The Class of 2005 have had an easy ride so far. Could 2008 be the year that finally tests them properly?

The Bermudian Class of 2005 provided reinsurance journalists with the literary equivalent of golden news nuggets.

Voracious M&A activity, extraordinary initial public offerings (IPOs) and enviable financial results combined to make this brood of young pretenders the most exciting thing to happen to reinsurance in years.

But with the world teetering on the brink of recession and a rash of uncertainty spreading through the financial markets, could 2008 be the year that finally tests these nubile young reinsurers?

Belles of the ball

The Class of 2005 - Harbor Point Re, Lancashire, Validus, Amlin Bermuda, Hiscox Bermuda, Flagstone Re, Ariel Re, New Castle Re, and Omega Specialty – formed in the hard market following hurricanes Katrina, Rita and Wilma.

According to Benfield, the nine companies wrote $3.3bn of gross premiums during the opening year, compared with an initial $5.1bn of the six 2001 start-ups.

“Good luck was a feature of the maiden year of the 2005 Bermudian (re)insurers. Unexpectedly light catastrophe losses and higher investment yields enabled the group to earn a collective return on opening shareholders’ funds of 16.5% compared with 11.4% for the 2001 Bermuda start-ups during their first year of business in 2002,” said the Benfield ‘Maiden Innings’ report.

Net income in 2006 for the Class of 2005 totalled $1.2bn, exceeding the $0.7bn earned in 2002 by the 2001 gang. The very benign catastrophe year was seen as the major driving force behind these strong results and extremely low average combined ratio of 56.7%.

“Voracious M&A activity, extraordinary initial public offerings (IPOs) and enviable financial results combined to make this brood of young pretenders the most exciting thing to happen to reinsurance in years

Landmark year

And now 2007 – a year with more catastrophes, certainly, but few that impacted reinsurers in any significant way. Preliminary results indicate another bumper year is in store for the plucky graduates of ’05.

Validus has already reported net income for the fourth quarter of 2007 of $139m, compared with $69.1m for the fourth quarter of 2006. Chairman and chief executive officer Ed Noonan called 2007 a “milestone year” for the company.

Lancashire meanwhile reported a net income after tax of $390.9m for the year, leading Richard Brindle, group chief executive officer to proclaim: “Lancashire has produced a remarkable set of results.”

And then there were the deals. The big deals. 2007 was the year that Bermuda fought back and used some of those piles of annoying excess capital to go out and buy things – usually Lloyd’s underwriters.

Ariel made an audacious unconditional bid for Lloyd’s underwriter Atrium and eventually won its prize for £192.7m.

Ariel chairman Don Kramer said: “The combination with Ariel provides Atrium with access to a high quality Bermudian reinsurance platform together with additional capital for strategic development within the Lloyd’s platform.”

Meanwhile Validus bought Talbot and managed to squeeze in a successful IPO, easily making it the busiest of the 2005 crowd.

“The companies that have expanded through M&A probably aren't going to see much opportunity left and most of the big players have conducted their IPOs. Frankly there's not much left to do!

Mark Rouck, senior director at Fitch Ratings insurance group

So what can 2008 possibly hold for the class that has achieved everything?

The big test?

“How are they going to be tested?” ponders Mark Rouck, senior director at Fitch Ratings insurance group.

“One way would be if there is a large catastrophe event in the US. In general the Class of 2005 is weighed more heavily towards property catastrophe exposures in the US than some of their older competitors. That would definitely test who would be here for the long term and how successful are they going to be.”

But with mixed reports as to the likelihood of an active year, perhaps the young Bermudians could be threatened by something else.

“The Class of 05 shouldn’t be hit on the underwriting side from the credit crunch,” reveals Rouck. “They do have fairly high exposure to mortgage-related securities but very little exposure to municipal bonds. The credit quality of the mortgage securities is extremely high, however, even at this point, so there not a lot of exposure from a credit perspective.”

In fact Rouck adds that assuming normal cat activity, he expects the Class of 2005 to be pretty profitable again.

“I think 2008 will be a quiet but financially sucessful year. The companies that have expanded through M&A probably aren’t going to see much opportunity left and most of the big players have conducted their IPOs. Frankly there’s not much left to do!”