trenwick, Gerling and Scor, for example, have all encountered problems over the past year and are drastically cutting back their reinsurance capacity.

As capacity dried up, reinsurance rates soared and terms and conditions tightened. New capital poured into Bermuda in just a matter of months to respond to the capacity crisis.

"You have to give these people credit, they moved very quickly," Dickey said.

But industry experts say the window of opportunity has certainly closed. The time to launch a new reinsurer was at the end of 2001. "In my opinion, the boat has left the dock," Dickey said.

In their first year, the new ventures have attracted an array of top talent to Bermuda and have established distinct business identities.

"A lot of people imagine us on a small island clubbing each other to death," LeStrange said. "I think each organization has developed a fairly distinct identity," he said.

Getting top talent to join a new venture was expected to be a more serious challenge, said Constantine Iordanou, president and chief executive of Arch Insurance Group (U.S.).

"Our ability to attract top level talent in the company has been a little easier than I would have thought when we started," he said. Despite the risks, he said "there is an excitement to be with a new company who focuses all of its activities on building and looking toward the future versus dealing with problems in the past," he said. "Some people like to remodel old castles and some people like to build new ones."