Adrian Leonard reviews the progress of the 'Class of 2001'
Phenomenal growth has characterised the new insurance and reinsurance companies that were launched in 2001 in the wake of the World Trade Center loss. In the year 2003, gross premium written at Arch Capital Group was up 117%, at Axis Specialty it was up 105%, Endurance Specialty managed growth of 101%, and Allied World (AWAC) put an extra 71% of premium on its books. Although the pure reinsurer DaVinci Re, which writes in parallel to RenaissanceRe, was stable, specialist Montpelier Re grew at the hardly sluggish rate of 33%.
The big question for Bermuda's Class of 2001 is what to do next? Their first full year was one for staffing up, establishing infrastructure and writing business at a time of incredible capacity restriction, immediately after the global market's largest ever loss. Building business was still important in 2003, but the established divisions of the new companies were able to focus on new business growth. With the first quarter of 2004 under their belts, expansion appears to be slowing, and the future of the new Bermudians beginning to show through.
Company by company
Axis Capital Holdings grew its premium income by 72% during the first quarter of 2004, which President John Charman, the former Lloyd's underwriter, described as the first during which all four Axis underwriting segments were "fully operational". The rise made Axis the largest insurer among the Bermudian start-ups during the period, as it edged out Arch Capital by $34.3m in premium for the quarter. US reinsurance topped the growth performance by swelling 170% to $166.3m, while global reinsurance grew 103% to $429.1m. In contrast, the global insurance unit grew 23% to $300.4m, and US insurance was up 61% to $148.3m.
Axis attributed the growth of its US reinsurance business to better market penetration, and in international reinsurance to its "strategic expansion" into continental Europe. The company launched its own European project in 2003, when it injected $500m into its European subsidiary, hired former GE Frankona Re Chief Executive Karl Mayr to run the operation, and staffed up with Gerling Global Re underwriting executives Stephan Knipper and Bruno Felix, all in time for renewals.
In the US, building up Axis Re had taken a back seat to getting the primary business up and running. The reinsurer received regulatory approval at the end of December 2002, too late to play an enormous role in the 1/1 renewal for 2003; its $500m capital injection was not in place until May last year, too late for 1/4 business.
Axis had instead been focusing its early attention on building up its primary insurance presence in the US, where 9/11 left capacity in short supply. The evolution is highlighted by the changing split in the Axis business profile: global insurance fell from 40.0% of its business in the first quarter of 2003 to 28.8% in the same period of 2004 (although premium was up almost $57m), while global reinsurance grew by 6.3 percentage points to 41.1%. US reinsurance grew almost six points to 15.9% of the portfolio, while US insurance fell just one point to 14.2% of the Axis portfolio.
Expansion in US primary business continues for Axis. In April it added new underwriting units for professional liability and financial institutions, as well as a new inland marine department which began business by writing non-catastrophe builders' risk. Axis is also looking to Asia, having hired Andreas Thiele from ACE Tempest Re, where he was in charge of Asia Pacific operations.
Allied Word Assurance Co (AWAC), which was launched as a joint venture by American International Group (23.4%) and Chubb (19%), is privately held and therefore does not publish detailed reports about its business.
However, it too has reported a slowdown in growth. Gross premium written was $499.8m in the first quarter, up 27% from $393.4m in Q1 2003, compared to 71% growth during the full year 2003. It continues to write a portfolio comprising predominantly US primary business, although it does put some reinsurance risk on its balance sheet. For the full year 2003, 22% of AWAC's business was reinsurance, largely written on AWAC's behalf under a multi-year agency agreement by International Property Catastrophe Re (IPC Re), itself launched in Bermuda by AIG during the wave of 1993 start-ups.
Reinsurance is a growing business for AWAC. Already in 2004 the agency agreement has been amended to allow IPCRe to write larger lines on behalf of AWAC, including $20m limits specifically for Norwich Union and the Japanese farm mutual Zenkyoren. Nonetheless, President and CEO Scott Carmilani has described AWAC as an "insurance platform", hinting that reinsurance will always be a sideline. Meanwhile AWAC's cession rate shot up to 13.9% in the first quarter of 2004, compared to just 4.7% in the same period of 2003, although the destination of the business is not divulged.
Endurance Specialty Holdings, launched by Aon with private equity investors, has bucked the trend of slowing growth in the first quarter of 2004 by almost sustaining the triple-digit growth it achieved in 2003. The group wrote premiums of $720.6m in the quarter, up 99% on its Q1 2003 underwriting.
Of the total, some 82% was reinsurance, up from 75% for the full-year 2003. About 28.6% was property per risk business, closely followed by casualty treaty at 26.0% and property cat at 17.8%.
The sustained organic growth in 2004 is important for Endurance, since its earlier expansion had been driven by acquisitions. The company swelled rapidly though the purchases of the property catastrophe reinsurance portfolio of ailing Trenwick subsidiary LaSalle Re in May 2002 (worth $133m in 2001), and in May 2003 of the $400m HartRe property/casualty reinsurance portfolio.
And growth has been spread across the business: both property per risk and casualty treaty grew by 124% in Q1 2004 over the previous year's first quarter; property cat grew 112%; and property insurance was up 102%. Endurance's smaller casualty insurance portfolio grew by 49.4%, and its specialty risk business by 52.5%. In September 2003, Endurance announced its expansion into marine and energy lines in the US and London markets.
Endurance established an international network early on, and made key hires throughout 2002. In December that year it opened Endurance Worldwide, a Financial Services Authority (FSA)-licensed subsidiary in London to write UK commercial property risks and international treaty, and Endurance Re, a New York-licensed operation to write property and casualty excess of loss and proportional reinsurance, per-person workers' compensation reinsurance, surety reinsurance and other lines. Endurance was also quick off the mark to go public, filing its Initial Public Offering (IPO) in December 2002. It had a secondary offering in March this year.
Arch Capital Group Ltd, remade and Nasdaq-listed, has insurance and reinsurance subsidiaries in each of Bermuda and the US, and in 2003 opened an insurance subsidiary in the UK headed by Robert T Van Gieson, a former CEO of CNA's global operations and, prior to that, of Chubb Europe. It has also expanded its horizons by opening an insurance office in Houston, and appointing a 38-year Generali veteran, Dr Riccardo Nicolini, as European marketing representative. These moves, along with recent fundraising, should fuel growth.
Arch has already grown very rapidly from the time it started fresh with a clean balance sheet in 2002, effectively making itself into a start-up by completely abandoning its old book of business. It has since become the largest of the new Bermuda players, racing ahead of rival Axis by nearly a billion dollars in terms of 2003 gross premium, during a year when it saw growth of 117%, more than any of the other Bermuda launches.
However, growth slowed to about a tenth of that pace in the first quarter of 2004, at 17.4% over Q1 2003.
The top-line growth figure masks substantial expansion of Arch's insurance portfolio. Reinsurance accounted for $565.7m of Arch's Q1 2004 gross premiums, up just half a percent over the previous year's first quarter. Arch said two "significant" quota share treaties for Lloyd's syndicates were not renewed (as Lloyd's centrally tightened up on qualifying quota share treaties for 2004), and that it reduced its underwriting in "certain sectors" due to falling prices. The portfolio yielded a combined ratio of 87.8%.
In contrast, gross insurance premiums rose 39.5% in the first quarter, compared to $481.6m. Arch attributed the expansion to "continued growth of the insurance division's market share". The primary business had a combined ratio of 90.8%. Program business is the largest component at 27.0%, accounting for $89.9m of premium, but down from 30.8% in Q1 2003, as Arch increased the portfolio share of professional liability (where written premium more than doubled), construction and surety, and property, marine and aviation. Insurance premiums received from clients outside the US soared 616%, but still accounted for just 2.4% of the total. That is likely to rise as the new UK business gears up.
In reinsurance, Arch's client base is much more international - and increasingly so. Premiums from North American cedants fell from 63.0% of the total in Q1 2003 to 61.9% in the more recent quarter. Most of the rest was from Europe. About 60% of Arch's business is pro rata, and casualty premiums accounted for 41.5% of the total, compared to 30.0% in Q1 2003. Arch has also slashed the size of its non-traditional reinsurance premium income.
Growth in several lines
Montpelier Re's first quarter takings were down 9% in 2004, as it too saw the non-renewal of qualifying quota share (QQS) treaties at Lloyd's.
Montpelier's QQS premium income was $76.4m in Q1 2003 - 21% of its book - but only $1.3m in this year's first quarter. However, the company said it expects 2004 full-year premium to increase nonetheless, after growing 33% in 2003. And despite the overall decline, growth was achieved in several lines in Q1 2004. Property catastrophe business, which at 52% of the portfolio is Montpelier Re's largest line, was up 15.6% in Q1, and non-property speciality business was up to $69.1m from $48.8m. Still, property speciality reinsurance slipped slightly, by 3%, to $88.1m. But top line growth, as the industry repeats often in these days of contrition, is not important.
Montpelier Re's net income for the quarter was up 5%, to $109.0m.
A short-tail reinsurer, Montpelier Re was launched after 9/11 by White Mountains Insurance Group, parent of the insurer OneBeacon, and reinsurance broker Benfield. It went to market through an IPO and listing on the New York Stock Exchange in December 2002, which raised more than $201m. A secondary offering was priced about six months later, followed by a debt issue. However, unlike some new Bermudian companies, Montpelier Re does not seem destined to become a goliath. Instead it is focussed on properly underwriting a book comprising property catastrophe excess, retro and pro rata, speciality property exposures assumed direct or as fac, risk excess or pro rata, and a growing book of other speciality business including MAT, PA, workers' comp and life cat, sabotage and terrorism, and crop and hail risks. This latter portfolio was up 42% quarter-on-quarter in the first three months of 2004.
DaVinci Re is a joint venture between RenaissanceRe (25%) and State Farm (50%), which were joined early in 2002 by fellow Bermudian reinsurer Max Re (12.5%) when it purchased $50m worth of DaVinci shares. Capitalised at $500m, DaVinci writes property catastrophe and speciality reinsurance and retrocession, primarily on an excess of loss basis, with per programme capacity of $50m. Business is underwritten in parallel with RenRe, which manages the underwriting on a fee-for-service basis. DaVinci wrote $126.5m of gross premium in the first quarter of 2004. Like Montpelier, its premium income shrank quarter-on-quarter: cat premium was up abut $3m, but offset by a $7.9m fall in speciality business, mirroring the shift in RenaissanceRe's own portfolio. Speciality business includes lines such as catastrophe-exposed workers' compensation and personal accident, aviation, property per risk, surety, finite and terrorism.