Carrier Watch

Stock Prices:
Despite the devastation caused by the three major hurricanes which struck the Gulf Coast and parts of Florida sending reinsurers scrambling to raise money to prevent ratings downgrades, commercial lines insurers were unscathed. Commercial lines carriers’ stocks traded up 5 percent or greater during September and October and are now trading at 97 percent, or greater, of their 52-week high. The sector continues to perform admirably regardless of hurricanes and increased competition, due in large part to strong third quarter earnings reports. Strong revenue growth and impressive numbers offset the significant catastrophe losses experienced by some companies. ACE was up a remarkable 18 percent for the two-month period even after reporting a net loss of $112 million or $0.43 per common share for the third quarter of 2005. ACE raised $1.5 billion in gross equity capital in early October, signaling the company’s confidence in the future market environment.

Valuation Multiples:
Multiples in the sector have inched up slowly in the last several months. At the end of August, the sector was trading at 1.19 times market capitalization to GAAP book value and was at 1.31 times market capitalization to GAAP book value at the end of October. P/E multiples have showed a more visible gain. The commercial lines insurers were trading at a 10.04 multiple using 2005 earnings estimates at the end of August and 13.34 by the end of October.

M&A Activity:
In one of several transactions driven by the recent hurricanes, Chubb announced that it has entered into a strategic agreement regarding a new global reinsurance company, Harbor Point Limited, to be formed by Stone Point Capital LLC. Harbor Point, which will be based in Bermuda, is expected to have an initial capitalization of about $1.5 billion. Chubb, along with Trident III, L.P., a private equity fund managed by Stone Point Capital, will be the lead investors in Harbor Point. Chubb’s continuing reinsurance business and certain related assets, including renewal rights effective Jan. 1, 2006, will be transferred to Harbor Point. Chubb will receive a $200 million five-year, 6 percent convertible note and warrants, representing in the aggregate on a fully converted and fully diluted basis, 16.25 percent of Harbor Point. Trident III has agreed to invest $200 million in the new company. The transaction closing is subject to the condition that $1.1 billion be raised from investors other than Chubb and Trident III, and certain customary conditions.

Raising Capital:
Insurers and reinsurers continue to raise capital in order to avoid ratings downgrades after large losses from U.S. hurricanes. During September and October, property and casualty insurers raised or made plans to raise more than $14 billion in new capital. On Oct. 3, 2005, ACE announced it had agreed to sell, in a public offering, 28,618,670 of its common shares at $45.38 per share. ACE expects to use the net proceeds of the offering for growth opportunities in the global insurance and reinsurance market. New reinsurers are being formed to respond to favorable market conditions.

Carrier Watch is provided by LMC Capital LLC, a national investment banking firm focused exclusively on the insurance industry. Services include industry-specific advisory relating to mergers and acquisitions, capital raises and valuations. The firm can be contacted at (704) 943-2600, by e-mail at Info@LMCCapital.com or visit the firm’s Web site at www.LMCCapital.com.