When 9/11 left the Bermudian market scrambling for capital, five new firms applied themselves to take full advantage. We speak to the graduating class that all passed with distinction and asks: could this ever happen again?
In 2001, out of the ashes of the World Trade Center and a human tragedy that will never be forgotten, a new class of reinsurers sprang up in Bermuda. Today, the five companies that made up the Class of 2001 – Arch Capital Group, Axis Capital, Allied World Assurance Company, Endurance Specialty Holdings and Montpelier Re – have graduated with flying colours.
Each has become an established market player, and each will play a role in the consolidation of the Bermudian market that is now looking inevitable.
But could it ever happen again? While US president Barack Obama’s administration tightens the screws on low tax domiciles, Europe is also growing wary in the wake of the financial crisis. And new ways of raising capital, such as cat bonds, side cars and insurance-linked securities (ILS), mean there is no longer a need to form new companies in order to inject capacity into the market.
“It was a perfect storm opportunity,” recalls one leading reinsurance broker who was involved at the time the five companies were formed. “Everything came together at the right time.”
The soft market of the 1990s had lingered into 2001, and risks were being written at unbelievably low prices. “In a cyclical business, that time stands out as particularly challenging,” Endurance chairman Ken LeStrange says. “With hindsight, a lot of risks were being profoundly mispriced.”
Something had to give. “The market was starting to crack; there were already some issues percolating underneath,” Arch’s reinsurance chief executive Marc Grandisson says.
Then 9/11 hit. The biggest insured loss of all time, it sent the industry into a hard market at great speed, revealing all those problems that had been going unnoticed.
“Apart from being very large, the loss exhibited correlation characteristics, involving many lines of business simultaneously, that had been under-appreciated by most carriers,” LeStrange says. “It was the catalyst for a sea change in the industry’s view of its capital adequacy. It had gone from being very adequate, at least cosmetically, to significantly deficient.”
So with insufficient capital in the industry, brokers were scrambling to place risks and prices were rising skyward. New capital was needed, fast.
A mixture of investors – private equity houses, investment banks, established insurers – saw the opportunity to invest and a new class of (re)insurers was born. Speed was of the essence, hence the attraction of Bermuda. There, a new company could be up and running in a matter of weeks, compared to years in onshore locations. By 1 January 2002, the doors were open.
Hiring the right people was key to the Class of 2001’s success. “They all hired industry titans,” a broker says. “Bermuda is a mousetrap,” he continues. “The most talented individuals know they will be paid extremely well, and it is very tax efficient. Not only did they get the titans, they also attracted the young Turks. They hand-picked them, made them excellent offers, and many couldn’t resist.”
Bermuda had already begun building its reputation as a new marketplace for reinsurance, and with the Class of 2001 the picture was complete. It rapidly began to rival London and New York as an international insurance centre. Its trajectory seemed unstoppable, until the recent financial crisis caused established governments to seek scapegoats.
Meanwhile, the capital markets have changed too. Since 2001, new forms of capital have gained popularity. Side cars, cat bonds and ILS offer investors new ways of putting money into the market and taking it out again fast. Setting up a company is beginning to look too much like hard work.
The Class of 2005, a second round of start-ups formed in Bermuda in the wake of two years of devastating storms, has fared less well than its predecessor.
“The market opportunity they experienced has not been nearly as good, and yet their results have been impressive,” LeStrange says. “The other business model that really came into its own in 2005 was the influx of capital markets capital through non-company vehicles, side cars, cat bonds and ILS.”
The conditions that led to the Class of 2001 have gone and as the Bermudian market braces itself for the tidal wave of consolidation, the class itself will alter radically. Global Reinsurance asked leaders from the 2001 class to look back at the past nine years, and offer their predictions for the future. GR
Endurance was formed with $1.2bn of capital, and today has $2.5bn, having returned $1.2bn to shareholders. Ken LeStrange has been chairman since the company was formed
For many companies that raised capital to enter the insurance market after 9/11, Bermuda stood out as an attractive domicile with a strong regulatory climate, yet one that offered the ability to enter the business quickly. Endurance was formed in weeks. In contrast, the following year when we sought to establish onshore operations in both the UK and the US, it took almost a year to create these entities.
Endurance was unusual in that our goal was to be diversified from the very beginning. We felt that the dislocation the industry was likely to experience would be far-reaching. We expected that it would be global in nature, affecting both US and international business, and that it would affect insurance and reinsurance, as well as both long- and short-tail lines of business. And it did.
I’m a strong believer in planning, but often you have to toss your plan away and deal with the reality that actually occurs rather than the one you hoped or planned for. This was no exception.
My first thought was: “Is anyone going to show up?”, or would the markets rebound and there would be no need for us start-ups in Bermuda. Thankfully, that did not happen. We had thousands of submissions on the first day we opened for business. There were people from all over the world lined up at our door to secure our capacity.
Given 9/11, one would have expected property cat capacity to be quite constrained. It did not turn out that way. While prices increased, there wasn’t a capacity crisis at all at 1 January 2002. That year we wrote a small fraction of the property cat business that we had anticipated, but we were not alone.
I didn’t expect in the early days that we would build our company through acquisitions, and yet our buyout of LaSalle Re’s property cat portfolio months after our founding took us near the top of the Bermuda league tables overnight.
I’m not sure I would have gone public as soon as we did, just 14 months after we were formed. It was certainly an important milestone for the private equity firms that were our original investors. But in order to very quickly prepare to go public, we diverted resources to build our infrastructure, operations and controls, at a time when we had a very small number of staff. I’m not sure there would have been any downside to going public a year later and it might have afforded us the ability to grow more than we did in the early days.
When I look at the Class of 2001, I think that each of the companies has been successful and played an important role in property/casualty insurance and reinsurance. As a group, we have acted responsibly through our underwriting and servicing our clients and brokers.
Arch was established with $1bn of capital, largely from US private equity firms. Today, it has about $5bn of capital. It was led by Dinos Iordanou. Marc Grandisson was chief underwriting officer in 2001, and is now chief executive of the reinsurance arm
9/11 meant that people’s perception of risk changed overnight. Companies didn’t have enough reserves and the market rediscovered that this is not as straightforward as it looks.
Overnight, people had problems with the old players. They asked: ‘Do they have balance sheets that can sustain more risk?’ The rating agencies got really scared.
Arch already existed as a company. It had redomiciled to Bermuda before 9/11 and was the successor of Risk Capital Re, which had sold its reinsurance arm, shut down ongoing writing of business and became an investment company. Then 9/11 happened and everything got pushed and reactivated. It got licences to write new business in Bermuda.
We were multi-line and multi-territory, and had a plan of doing insurance and reinsurance. We thought we were going to be more of a liability writer. We thought this was one of the few times that the market would turn, and it did.
Property was important and we did a bit of it. It did get hard but it was a matter of allocating capital, and working out where we would get the best bang for our buck. Liability was our choice in 2002-04 and it was vindicated by the marketplace. Call it luck or call it being good.
Now we have about 165 people on reinsurance and 1,000 on insurance; the staff is much more geared to insurance, as you would expect. Are we still flexible? I think flexibility comes at many levels. The number-one level is the ability to deploy capital between insurance and reinsurance. I think we have proven that we can do this.
The senior team is still a very small team of people, which is very easy to get access to and is very quick in its decision-making.
Bermuda is currently a moving target. The US government can make a decision and we have to react. We spend a fair amount of time talking about it at a strategy level but, then, there’s only so much the US government can do; it’s a worldwide market.
We are always on the look out for new kinds of products and industries. If you get the right people at the right time you can graft them onto your platform. The whole company was created that way.
I don’t know about consolidation. Everyone thinks they are undervalued right now – the price-to-book multiple is less than one. As an investor, I think this is the right time to buy; it’s hard to see how you could lose.
Allied World Assurance Company was formed with $1.5bn of capital, and today has $3.1bn. Frank D’Orazio was appointed president in 2009, prior to which he was chief underwriting officer
Terrorism had caught much of the industry by surprise as a catastrophe peril. At the time, it was not properly contemplated, modelled or priced for, and on 9/11 numerous lines of business correlated, handing the industry an insured loss in excess of $32bn.
Beyond the loss of capital, carriers were also forced to deal with the aftermath of recalibrating their strategies, developing loss estimates and interacting with both government and rating agencies to plot a course forward.
Several companies were downgraded, while others were forced to cut back capacity, shut down certain product lines and take an overall account of how badly not just 9/11, but recent accident years, had affected their operations. Our initial shareholders sensed the massive market dislocation that was about to occur, and Allied World was incorporated in November 2001.
Expediency in bringing capital to the marketplace was critical. Bermuda, because of its distribution network, proximity to the USA and pro-business dynamics, provided the perfect incubator. At the time, our strategy was to be primarily a direct insurer with complementary reinsurance capabilities.
On the direct side, our goal was to provide meaningful capacity to affected product lines and markets while at the same time differentiating ourselves from the herd. For instance, we became the leading primary property player for large accounts in the Bermuda space.
In casualty lines, Allied World participated at lower attachments than the traditional Bermuda marketplace and added a dedicated healthcare practice. By 2002, plans were under way to expand our footprint in Europe and the USA.
I think the same entrepreneurial spirit of the early days exists today in our management team and staff. While we continue to respond expeditiously to new opportunities to capitalise on perceived displacements in the market, there are probably fewer accretive new ideas out there given current market conditions, and we have less margin for error in our execution than we did back in 2002. As a result, we employ a fairly vigorous vetting process for new initiatives.
That said, we’re a much more complex organisation than we were back in 2001. We now have 652 employees and 15 offices in seven countries. That’s a far cry from late 2001, when Allied World was able to hold ‘all employee’ meetings in a small conference room.
Given the current state of the capital markets, as well as the industry rate environment, it’s hard to imagine significant new company formations of any consequence in the future.
Since 1985, however, there have been four distinct rounds of post-event capital formation in Bermuda that have given birth to some of today’s most significant industry players.
So yes, I would say history suggests it could happen again, but there must be a catalyst to trigger a market change.