The Yearlings: the largest of the Bermuda start-ups formed in the wake of Sept. 11, 2001, have already had an impact in the market. (Bermuda Start-Ups: Property/Casualty).

The five largest Bermuda startups launched to take advantage of post-Sept. 11, 2001, market conditions have taken off rapidly, and some say have already had a surprising impact in the market.

The new players have helped to stabilize the hardening property market. The companies have not slashed prices to gain market share, as some feared, but by adding new capacity, they've made some existing companies work harder to keep their existing business. These Bermudians have also branched out into other areas where lack of capacity left ample room for the newcomers to enter. After their first full year of operations, the five largest new Bermudians have proven to be nimble, quick and profitable.

"Their timing was exact," said Peter Dickey, managing senior financial analyst at A.M. Best Co. "They picked up capacity that had been lost after the Sept. 11th terrorist attacks. They managed to get in when rates were starting to increase, but most importantly, they had balance sheets that were unencumbered by any past reserve issues. This has made them very popular with brokers and clients."

While dozens of Bermuda insurance companies were launched in late 2001 and early 2002, five had capital of $1 billion or more: Axis Speciality Ltd. and Montpelier Reinsurance Ltd., concentrated on writing property risk, while Endurance Specialty Insurance Ltd., Arch Capital Group and Allied World Assurance Co. Ltd. focused on writing both property and casualty business.

Deep Impact

"There's no question they've had an impact," said Bryon Ehrhart, president of broker Aon Re Services. "They have added new and necessary capacity for placing, certainly in the first instance, property catastrophe risk and in the second instance, property per risk capacity to a market that saw a pretty significant shift away from reinsurers that had impaired or less capacity than they had traditionally offered."

He said existing companies that were healthy and continued to write property catastrophe risk sought "relatively large price increases. There were a number of them that decreased their participation in those markets and there was a void in those markets. And the new Bermuda companies did come in to fill that void."

Grahame J. Millwater, chief executive officer of Global Markets for the broker Willis, agreed the new Bermuda companies have impacted the market, but not in the way some feared initially.

"The big issue post 9-11 was how much the new capacity coming in would have a softening effect on the market. And I think the discipline of the new Bermuda start-ups has been very strong. We haven't seen them coming in and undercutting the more established markets;' Millwater said.

While the new companies haven't taken a lot of market share, they've provided reinsurance brokers with "a good number of other options to go to," said Adam Klauber, managing director of equity research for Cochran, Caronia & Co.

They also helped cap the escalating rates in the property catastrophe market; he said. "On the property catastrophe side, the Bermuda companies are one of the factors that limited rate increases. They limited the ability of existing players to get rate increases," Klauber said. "In other markets where there is a capacity shortage, they're not really hurting other carriers."

Millwater called it a natural cap in the property market. "When rates reach a certain level--what I would call the correct technical price, which is more identifiable in certain lines of business than in some others--what you see is capacity coming in at that price and if you hit a certain price, you can get your programs paid."

Some existing companies have felt the increased competition in the market. "The business isn't less profitable--we just have to search longer for it," said Simon Welton, senior underwriter for catastrophe retrocessional coverage for GE Employers Reinsurance Corp.

"The competition isn't on price, it's on who will get the largest amounts of business," said Nicola Stacey, global product leader for property catastrophe for GE ERC. In the 1990s, a large company searching for property insurance may have had 30 different companies sign up to take a piece of the contract. Today, companies are taking larger amounts, so maybe just five companies could offer the needed capacity to the insured, Stacey said.

"There's still new business out there, so if we are getting less on one [existing] piece of business, we might be able to write something new," Stacey said.

More Than Property

Not all companies have felt the impact of the new Bermudians. "I don't see a big effect," said Brian O'Hara, president and CEO of XL Capital Ltd. "They're most notable in the market on the shorter tail lines of business--property in particular. There's been some impact, but it's not dramatic." He noted some of the companies have tried to enter other lines, but said "they'll be challenged because of ratings. The only one that is A+ (Superior) is Allied World. I call them a clone of AIG. They've been most active in the casualty lines."

The property market has stabilized, Ehrhart said, but the casualty market still lacks capacity, leaving room for the new companies to expand.

"Some of the new players have entered the casualty lines, and I think that you're still seeing upward pricing pressure in those lines, so I don't think we've found that equilibrium yet where people are comfortable with the underlying issues and the underlying prices," Ehrhart said.

"The whole group has diversified much more aggressively and more rapidly than people would have expected because of the stabilizing property catastrophe market," Klauber said. Comparing the companies to those formed in the wake of Hurricane Andrew, Klauber said, "The amount of premium that these companies have put on dwarfs what some of those other companies did in '93-'94. They've definitely caught momentum faster than most people thought."

Five Companies, Five Stories

The five start-ups share some commonalities: all were able to get up and running quickly, and all were profitable in 2002. With few catastrophes in 2002, it was a good year for property insurers and the more property insurance the start-ups wrote, the more profitable their business was in 2002. The five companies' combined ratios ranged from 67.4 for Montpelier to 90.8 at Allied World. They also were able to hire some well-known industry leaders with established reputations. And as new companies, they were free from balance sheet issues--such as reserve charges--that some existing players face. For the most part, the five started out with a big chunk of capital, very few employees, and no customers. But as tempting as it is to lump the companies together, each company has a distinct operating structure, management and culture.

"What I see among our peer companies is that we are all very different," said Kenneth J. LeStrange, chairman, president and CEO of Endurance Specialty. "Some people imagine we are on a small island beating each other up every day, but each company has carved out a distinct identity. And all are acting with a pretty good degree of discipline."

The Oldest New Kid

Arch Capital Group is the oldest start-up, having originally been formed in 1995. The company sold off most of its underwriting operations, however, except for some nonstandard auto business, and was mostly acting as an insurance fee-for-services company with $276.4 million in capitalization before Sept. 11,2001. It had kept its operating licenses, and after the market changed post 9-11, the company raised $1.4 billion in capital and launched Arch Reinsurance Ltd. and Arch Insurance Group. Unlike the other four start-ups, Arch's stock was already trading on the NASDAQ market exchange when it launched its underwriting business.

"When Sept. 11th happened, the environment changed totally and our strategy changed," said Constantine Iordanou, president and CEO of Arch Insurance Group. "We felt that in order to be a major player, we needed much more capital than $250 million, so we raised another $750 million. The posture of the company changed from a fee-for-service to becoming purely an underwriting company, both in the insurance and reinsurance sector."

Iordanou said the company didn't want to be a monoline writer. "We wanted to be specialists focused on sectors that were shrinking in capacity with rates improving. We didn't limit it to property/catastrophe on both the insurance and reinsurance sides."

The company has expanded into some areas, such as primary marine and aviation, that it didn't originally plan to enter. The company also acquired the renewal rights to Kemper Insurance Co.'s surety.

"We didn't have to displace other players," Iordanou said. "We were filling necessary needs in the marketplace, which made our evolution and growth easier."

The company has grown rapidly, establishing offices in Chicago; Atlanta; Stamford, Conn.; Morristown, NJ.; New York and San Francisco. "We operate with significant strength onshore, which is unusual for a start-up," Iordanou said. "That gives us the ability to fill market needs closer to brokers and customers."

Iordanou said the new companies have had a positive impact on the market. "The capacity need is much bigger than what the Bermuda start-ups could fulfill. Some people had concerns that the new start-ups would interfere with the readjustment of the market. In my view, that hasn't happened. Just $7 billion to $8 billion of new capital came in, which was insignificant to the need."

He emphasized the company's focus on underwriting. "My wish is for Arch to be a company that is known as an underwriting company that is willing to accept risk for the appropriate price. We are not a company that will be driven by cash-flow underwriting or market-share underwriting."

Be Nimble, Be Quick

Like Arch, Endurance Speciality built a company that is active in both the insurance and reinsurance market, as well as both property and casualty, said LeStrange.

"Our speciality is property catastrophe," LeStrange said, noting the company gained significant participation in the market when it purchased the renewal rights of LaSalle Re's property catastrophe portfolio last year. Also, the company hired 20 of LaSalle's employees.

The company was able to get off to a quick start using office space and infrastructure of Zurich Financial, one of its original investors, for the first several months in 2002.

"We pride ourselves on being a nimble company" LeStrange said. "We think very carefully about what we do, and when we decide to do something, there is virtually no lag between intent and implementation."

For instance, Endurance quickly realized an opportunity in the troubled medical malpractice line, and began writing coverage for hospital professional liability. "We started out looking at all med mal, and narrowed the focus to hospitals," LeStrange said. "I think we've assembled the most robust database on hospital claims and related exposures that exists."

The company found the directors and officers liability market wasn't hardening as fast as it had hoped, and so it didn't write any business until the end of 2002, even though that was part of the company's original game plan.

When it comes to the property catastrophe market, an insured looking for coverage has no problem getting companies to sign on when the price is right, LeStrange said. "Everyone is pretty much using the same modeling technology," LeStrange said. "Any company that started recklessly pricing their business would really stand out in today's environment."

Making sure the price and terms are appropriate to the risk are key to Endurance, he said. "We declined two-thirds of the business opportunities offered us. We're very selective."

Room at the Table

Allied World, which was created with investments by competitors American International Group and Chubb Corp., as well as Goldman Sachs, also agrees with the importance of underwriting. "If you don't write to an underwriting profit, you are courting disaster," said Michael Morrison, who came out of retirement after a career with AIG to take the helm of the fledgling company.

"We are an insurance company with a reinsurance department, not a reinsurer per se as many other startups are," said Morrison. "Our game plan was to write property/casualty to provide capacity where it was missing. We've stuck to that."

Allied World has been active writing directors and officers liability, property and energy.

"When the brokers came pounding on our doors for that, we went out and got the expertise," Morrison said. "They pounded on the doors for other things, such as surety, and we're not interested."

One of the things that helped lift Allied World off the ground was contracting with a service company to provide a Bermuda-based support staff, including data processing, computers, legal and accounting people and equipment. "We were able to concentrate right away on the underwriting," Morrison said. "Three of us were in an office and the tables were there, chairs, computers, pencils. Everyone else who came had to find out where to buy the pencils. We got up running right away."

Morrison said the company doesn't compete with its investors AIG and Chubb, who usually write lower layers of coverage, nor with fellow Bermuda-based insurers, Ace and XL, which write the upper layers on liability contracts. Rather, Allied World has found a niche writing in the first or second excess-of-loss layer on casualty contracts. "We brought something to the island that they didn't have before," Morrison said. "There's plenty of business to go around. We don't clash with another island insurer."

It's taken a lot of time and effort to get the company where it is today, and one of Morrison's greatest concerns was that the employees would be burned out after working 14- to 16-hour days, sometimes seven days a week. But a recent survey found employees are still enthusiastic and passionate, Morrison said. "The thing that I am proudest of is our people love working for the company. We've created an ownership culture."

New, but Experienced

Axis and Montpelier have focused on short-tail property lines. Axis, which is due to launch its initial public offering shortly, wasn't available to comment for this article.

The difference between the market in 1993 and 1994 after Hurricane Andrew and the current market is that then there was a huge displacement in the property catastrophe area, said Russell Fletcher, chief reinsurance officer for Montpelier Re. "This opportunity after the World Trade Center disaster resulted in a much broader market opportunity." Property catastrophe represented about 23% of Montpelier's book of business in 2002. About 38% of its business was property pro rata business; 28% was qualified quota share; and about 11% was specialty personal accident, catastrophe, terrorism, marine and aviation, and workers' compensation catastrophe.

"The market has given us an excellent reception, for several reasons," Fletcher said. He cited the company s experienced management team, its balance sheet strength and its successful IPO. "We're off to a very strong start. Given the dysfunction in the world marketplace right now, big questions about balance sheet integrity and reserve strengthening, the discernible trend toward companies with clean balance sheets and experienced management has helped us write a lot of business right out of the shoot."

While other starts-ups have been quick to establish multiple offices, Fletcher said having a single base of operations has helped the company because logistics are much easier. "The segmentation focus on property/specialty areas, coupled with keeping the systems very concentrated and disciplined, has allowed us to get our message out to the market. This is what we want to do, this is where we want to play," Fletcher said.

The company's underwriters have an average of 23 years of experience, he said. "We have a very strong platform, and there's very much an entrepreneurial dimension of the company. [Chairman] Jack Byrne has pretty much laid down the economic culture of the company, which is to focus on building diluted book value. That's what we focus on."

It's too early to know if the new start-ups will be independent players in the future, or if they'll be swallowed up by bigger companies or leave the market.

"As the market turns in a couple of years, when it really softens again, the companies that have been able to develop franchises outside of the reinsurance market will probably have a longer outlook," Klauber said. "With the top 10 reinsurers pretty much controlling the market, it's hard to be No. 20."

--Senior Associate Editor Barbara Bowers contributed to this story.

The Big Five

Here's a closer look at the largest five Bermuda companies launched in the wake of Sept. 11, 2001:

Holding company: Allied World Assurance Holdings Ltd.

# Operating company: Allied World Assurance Co. Ltd.

# A.M. Best Rating: A+

# A.M. Best Co. No.: 84808

# Investors: American International Group, Chubb Insurance Co., Goldman Sachs

# Capitalization: $1.5 billion

# Structure: Privately held, no plans to go public

# Incorporated: Nov. 13, 2001

# Employees when launched: Four

# Employees now: 85

# Financial information (year-end 2002) *: Net income, $127.6 million; gross premiums written, $922.5 million; net premiums written, $846 million; net premiums earned, $434 million

# Combined ratio: 90.8

# Lines of business: Commercial property/casualty lines, including general and professional liability insurance, energy, transportation and commercial real-estate property risks

* Source: Allied World fourth-quarter 2002 earnings release.

Holding company: Arch Capital Group Ltd.

# Operating companies include: Arch Reinsurance Ltd. and Arch Insurance Group

# A.M. Best Rating: A-

# A.M. Best Co. No.: 75169

# Investors: Warburg, Pincus and Hellman & Friedman

# Capitalization: $1.4 billion

# Structure: Public company 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

# Stock: NASDAQ: ACGL 

# Launched underwriting initiative: October 2001

# Employees when launched: 170, including 144 for the nonstandard auto operations

# Employees now: 673, including 184 for nonstandard auto operations

# Financial information (year-end 2002) **: Net income, $59.0 million; net premiums written, $1.26 billion; net premiums earned, $655.0 million

# Combined ratio: 89.7

# Lines of business: U.S. casualty treaty, U.S. and non-U.S. catastrophe treaty, property risk and proportional property risk

** Source: Arch Capital Group's 10-K filing with the SEC.

Holding company: Axis Capital Holdings Ltd.

# Operating company: Axis Specialty Ltd.

# A.M. Best Rating: A

# A.M. Best Co. No.: 84766

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

# Capitalization: Initial $1.7 billion; additional $400 million credit line secured in April 2002

# Structure: Privately held, but IPO is planned for 2003

# Incorporated: Nov. 8, 2001

# Employees when launched: Not available

# Employees now: 168

# Financial information (year-end 2002) ***: Net income, $265.1 million; gross premiums written, $1.10 billion; net premiums earned $536.9 million

# Combined ratio: 70.7

# Lines of business: Short-tail primary and reinsurance lines of business. Primary lines include marine liabilities, marine hull, energy, political risk, aviation war and marine war. Reinsurance lines include property catastrophe, property, marine and aviation

*** Source: Axis Specialty's IPO prospectus on file wit SEC

Holding company: Endurance Specialty Holdings Ltd.

# Operating company: Endurance Specialty Insurance Ltd.

# A.M. Best Rating: A-

# A.M. Best Co. No.: 84835

# Investors: Aon Corp., Zurich Financial Services, Golden Gate Capital

# Capitalization: $1.2 billion

# Incorporated: Nov. 30, 2001

# Structure: Went public with IPO February 2003

# Stock: NYSE: ENH 

# Employees when launched: 3

# Employees now: 148

# Financial information (year-end 2002) ****: Net income, $153.9 million; gross premiums written, $798.8 million; net premiums written, $764.9 million; net premiums earned $369.5 million

# Combined ratio: 69.9

# Lines of business: Property, casualty, catastrophe, excess workers' compensation, aviation and space reinsurance, primary property, excess casualty and directors and officers insurance

**** Source: A.M. Best Co. reports

Holding company: Montpelier Re Holdings Ltd.

# Operating company: Montpelier Reinsurance Ltd.

# A.M. Best Rating: A-

# A.M. Best Co. No.: 84809

# Investors: White Mountains Insurance Group, Benfield Group, Gilbert Global Equity Partners

# Capitalization: $1 billion

# Incorporated: Nov. 14, 2001

# Structure: Went public with IPO October 2002

# Stock: NYSE: MRH 

# Employees when launched: Four

# Employees now: 37

# Financial information (year-end 2002) *****: Neet income, $152.0 million; gross premiums written, $607.7 million; net premiums written, $565.9 million; net premiums earned, $329.9 million

# Combined ratio: 67.4

# Lines of Business: Property catastrophe reinsurance, commercial property insurance and reinsurance and property retrocession reinsurance

***** Source: Montpelier Re's 10-K filing with the SEC

Note: A.M. Best ratings as of May 13, 2003.