Reinsurer Ariel Seeks Investment Opportunities from Credit Crisis

By | July 7, 2008

Ariel Holdings Ltd., a closely held Bermuda-based reinsurer, has seen strong growth and a rapid rise in profits since it was formed in late 2005, but thornier market conditions are now driving it to look for alternative ways to boost shareholder returns.

Chief Executive Donald Kramer told Reuters he is looking to tap into investment opportunities emerging from the credit crisis that has gripped worldwide markets.

“We are in a disrupted financial market, and there are a huge body of mispriced securities that I can buy at very high yields,” said Kramer, who may use as much as 15 percent of the company’s roughly $2 billion investment portfolio to pursue such opportunities.

“You can find companies that have debt outstanding in small amounts where there is no liquid market,” he added. “If you can find a portfolio of these mispriced securities you can get yield of 12 to 13 percent in strong, credit-worthy companies.”

Ariel is seeking ways to boost returns as it becomes more difficult to do so through its main business of selling reinsurance policies.

Reinsurers provide insurance to other insurers, spreading the risk of losses among several carriers. But low claims have taken a bite out of reinsurance rates, leading the sector to tread carefully to avoid being badly burned when claims are filed.

“If I am willing to give up margin on underwriting, I ought to get it back in investment,” Kramer said.

That does not mean the bottom has fallen out of the reinsurance market. Kramer said for the first half of 2008, Ariel’s business was close to its projections, but it was taking on about 10 percent more risk for the same premium.

Ariel, which is headquartered on Bermuda — the wealthy mid-Atlantic British colony that is one of the world’s largest reinsurance markets — has over the last year expanded its business on both sides of the Atlantic, giving it broader reach, which should pay off handsomely when market conditions improve.


Ariel’s profit from 2006 to 2007 rose by about 60 percent, and gross written policies grew more than 20 percent over the same period. Last July, the reinsurer bought into the Lloyd’s of London market with its $386 million purchase of syndicate Atrium, which has roughly doubled business, and boosted profit by another 35 percent, said Kramer.

And in September, it bought U.S. company Valiant, which had little in the way of operations but held licenses to do business in almost every U.S. state. The combined company has about 200 employees.

Ariel’s combined ratio, a measure of underwriting profitability, over the last two years has beat many Bermuda peers, according to Guy Carpenter, a unit of insurance brokerage Marsh & McLennan Inc. Ariel’s 41.6 percent ratio compared to an average rate of 84.9 percent for two dozen of the Bermuda market’s largest insurers. The measurement tracks cost and claims as a percentage of every dollar of underwriting income.

To be sure, business conditions have been good over much of Ariel’s short history. The reinsurer was formed just as rates for property-catastrophe policies, a large part of its initial business, were pushed sharply higher by record losses from Hurricane Katrina. And there have been no large losses since to erode premium.

“We have been very fortunate that we have had a benign claims period, so we really have not been tested by fire yet,” said Kramer.

However, all that could change if weather forecasters’ predictions for greater-than-expected hurricane activity in the coming months pan out. Kramer said Ariel is well capitalized to handle a few bumps.


While a number of other reinsurers formed in 2005 have already launched public offerings, Kramer said his investors have so far been happy with returns and are not eager to sell out.

“We are not necessarily obsessed with getting a public market — what we are trying to do is get the best return for our stockholders,” said Kramer.

In the 1990s, Kramer, 70, formed another reinsurer, Tempest Re, specializing in property-catastrophe coverage. In that case, he chose to bypass a public offering altogether, instead selling to larger insurer Ace Limited. Investors got a good premium from that deal, leading some to sign up to back Ariel when it was formed. Based on where the shares of some of Ariel’s peers are trading — with the market for initial public offerings having floundered in recent months — the company’s investors may also be waiting for a better time to float the shares.

Validus Holdings Ltd and Flagstone Reinsurance Holdings Ltd, for example, are now trading below their initial public offering prices last year. Both were formed around the same time as Ariel.

Ariel’s backers include Blackstone Group, what is now known as TPG Capital, Thomas H. Lee Partners , affiliates of Bain Capital, SAB Capital and Eton Park Capital Management.

(Editing by Brian Moss)

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