Bermuda Insurers on a Roll – As Good as It Gets’

Although “One swallow maketh not a summer,” over two years of good results would seem to indicate that Bermuda’s insurers are on a roll. Both the new companies, founded after Sept. 11, and the older ones, already established on the island, or that moved there as part of a restructuring, seem to be doing something right. It’s perhaps a bit of a misnomer to call the post 9/11 companies “new,” as they were founded by some of the biggest and oldest names in the industry. Plus they’ve been profitable, and some have gone public—quite successfully. Virtually none of them have disappointed their investors. Among the newcomers three stand out.

Endurance Specialty Insurance Limited (Aon and Zurich) has seen its basic capitalization grow from $1.2 billion in 2001 to $1.8 billion at March 31, 2004. In Feb. 2003, Endurance raised $202.3 million from its IPO. In May 2002, it acquired LaSalle Re’s Property-Catastrophe reinsurance business. Later that year it purchased the majority of HartRe’s reinsurance business. In Sept. 2002, the company repurchased the $100 million in equity from Zurich (which still holds a stake, however, through investment partnerships).

As A.M. Best, which rates Endurance “A” (Excellent) acknowledged, the company’s “growth is primarily attributable to earnings,” as well as the IPO. It continues to prosper. Its return on equity (ROE) is around 17 percent. Net premiums written in the first quarter of 2004 rose to $717 million from $360 million in the first quarter of 2003.

Allied World Assurance Co. (AWAC) (AIG, Chubb, Goldman Sachs and others) reported net income of $89.4 million for the first quarter 2004, compared to $55.8 million for the first quarter of 2003. The original $1.5 billion capitalization has grown to $2.1 billion. Net income for the 12 months ending Dec. 31, 2003, was $288.4 million, compared to $127.6 million in 2002.

The three principal founders respectively hold 23.3 percent, 18.6 percent and 14.7 percent of AWAC’s stock. Other shareholders include Swiss Re Capital Partners, Thomas H. Lee Investors, Arthur J. Gallagher and Company and Mellon Bank. A.M. Best rates AWAC “A+” (Superior). It opened its European branch in Dublin at the end of Oct. 2002 and a London branch in May 2003.

Axis Capital Holdings Ltd. (AXIS) (Marsh’s Trident II Investment Trust, CSFB, The Blackstone Group, J.P. Morgan and Thomas Lee) reported a 56 percent increase in net income for the quarter ended March 31, 2004, to $166.8 million, from $107.1 million, for the same quarter in March 2003. AXIS reported a 100 percent increase in its 2003 net income for the year which reached $532.3 million, or $3.42 per diluted share, compared to $265.1 million, or $1.91 per diluted share, for the year ended Dec. 31, 2002, an increase of $267.2 million.

AXIS’ ROE was 22.9 percent for the year. It launched an IPO in June 2003 with an initial share price of $22. The shares rose above $32 in February, but have recently been trading in the $27 to $28 range, due in part to the slump in the stock market and a secondary offering that took place in April. Both Best and Standard & Poor’s give AXIS an “A” rating.

The “new” companies’ list should also include the spin-offs and start-ups, which have been formed by existing companies.

Arch Capital, which lured Paul Ingrey out of retirement to head its new Bermuda-based reinsurance operation, Arch Reinsurance Ltd., in Jan. 2002. A group of investors led by Warburg Pincus and Hellman & Friedman invested an aggregate of $750 million in the venture, which has since been increased. Arch Capital, which is also headquartered in Bermuda, reported net income of $87.5 million for the first quarter of the year, compared to $ 52.5 million in the same period of 2003.

Montpelier Re Holdings Ltd., which conducts its reinsurance operations through a wholly owned subsidiary also named Montpelier Re, was set up by White Mountains Insurance Group and Benfield in Dec. 2001 with approximately $1 billion in capital. It reported record net income of $407.1 million, or $6.05 per diluted earnings per share, for 2003, a total return to its shareholders of 30.3 percent.

It kept up the good results in the first quarter, reporting net income of $109 million, or $1.59 diluted earnings per share. In February the company announced that Anthony Taylor had succeeded Jack Byrne, retired chairman and CEO of White Mountains, as chairman of Montpelier. Montpelier Re is rated “A” (Excellent) by A.M. Best and “A3” (Good) by Moody’s Investors Service.

Platinum Underwriters Holdings Ltd. was formed through the spin-off of The St. Paul’s reinsurance operations (and their relocation to Bermuda) in April 2002. After a great deal of delay it held an initial public offering in Oct. 2002, raising $675.9 million. In September it sold a 9.9 percent stake to RenaissanceRe for between $82 to $100 million. Best rates Platinum and its operating companies as “A” (Excellent).

Despite the rather rocky start, the company has been quite successful. Net income for 2003 was $144.8 million on net premiums written of $1.2 billion with a combined ratio of 84.7 percent. The trend continued in the first quarter of 2004, when the company reported net income of $54.8 million, net premiums written of $480.1 million, net premiums earned of $321 million, and a combined ratio of 83.1 percent.

All of these companies have had an exceptional run. They’ve realized their successes in a very short time, a little over two years. For any enterprise to go from a start-up to an “A” rated company with strong and growing earnings in so short a period is extremely rare. For six insurance companies to do so is unheard of.

Part of the explanation lies in the cyclical nature of the industry and paradoxically the sharp declines in the capital markets. The new companies were strongly capitalized and could offer coverages the market needed right away at profitable rates. They could also make investments in depressed equities, which were due to rise. In addition they weren’t burdened by long-tail liabilities such as asbestos, workers’ comp, E&O and D&O claims, as many older companies are. Finally they are all well managed with capable and experienced teams, led by people like Jack Byrne at Montpelier, Paul Ingrey at Arch, John Charman at AXIS, Ken LeStrange at Endurance and Michael I.D. Morrison at AWAC. Collectively they probably have as much or more experience in the insurance business as one can find anywhere.

In the rush to examine the new, one sometimes neglects the old, but Bermuda’s more established companies haven’t exactly been suffering either, except perhaps for XL Capital, which saw its 2003 profits shrink due to the need to strengthen reserves.

XL, however, bounced back strongly in the first quarter of 2004, posting net income available to ordinary shareholders of $452.2 million, or $3.25 per share, compared with $239.9 million, or $1.74 per ordinary share, for the quarter ended March 31, 2003. It also reported that net premiums written from general operations increased 19 percent to $2.8 billion; the combined ratio was a “satisfactory 88.8 percent,” and net investment income was up 19 percent to $228 million.

Bermuda’s biggest insurer, ACE Limited, also reported a very strong first quarter, posting net income of $447 million or $1.53 per share, compared with net income of $247 million or $0.90 per share for the prior year. Net premiums written increased 11 percent to $3.2 billion, reflecting P/C net premium growth of 26 percent.

The P/C combined ratio improved to 88.4 percent for the quarter compared with 90.6 percent last year. Operating cash flow amounted to $1.2 billion for the period, while cash and invested assets increased by $2.2 billion and net investment income rose by 16 percent to $238 million.

In the report, Chairman and CEO Brian Duperreault also noted that ACE would soon complete the initial public offering of its financial guaranty business (Assured Guaranty), “putting ACE in the strongest position it has ever been in to face the new business opportunities that lie ahead.”

No report on Bermuda would be complete without RenaissanceRe, the island’s premier property reinsurer. It reported first quarter operating earnings of $137.8 million compared to $130.2 million in the first quarter of 2003. RenRe’s ROE stayed at its usual high level, 25.5 percent for the quarter on an annualized basis.

This could change as RenRe expands, but, given the company’s track record, it probably won’t. DaVinci Re, its post 9/11 joint venture with State Farm, reported a slight drop in the first quarter. RenRe is also involved in catastrophe reinsurance written for the account of Top Layer Reinsurance Ltd. and in February it formed a new financial guaranty company, Channel Reinsurance Ltd., in which it has a 32.7 percent stake. It also currently holds a 9.2 percent share in Platinum, although a recent shelf registration would seem to indicate that RenRe may reduce its stake.

PartnerRe had a record year as well, reporting net income for 2003 of $467.7 million, or $8.13 per share, which included a net after-tax realized gain on investments of $80 million. This compares with net income in 2002, of $190.3 million or $3.28 per share including a net after-tax realized loss on investments of $16.7 million.

It seems strange that Partner Re is now considered one of Bermuda’s older companies. As President and CEO Patrick Thiele noted in the earnings report, “We had another strong quarter to finish 2003, our tenth anniversary year, well ahead of plan.” He also pointed out that the company “had a full year operating return on equity of 20 percent, affirming our leadership position as one of the world’s most profitable reinsurers. We also grew book value by 25 percent to year-end shareholders’ equity of $2.6 billion, again underscoring the financial strength and stability of our company.”

There are a number of other insurers in Bermuda that have done as well, or better, but these are among the best known. From returns they’ve generated one can see why the island’s companies are so popular with investors. In addition to the comparative ease of establishing a new company, as well as the often discussed tax advantages, they make money.

A.M. Best issued a report last December on the island’s insurers which noted that the 15 largest companies based there generated $28.6 billion in net premiums written and underwriting income of $3 billion as of the end of the third quarter. “This translates into a year-to-date combined ratio of 87.5 percent, which includes the consolidated underwriting results of U.S. based operating subsidiaries,” said Best. In the fourth quarter of 2003 and the first quarter of 2004 things got even better.

Whether this is as good as it gets, only time will tell, but based on their recent performances Bermuda’s insurers are certainly on a roll. In addition to all the other factors, Mother Nature has been kind as well. There have been relatively few costly natural disasters in the last two years. Ironically one of the worst was Hurricane Fabian, a Category 3 storm which hit Bermuda on Friday, Sept. 5, 2003, with winds in excess of 140 mph, causing an estimated $350 million in damages and several deaths. It was the worst storm to hit the island since 1926.

The island’s insurers weathered even Fabian, and have continued to prosper. Best’s report notes that Bermuda-based companies are moving into “select casualty classes of business, where rates continue to increase at levels which A.M. Best believes remain ahead of increases in loss cost.”

The comment concluded, “The Bermuda market continues to enjoy strong demand for its products and services as clients seek carriers possessing underwriting capability and strong and unencumbered balance sheets.” As good as it gets? Maybe.