The reinsurance industry is gearing up to replace a good portion of the capital lost in the Sept. 11 attacks, and companies are also seeking to place themselves in a position to profit from the expected surge in demand and concomitant increases in premiums. Bermuda is once again the center of this capital earthquake.
According to longtime industry consultant Paul Walther, who heads Reinsurance Directions Inc., “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.” The current scramble to increase capacity and start new ventures would also seem to validate one of Walther’s earlier observations (IJ West, Oct. 29), that the larger companies stand to gain an even greater share of the market.
The following Bermuda-based companies have recently announced capital initiatives:
• On Sept. 19, RenaissanceRe Holdings Ltd. announced 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 on 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. 11.” MMC plans to establish AXIS in Bermuda with an initial capitalization of $1 billion. The lead investor is the Trident II LP fund managed by the company.
• RenaissanceRe revealed details on 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.
• ACE Ltd. joined the ever-expanding group with the announcement on Oct. 24 that it will raise an additional $1 billion in capital. The next day, it 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. announced plans to 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 & McLennan 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.
• 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.
• XL Capital Ltd. announced plans on Oct. 29 to offer up to seven 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 the company reported on Oct. 24, 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. The two will increase Le Mans Re’s share capital by $55 million in proportion to their current ownership percentage before Dec. 31.
• On Nov. 1, the Everest Re Group Ltd. (which, although it’s a Bermuda company, has headquarters 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 shares.
• White Mountains Insurance Group announced on Nov. 2 that it would lead a group establishing a new reinsurer with an initial capital of $1 billion. The company said it was responding “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.
That’s the latest Bermuda entrant, but certainly not the last. At press time, Aon had announced that they too are setting up a Bermuda-based insurer/reinsurer with an unnamed “major financial services company,” capitalized at $1.2 billion.
The Sept. 11 attacks have 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, which allows it 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.
Whatever the reasons, Bermuda is currently witnessing its third wave of capital importation in 20 years and possibly the largest yet.
Topics Reinsurance
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