New Capital Boosts Bermuda’s Reinsurance Industry

By | November 19, 2001

As the reinsurance industry gears up to replace a good portion of the capital lost in the Sept. 11 attacks, companies are seeking to place themselves in a position to profit from the expected surge in demand and resulting increases in premiums, and Bermuda is once again at the center of this capital earthquake.

Longtime industry consultant Paul Walther, who heads Reinsurance Directions Inc., said, “As respects the capacity issue, yes, there is probably an element of capital replacement in the new money being generated, but I see most of it as opportunistic capital, as was the case when the Bermuda market boomed after [Hurricane] Andrew.”

Booming it clearly is, but Walther characterized it as practically a zero sum game. “My gut feeling is that new capital won’t really result in more excess of capacity down the road, as I see other players bowing out and either becoming discontinued operations, or merging with the bigger players, as parents debate whether reinsurance is or should be a core business within their organizational structures.”

Nevertheless, in the scramble to increase capacity and start new ventures, the following Bermuda-based companies have recently announced capital initiatives:

– On Sept. 19, RenaissanceRe Holdings Ltd. stated that it would increase the capital and surplus of Glencoe Insurance Ltd., its primary commercial property insurance unit, by $100 million.

– MMC Capital, the private equity subsidiary of Marsh & McLennan, announced Sept. 28 that it is establishing a new specialty insurance and reinsurance company, AXIS Specialty Ltd., “to respond to the capacity shortage in the insurance industry resulting from the events of Sept. 11th.” MMC plans to establish AXIS in Bermuda with an initial capitalization of $1 billion. The lead investor is the Trident II L.P. fund managed by the company.

– RenaissanceRe revealed details Oct. 9 of a joint venture with State Farm Mutual to establish a new Bermuda-based company, Da Vinci Reinsurance Ltd. with an initial capitalization of $500 million. RenRe will put up $100 million, State Farm $200 million and other investors are providing the rest.

“In conjunction with OPCat and Da Vinci Re managed ventures, RenaissanceRe will offer capacity of $200 million per program from three strong reinsurers with over $2 billion in total capital,” said CEO James Stannard in a statement. Renaissance Underwriting Managers Ltd., a wholly owned subsidiary of RenRe, will manage Da Vinci.

– ACE Ltd. joined the group on Oct. 24, announcing its intent to raise an additional $1 billion in capital. ACE subsequently detailed plans to sell 28.6 million shares at $35 per share, plus 4.29 million shares to cover over-allotments to the investment banks handling the sale.

– On the same day Arch Capital Group Ltd. said it will establish a new Bermuda-based reinsurer, backed by the private equity firms Warburg Pincus and San Francisco’s Hellman & Friedman. Arch Reinsurance will begin life with $1 billion in capital. Arch, which is backed by Marsh Mac and Merrill Lynch, will contribute $250 million. Warburg plans to inject $500 million through purchases of Series A Convertible Preference Shares and Class A warrants. Hellman will similarly invest $250 million.

Arch Re will have an experienced management team headed by CEO Paul Ingrey, former chairman of F&G Re; president Dwight Evans, former executive vice president of North America for St. Paul Re and F&G Re; and Marc Grandisson, vice president and actuary of the reinsurance division of Berkshire Hathaway.

– On Oct. 26, PartnerRe, which had estimated net losses from the Sept. 11 attacks of around $400 million, said it faced additional claims of around $25 million from Tropical Storm Nari and the explosion and fire at the TotalFinaElf chemical plant in Toulouse, France. Its third quarter operating losses were between $6.65 and $6.75 per share. It also revealed plans to raise an additional $350 million.

In a statement, president and CEO Patrick Thiele said PartnerRe plans to raise new capital to provide additional capacity to its clients and to maintain its strong financial strength ratings, adding that trust preferred and convertible preferred securities will be issued before the end of the year.

– XL Capital Ltd. announced plans on Oct. 29 to offer up to 7 million ordinary shares, plus additional shares if necessary to cover underwriters’ over-allotment, in a move to strengthen its capital base. The amount would significantly restore the $840 million net third quarter loss reported by the company, most of it due to the estimated $750 million in net claims from the WTC disaster. XL’s shares have been trading in the $85-$90 range, making the offering worth over $600 million before expenses and commissions.

XL also confirmed plans to increase its ownership in Le Mans Re from its current 49 percent by acquiring enough additional shares from its partner Les Mutuelles du Mans Assurances Group to control an absolute 67 percent majority of the company.

– On Nov. 1, the Everest Re Group Ltd. (a Bermuda company headquartered in The Barbados) filed a shelf registration statement with the SEC to offer newly issued common shares to the public up to an aggregate of $575 million. Its preliminary net loss estimates from Sept. 11 were around $75 million, indicating that the principal purpose of the share sale was to increase capital and capacity. So far the company hasn’t revealed any firm plans to begin selling any shares.

– Finally, White Mountains Insurance Group announced Nov. 2 that it would lead a group establishing a new reinsurer with an initial capital of $1 billion, in response “to the current favorable underwriting and pricing environment in the insurance and reinsurance industry.” It will invest $200 million in the as yet unnamed venture and expects to raise the remaining capital from investors. Banc of America Securities LLC and reinsurance broker Benfield Group plc, are acting as financial advisors.

Jack Byrne, who currently heads White Mountains’ subsidiary OneBeacon Insurance Group, will become chairman, and Anthony Taylor, who resigned his post as deputy chairman of Lloyd’s Insurer Wellington Holdings at the end of October, will take over as CEO and chief underwriting officer effective January 1, 2002.

The Sept. 11 attacks created a largely unprecedented situation for the reinsurance industry, which is facing the challenge of meeting the largest claims in its history, while at the same time trying to prepare for an anticipated surge in demand. Many players have still to be heard from. Both AIG and Chubb have said they have plans along similar lines, but haven’t announced anything specific; nor have they indicated if their ventures will be “offshore.”

Capitalizing reinsurance ventures in Bermuda and other offshore “havens” has been a fact of life since the medical malpractice insurance crisis of the early 1980s saw the birth of ACE Ltd. and XL Capital. Proponents cite the easier conditions for establishing a company there—the ability to commence writing business more rapidly; the comparative freedom to set underwriting guidelines and premium rates; and the absence of corporate taxes—as reasons for locating there. Opponents, notably Chubb, Hartford, Liberty Mutual and Kemper, who’ve been lobbying Congress to pass a bill closing what they call a “tax loophole,” assert that offshore operations enjoy an unfair advantage over U.S. based companies.

Critics aside, Bermuda is currently witnessing its “third wave” of capital importation in 20 years and possibly the largest yet.

Topics Excess Surplus Reinsurance

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Insurance Journal Magazine November 19, 2001
November 19, 2001
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