Growing up fast: the five largest insurers formed in Bermuda in 2001 have survived their first major losses--due to Hurricanes Katrina, Rita and Wilma--and are now tasting their first softening market.

In the shadow of Sept. 11, 2001, five insurance companies with $1 billion or more in capital sprouted in Bermuda and were accepting new business as of Jan. 1, 2002. Axis Specialty Ltd. and Montpelier Reinsurance Ltd. focused on writing property risk, while Endurance Specialty Insurance Ltd., Arch Capital Group and Allied World Assurance Co. Ltd. wrote both property and casualty business.

"Up until 2004, they performed obviously very well," said Sean Mooney, chief economist from broker Guy Carpenter. "The more focused on property they were, the better they did in those early years. Overall, when you look at the return for investors and founders, it was pretty good."

The companies churned out significant profits for their original investors, especially in their early years. They added capacity to the market at a difficult time, and have grown, organically and through acquisitions, branching out into new types of insurance and covering new territories. In some cases, after just five years, they've already become major players in the industry.

From 2002 to 2004, all five of those companies turned underwriting profits. Some boasted exceptionally low combined ratios, a measure of profitability. Axis Specialty posted a combined ratio of tinder 78 from 2001 to 2004. Underwriting profitability peaked for the company in 2002. While the entire property/casualty industry reported a combined ratio of 107.2 that year, Axis' combined ratio dropped to 56.7, according to A.M. Best company reports.

Montpelier's most profitable year came in 2003, when it posted a 48.5 combined ratio, meaning for every $1 of premium taken in, only 48.5 cents was spent on claims and expenses. The 2003 property/casualty industry as a whole posted a combined ratio of 100.1.

"The class of 2001 has for the most part performed very well, particularly if you look at the challenges they have faced over this five year period. Some of the results they have returned are remarkable," said John Johnston, a partner in Deloitte Bermuda. "They had a real challenge out of the box, having a short time frame to get themselves capitalized and get basic infrastructure and talent in place to take advantage of the January 2002 renewal season.

Most of them were able to complete successful IPOs [initial public offerings] after only a few years of operations, which returned value to founding investors within a relatively short time frame. On top of building their business platforms, they had to contend with the Sarbanes Oxley Act of 2002 and, like all the established players, deal with the negative fallout from various business failures and failures in corporate governance. None of the companies could have anticipated the environment they would be operating in, yet most appear to have thrived."

Growth Spurt

Like children, some companies grow faster than others.

For this group of five companies, it's been a mixed performance, said Adam Klauber, managing director of Cochran Caronia Waller. "Arch and Axis have done very well. Their growth and returns have been impressive. Endurance hasn't had quite the trajectory that Axis and Arch have had, if you look at its market cap. Montpelier, given its focus on property, has not done as well [after the 2005 hurricane season]."

Arch Reinsurance has risen to become the 23rd-largest global reinsurer, ranked by consolidated gross premium written in 2005. Endurance ranks as the 25th largest; Axis as the 30th; and Montpelier as the 35th, according to A.M. Best Co. data.

Klauber said the 2001 "class" has some things in common with the class of 1994-1995, which formed after Hurricane Andrew.

"Their roots were similar. They were formed in a very hard market, when there was a need for additional capacity in the market," he said.

However, the 2001 class has grown much faster.

"They have ramped up much more quickly than the '94 class, or even Ace and XL," Klauber said. "It took [Ace and XL] years and years to get to a multibillion dollar level."

Arch has been expanding in the U.S. excess and surplus lines business "pretty aggressively," Klauber said. "If you talk to brokers, [Arch] is seen as one of the core insurance markets on the E&S side. Arch is by far the first and more aggressive" of the Bermuda 2001 insurers to enter the E&S market, Klauber said.

"Axis has been expanding in Europe recently, but is also in the U.S. E&S market," he said.

Arch and Axis have both penetrated the top 25 leading surplus lines writers. Based on 2005 direct premiums written, Arch ranks as the 10th largest and Axis as the 11th largest, according to A.M. Best Co. data.

Diverse Strategies

Mooney said that while it's tempting to consider the companies formed in 2001 in Bermuda as a class, they're a very diverse group.

More than 108 companies, including captives, were formed in Bermuda in 2001, according to the Insurance Information Institute. Some industry watchers expand the so-called class of 2001 to include companies officially incorporated in 2002, with the rationale that all were inspired, in part, by the hard market after the Sept. 11, 2001, terrorist attacks.

For instance, often included in the class of 2001 are Bermuda companies such as Aspen Insurance, formed in December 2002; Platinum Underwriters, formed in November 2002; and Olympus Reinsurance Co. Ltd., formed in August 2002.

All of the Bermuda companies "have different styles of management and different styles of underwriting," Mooney said. "The first issue is whether they want to be property only, which was the original Montpelier strategy. The second issue is how much primary business they want and how much reinsurance."

And with hurricanes Katrina, Rita and Wilma, the five largest companies incorporated in Bermuda in 2001 experienced major losses in 2005--but are still standing.

Montpelier was hit particularly hard, with losses from the 2005 hurricane season amounting to more than $1 billion, or 30% of its June 30, 2005, shareholder funds, according to a report by broker Benfield. Axis, Endurance and Platinum also reported significant losses that were greater than 30% of their June 30, 2005, shareholder funds, "a surprisingly high ratio given the diversified underwriting portfolios of these companies," Benfield noted.

Arch fared the best of the five largest companies incorporated in 2001, still managing to report a profitable combined ratio of 95.8 in 2005, in spite of net catastrophe losses of $330 million for the year, according to A.M. Best Co. However, about 60% of Arch's book is long-tail casualty lines.

Axis also managed to stay in the black, but 2005 net income plummeted to $46.8 million compared with $438.6 million from the year before. Meanwhile, Allied World, Endurance and Montpelier all reported a net loss for 2005, coming in with losses of $175.4 million, $185.7 million, and $726.1 million, respectively, according to A.M. Best company reports.

Some of the companies re-evaluated their books after the devastating 2005 hurricane season.

"There was also a fair amount of rebalancing of portfolios, examining exposures and retentions ... I would consider these to be normal practices in the successful running of an insurance or reinsurance company, rather than strategic changes," Johnston said.

Montpelier's high loss ratio of 178 in 2005 "was attributable to several factors including unanticipated correlations risk within lines of business; model risk stemming from underestimated storm surge and flood damage; and a weak retro reinsurance program," A.M. Best Co. said.

Montpelier responded by taking steps such as reducing catastrophic exposed offshore marine business and raising $600 million in equity shortly after initial Hurricane Katrina losses were reported.

The company also took some innovative steps. In December, the company purchased fully-collateralized coverage for losses sustained from qualifying hurricane and earthquake losses from Champlain Ltd., a Cayman Islands special purpose vehicle that financed this coverage by issuing $90 million in catastrophe bonds. The bonds were issued under two separate tranches, each of which matures in January 2009. The first $75 million tranche covers large earthquakes affecting Japan and/or the United States. The remaining $15 million provides second event coverage for a U.S. hurricane or earthquake. Both tranches respond to parametric triggers where payments are determined on the basis of modeled losses incurred by a notional portfolio rather than by actual losses incurred.

Also, the company and other investors formed Blue Ocean Re in January 2006 with $300 million in capital, 57% of which came from outside investors. Blue Ocean took over Montpelier's former retrocessional book of business. While the reinsurance community has come to refer to this type of vehicle as a "sidecar," Blue Ocean Re sees itself as a more traditional style of company specializing in property retrocession.

The impetus for launching Blue Ocean stemmed in part from the additional scrutiny of rating agencies with regard to the level of capital required to support property retrocession business within a rated company.

Blue Ocean's private investors include hedge funds and other private investors who have not been named.

The new company took over where Montpelier left off, offering renewals to Montpelier's property catastrophe retrocessional clients. Blue Ocean is a stand-alone company writing on Blue Ocean paper, although Montpelier provides the underwriting services.

Arch Reinsurance was also involved with a sidecar. It launched a quota share agreement with Flatiron Re, a new vehicle with $900 million in capital.

"The sidecar concept, while not entirely new, has become much more visible in the past year. For the ceding company, it provides an additional source of capital in the form of reinsurance protection; for the investors, it provides a unique opportunity to participate in the economics of a defined group of reinsurance risks."

Catastrophe-exposed property business "has become a tougher business," Klauber said, noting it's harder to find retrocessional coverage and rating agencies have increased the pressure on insurers.

Allied World has been changing its business mix since 2002, said Scott Carmilani, president and chief executive officer.

In 2002, the company's business was 41% property, 41% casualty, 5% property reinsurance and 13% casualty reinsurance, totaling gross premiums written of $922 million. In 2005, the company's business mix was 26% property insurance, 41% casualty insurance, 10% property reinsurance and 23% casualty reinsurance, totaling gross written premiums of $1.56 billion.

"As a primary property market, we closely monitor catastrophic zones while continuing to build our professional liability, excess casualty and health-care books of business to balance out our portfolio of risk" Carmilani said. "We want this operating strategy to remain flexible so we can appropriately adjust our objectives as market forces dictate."

Allied World has also installed "self-imposed caps on aggregate liabilities exposed to wind and earthquakes in cat-prone areas to help control the potential impact of a major disaster and its possible effects on our portfolio and results," Carmilani said.

Not all new companies have succeeded with flying colors.

Hurricane losses helped hasten the demise of Rosemont Re, now in runoff, with estimated storm-related losses of $98 million to $105 million from the 2005 hurricane season. The company, originally named Goshawk Reinsurance Ltd., had been formed by Goshawk Insurance Holdings in Bermuda in December 2001. Rosemont has reached an agreement with a private-equity investors' group for a fixed, up-front payment of $2.5 million for its infrastructure, plus 8% commission on renewals. Rosemont then became Ariel Reinsurance Co. Ltd., which was incorporated in Bermuda in November 2005.

Softening Market

Four of the five largest companies launched in Bermuda in 2001 have reported lower gross premiums written for the first quarter 2006 compared with 2005. Montpelier showed the greatest drop, at 27%, followed by Endurance with a 19% drop, Axis with a 3% drop and Allied World with a 1% drop. Arch bucked the trend, reporting a 19% increase.

"Such shrinkage is not altogether indicative of a reduction in market risk but rather that companies have re-evaluated risk selection, aggregates and peak exposures against a backdrop of variable pricing in distinctive markets" Benfield said in its Benfield Bermuda Quarterly--First Quarter 2006.

Mooney of Guy Carpenter said the companies are being more conservative than average.

"That's a mixture of the impact of the soft market--outside of property catastrophe for U.S. coastal exposures--and also a more conservative approach to the marketplace in response to an increased focus on aggregates," Mooney said. "This is the first time they've had to show they can operate in a soft market. Right now, they appear to be more disciplined than other companies."

Klauber, of Cochran Caronia Waller, wasn't so sure.

"It's too early to say how soft the market is getting, so it's tough to know how disciplined they are being. It remains to be seen for this class," Klauber said.

Familiar Faces

One interesting aspect of the new Bermuda companies is that they often have investors well-known to the insurance industry--in fact, often other insurance companies.

For instance, one of Montpelier's investors was White Mountains Insurance. In 2002, Montpelier Re acquired about 8.9% of Aspen Insurance Holdings Ltd. American International Group and Chubb Group were original investors in Allied World. St. Paul and RenaissanceRe backed the formation of DaVinci Reinsurance Ltd. in 2001.

"It's a way for existing insurers to take a stake in opportunities that open up after events without having to create a whole new company" said Robert Hartwig, executive vice president and chief economist with the Insurance Information Institute. "It makes a lot of sense for insurers to think about ways for them to grow profitable in the wake of tumultuous markets."

Allied World said it has transitioned away from its original founders, including AIG, by completing its initial public offering in July. AIG "is still our largest shareholder, but our public company status provides us with an independent board and public shareholder base," Carmilani said. While AIG provided Allied World with some back office support, Allied World "should be completely independent of AIG's administrative services by the end of the year," he said.

Many in the industry are interested in seeing how this "Class of 2001" compares to the Bermuda "Class of 2005," launched in the wake of the devastating 2005 hurricane season.

Today the Class of 2001 "is viewed as more or less established companies" Johnston said. "There's a focus now on the new group, the Class of 2005."

Hartwig said within a year after Sept. 11, 2001, about $53 billion in new capital had either been raised or was pending. At that time, companies had $28 billion actually raised and shelf registrations for another $15 billion.

Today, a year after Katrina, about $30 billion in new capital has been raised, with registrations pending for a possible $25 billion to $30 billion more.

"It's very interesting to me, that in terms of capital raised, we're in the same ballpark," Hartwig said. "It will be interesting to see how the new companies perform."

AWA

Holding Company: Allied World Assurance Co. Ltd.

Operating Company: Allied World Assurance Co. Ltd.

Incorporated in Bermuda: Nov. 13, 2001

A.M. Best Company #: 84808

Lead Investors: American International Group, Chubb Insurance Cos., Goldman Sachs

Initial Capitalization: $1.5 billion

IPO: July 2006

Stock: NYSE: AWH

Distribution: Brokers

Employees When Launched: Four

Employees Today: 250

Offices: Bermuda, Boston, Chicago, Dublin, London, New York and San Francisco

Business: Commercial property and casualty lines, including general and professional liability insurance, as well as coverage of energy, transportation and commercial real estate property risks. Company is focused as a primary writer, but expanded to provide other specialty and reinsurance lines of business.

Company Highlights:

--During first year of business, company acquired two U.S. surplus lines writers: Allied World Assurance (U.S.) Inc. and Newmarket Underwriters Insurance Co.

--AWAC formed affiliates in both the United States and Europe since its inception.

--Terminated agreement with IPCRe Underwriting Services Ltd., effective in 2007.

--Completed a capital action plan in 2006, which continues the company's transition away from its original sponsor, American International Group, as Allied World develops its own independent support systems and U.S. distribution platforms.

--Company holds investments in four hedge funds: The Goldman Sachs Global Alpha Hedge Fund, The Goldman Sachs Liquid Trading Opportunities Fund Offshore, The AIG Select Hedge Fund and The Goldman Sachs Multi Strategy Portfolio. The four funds account for only 6% of Allied World's invested assets.

Capital & Surplus

($ Billions)

2002    $1.58
2003    $1.79
2004    $1.92
2005    $1.73

Profit/Loss After Tax

($ Millions)

2002     $184.8
2003     $284.4
2004     $153.0
2005    -$175.4

Combined Ratio

2002     80.6
2003     82.5
2004     94.6
2005    123.7

Note: Table made from line graph.

Sources: Allied World, A.M. Best company report

Arch

Reinsurance Ltd.

Holding Company: Arch Capital Group Ltd.

Operating Company: Arch Reinsurance Ltd.

Incorporated in Bermuda: November 2001

A.M. Best Company #: 75169

Lead Investors: Warburg, Pincus and Hellman & Friedman

Initial Capitalization: $1 billion

Stock: NASDAQ: ACGL

Distribution: Brokers

Employees When Launched: 170, including 144 for the nonstandard auto operations

Employees Today: 980

Offices: Bermuda, the United States, Europe and Canada.

Business: Global insurance and reinsurance. About 60% of its book is long-tail casualty lines. By segment, 47% is insurance, 53% reinsurance.

Company Highlights:

--Public company was originally formed in 1995, although original insurance business was sold off and the company was mostly involved as a fee-for-service company before Sept. 11, 2001, except for nonstandard auto operations.

--Formed Arch insurance Co. (Europe) Ltd. in London in 2004.

--Sold two operating units considered not core to the company: American Independent Insurance Holding Co. and Personal Service Insurance Co., both nonstandard auto writers, were sold in December 2004. In October 2004, Hales & Co., a merchant banking operation; was sold.

--Posted a combined ratio of 95.8 at year-end 2005 despite net catastrophe losses of $300 million for the year.

--Formed a 45% quota share agreement in certain lines of property and marine business with Flatiron Re Ltd., a Bermuda-based sidecar that will offer fully collateralized property coverage exclusively to Arch.

Capital & Surplus

($ Billions)

2002    $1.11
2003    $1.81
2004    $2.33
2005    $2.64

Profit/Loss After Tax

($ Millions)

2002    -$47.5
2003    $295.5
2004    $356.9
2005    $253.8

Combined Ratio

2002    91.7
2003    85.6
2004    91.1
2005    95.8

Note: Table made from line graph.

Sources: Arch Capital Group, A.M. Best company reports, Securities and
Exchange Commission filings.

AXIS

Holding Company: Axis Capital Holdings Ltd.

Operating Company: Axis Specialty Ltd.

Incorporated in Bermuda: November 2001

A.M. Best Company #: 84766

Lead Investors: Private placement equity through Trident II, managed by MMC Capital, a Marsh & McLennan subsidiary

Initial Capitalization: $1.7 billion

IPO: July 2003

Symbol: NYSE: AXS

Distribution: Brokers

Employees When Launched: Not available

Employees Today: 300

Offices: Bermuda, the United States, Europe and Singapore

Business: Global insurance and reinsurance; U.S. insurance and reinsurance. About 64% is primary business and 36% reinsurance.

Company Highlights:

--Established companies in the United States and Ireland in 2002

--Established companies in London and Switzerland in 2003.

--Acquired Sheffield Insurance Corp., which was renamed Axis Surplus Insurance Co., in 2003.

Capital & Surplus

($ Billions)

2002    $1.45
2003    $1.82
2004    $2.5
2005    $3.0

Profit/Loss After Tax

($ Millions)

2002    $290.6
2003    $524.8
2004    $438.6
2005     $46.8

Combined Ratio

2002     56.7
2003     64.1
2004     77.1
2005    103.5

Note: Table made from line graph.

Sources: Axis Capital and A.M. Best company reports.

Endurance

Holding Company:. Endurance Specialty Holdings Ltd.

Operating Company: Endurance Specialty Insurance Ltd.

Incorporated in Bermuda: November 2001

A.M. Best Company #: 84835

Lead Investors: Aon Corp., Texas Pacific, Thomas H. Lee

Initial Capitalization: $1.2 billion

IPO: February 2003

Stock: NYSE: ENH

Distribution: Brokers

Employees When Launched: Three

Employees Today: 396

Offices: Bermuda, New York, Chicago, Los Angeles, San Francisco and London

Business: Short-tail and long-tail lines, including property/catastrophe reinsurance, casualty treaty reinsurance, casualty individual risk and specialty lines. Book is split about 74% reinsurance, 26% insurance in 2005. Property lines were 40%, casualty lines 41% and specialty lines 19%.

Company Highlights:

--Formed companies in the United States and United Kingdom and acquired renewal rights to LaSalle Re's property catastrophe book in 2002.

--Acquired renewal rights to selected portions of Hartford Re's reinsurance book in 2003.

--Acquired renewal rights to XL Re's surety book and hired Converium's agribusiness underwriting team in 2004.

--Acquired Traders & Pacific Insurance Co. in 2005.

--Acquired $235 million of multi-year, collateralized catastrophe reinsurance from Shackleton Re Limited, a Cayman Islands reinsurance company, in 2006.

Capital & Surplus

        ($ Billions)

2002       $1.41
2003       $1.63
2004       $2.1
2005       $2.29

Note: Table made from line graph.

Profit/Loss After Tax

        ($ Millions)

2002       $103.2
2003       $272.1
2004       $374.5
2005      -$185.7

Note: Table made from line graph.

Combined Ratio

2002     69.9
2003     76.7
2004     84.1
2005    124.5

Note: Table made from line graph.

Sources: Endurance Specialty, A.M. Best company reports, SEC
filings

Montpelier Re

Holding Company: Montpelier Re Holdings Ltd.

Operating Company: Montpelier Reinsurance Ltd.

Incorporated in Bermuda: November 2001

A.M. Best Company #: 84809

Lead Investors: White Mountains Insurance Group, Benfield Group

Initial Capitalization: $1 billion

IPO: October 2002

Stock: NYSE: MRH

Distribution: Brokers

Employees When Launched: Four

Employees Today: 66

Offices: Hamilton, Bermuda and London

Business: Property and property catastrophe insurance and reinsurance. Other specialty category includes aviation liability, aviation war, marine, personal accident catastrophe, workers' compensation, terrorism, casualty and other reinsurance businesses. The company has expanded its casualty book, which accounted for about 8.5% of gross premiums written in 2005. The company plans on exiting or significantly reducing its catastrophe exposed offshore marine business in 2006.

Company Highlights:

--Raised $600 million in equity shortly after initial Hurricane Katrina losses were reported.

--Established Blue Ocean, a sidecar, in October 2005, with $300 million.

--Purchased collateralized coverage for losses sustained from qualifying hurricane and earthquake losses from Champlain Ltd., a Cayman Islands special purpose vehicle, which issued $90 million in cat bonds.

Capital & Surplus

        ($ Billions)

2002       $1.31
2003       $1.79
2004       $1.98
2005       $1.23

Note: Table made from line graph.

Profit/Loss After Tax

        ($ Millions)

2002       $106.8
2003       $407.2
2004       $262.7
2005      -$726.1

Note: Table made from line graph.

Combined Ratio

2002     63.5
2003     48.5
2004     78.5
2005    202.1

Note: Table made from line graph.

Sources: Montpelier Reinsurance, A.M. Best company reports, SEC
filings

Key Points

* The five largest companies incorporated in Bermuda in 2001 have grown rapidly, both organically and through acquisitions.

* The companies were all profitable in the early years, but some have had to change their original business strategies.

* Industry watchers are curious to see how the new "Class of 2005" born after hurricanes Katrina, Rita and Wilma will perform compared to the "Class of 2001."