The past year has seen a slew of new capital into the re/insurance sector, with some markets more popular as a destination for the new money than others. Sarah Goddard spoke to some of the new players.

That the re/insurance losses attributable to the events of September 11 will be huge is undeniable. Estimates of the final figure to be paid by the industry range from around $30bn to $78bn, but whichever end of the spectrum the losses settle at, it will be a gargantuan amount of capital to exit the industry, in anybody's terms. On the other side of the capital equation, in the months following September 11 investors saw an opportunity to become involved in the upcycle. Analyst estimates indicate around $25bn entered the re/insurance sector this way, a substantial proportion of it into new ventures with no exposure to the World Trade Center (WTC) losses, no long-tail book, nor any skeleton-bearing cupboards still to be opened.

But the response has been mixed. Some industry practitioners have criticised the new capital, saying it has depressed the upswing in rates and conditions which had been showing itself before September 11. The new capital, they say, entered faster than the losses exited, therefore effectively overcapitalising an already-weak sector. Others have countered that argument, pointing out that not only did capital exit the industry from the WTC losses, but also the growing burden of asbestos-related claims had been increasingly draining the sector. In addition, the general pain being felt by a number of organisations led them to pull from certain markets - most notably, recently, Gerling Global Reinsurance Corp of America's exit from US business. Alongside these exits has been the `flight to quality' long talked about and now appearing to come to fruition. With half the market on creditwatch, cedants are becoming increasingly fussy over the security of their reinsurers, and the new gang is bringing unencumbered capital with good initial ratings.

The focus for new start-ups was, almost inevitably, Bermuda, which had proven its worth in this field both in the liability crunch in the 1980s and the property catastrophe crunch in the 1990s. One of the first start-ups was Endurance Specialty Insurance Ltd, backed with around $1.2bn from a variety of investors including Aon Corp (through its Combined Specialty business), Zurich Financial Services, Capital Z Financial Services and General Motors Asset Management. Launched in mid-December and headed by Ken LeStrange, formerly of Aon and American-Re, Endurance is focusing on certain lines of business, including property insurance and per-risk reinsurance, property catastrophe reinsurance, excess general liability re/insurance and reinsurance, excess workers' compensation reinsurance, space and aviation re/insurance, D&O re/insurance, hospital professional liability and alternative risk transfer.

"Our style of management is conservatism and transparency," said Endurance executive vice president of international operations, Mark Boucher. "We have an underlying strategy of growth and development, which is organic, though we will analyse any opportunities." Though that does not mean picking up old books of business.

Nevertheless, of more than 50 acquisition opportunities that Endurance has seen since its opening, so far it is LaSalle Re's property catastrophe business which has proved the most enticing. In May, Endurance announced it had agreed to take on the business from Trenwick. Speaking at the time, Mr LeStrange commented, "We are very pleased to have reached this agreement with Trenwick, and, in so doing, to have completed the build-out of our property catastrophe and Bermuda platforms within just five months of our founding. This carefully considered transaction makes Endurance a powerful resource for our clients - combining the talented employees and impressive client base of LaSalle Re with Endurance's strong capital base, broad array of products, experienced management team and strong investor group."

The arrangement with Trenwick included a quota share protection for in force policies, as well as Trenwick retaining LaSalle's run-off business and Lloyd's investment. Endurance does have the right to renew LaSalle contracts when they expire, and has taken on about 20 LaSalle employees in the Bermuda operation. More recently, Dan Izard, the former head of Associated Aviation Underwriters Inc, has been retained at Endurance to oversee its aviation and aerospace operations out of Bermuda.

"We are very committed to Bermuda as our head office, and to the Bermudian people," said Mr Boucher. The Bermudian business infrastructure makes it easy and quick to form a new re/insurer, he said, "but with strong, professional regulation." In addition, there is a pool of underwriting talent on the island, an excellent infrastructure, "and one of the benefits additionally is a favourable tax position," he added.

But the international marketplaces continue to hold an attraction for business, and Endurance is currently in talks with regulators in the US and the UK to set up operations in both countries, hopefully before the year-end. "Onshore there is business more readily accessible," said Mr Boucher, "and there is business which is more suitably serviced from an onshore platform." As far as criticisms of swamping the market with unnecessary capital are concerned, Mr Boucher refuted any suggestions that the new players were ruining the game. "The WTC and the strengthening of reserves over the past year, [many] billions of unexpected losses have occurred. Link this to the many companies holding shareholder funds in equities, and capital is down even further. A substantial amount of capital has gone out of the business, and what has come in was a comparably paltry $1.2bn," he said.

Another new entrant into Bermuda is GoshawK Re, a new subsidiary of a well-established Lloyd's managing agency, GoshawK. GoshawK wholly owns Lloyd's syndicate 102, which has £185m in capacity for the 2002 year of account, and writes business over a number of classes including hull, cargo, liability, satellite, marine XL, non-marine property and contingency. "GoshawK was a listed vehicle in London with a small market cap, and was entirely dependent on Lloyd's," said GoshawK CEO Chris Fagan. "Lloyd's is an excellent place to do business because of the licenses around the world. It attracts brokers and it has a credit rating." By the middle of last year, GoshawK had decided that if it wanted to grow, it should do so outside the Lloyd's market. At that point, it started exploring the Bermuda option, and the effects of September 11 were to cement that interest. In November, the company undertook a ten for seven rights issue, raising £100m - more, in fact, than its market cap - allowing it to open an A- rated reinsurer in Bermuda.

There were three main reasons to set up in Bermuda, said Mr Fagan. "You can use capital much more effectively, and since it is a reinsurer you don't need licenses around the world," he said. In addition, it does not have the same risk-based capital demands that Lloyd's puts on excess of loss and retro business. Secondly, it is much more cost effective both to set up in Bermuda and to transact business there compared to Lloyd's. And finally, it is a tax-efficient environment.

GoshawK Re is writing marine retro, marine XL, aviation XL, non-marine property catastrophe and finite business, and is likely to write about $150m in premiums over the year. The Bermuda team includes Paul Roberts, previously with Allianz Cornhill, who is writing the marine XL and retro books, and property specialist Jim Kemp from Tate & Lyle Re. There was, admitted Mr Fagan, an issue with whether practitioners could be tempted to Bermuda from markets such as London. GoshawK's relatively small size could also be a factor in attracting new people. He was, however, very confident about GoshawK's future: "We're very much focused on shareholder return," he said. "We are in the fortunate position to be in a smaller capital base and have more choice of risks we write ... we are confident about delivering an acceptable return on capital."

By raising the capital for its new operations through a rights issue, GoshawK is less encumbered with potentially loud clamours for certain levels of return on investment than other new vehicles. There is speculation that some of the investors in new operations will be disappointed by lower-than-expected returns - particularly since the market recovery in rates has been less pronounced than anticipated - and may make a speedier exit than originally expected.

This has not, however, caused Chris O'Kane, CEO of the newest UK-based reinsurance company, much worry. Wellington Re was launched in May as a London market-based, FSA-regulated reinsurer, owned by a new Bermuda holding company, Holdings, and backed with £448m in capital provided by an investor group including Blackstone, Candover, CSFB Private Equity, Montpelier Re (one of the new Bermudian reinsurers headed up by former Wellington chief Tony Taylor) and Lexicon. Wellington Underwriting PLC, owner of Lloyd's syndicate 2020, has split the syndicate's business so the property/casualty reinsurance, UK commercial property, UK commercial liability, and US facultative business now goes into Wellington Re, while the syndicate retains classes including aviation, accident and health, marine, war, political risk and energy liability.

The reasons for the split are straightforward. Despite the syndicate having a £625m stamp for the 2002 year of account, it was felt late last year that more capital was needed to play in the prevailing market conditions. "If you look at how much more capital was needed to grow the business, and that we needed to do it quickly - well, private investors were a bit nervous about Lloyd's." He did add that the climate for Lloyd's capital raising is "more successful now," and ironically, some of the new Bermuda vehicles are effectively providing new capital for the Lloyd's market through a number of quota shares for specific syndicates.

Catlin Underwriting Agencies' new Bermudian insurer, Catlin Insurance Co Ltd (CICL), is doing just that for its Lloyd's relation. Before CICL was established, Catlin had arranged a qualified quota share with Berkshire Hathaway. Two-thirds of that facility has now been taken over by CICL, with the balance remaining with Berkshire Hathaway. "Bermuda is a very good place for an insurance company holding company," said Catlin CEO Stephen Catlin. "It's a good place to write limited business such as property catastrophe, excess liability and ART. But it's an appalling platform for anything else because there is not the infrastructure and resource on island to deal with it. London is the best place in the world to write global speciality business, and Lloyd's is the best platform in London." For the course of this year, CICO's largest source of income will be the quota share for the syndicate, and Mr Catlin expects that to remain the situation for next year as well. But the Bermuda operation will be developing a financial risk management portfolio, and "we'll probably offer some complex reinsurance products to the London market." Another indication, perhaps, that the major markets are now increasingly interdependent.

By Sarah Goddard
Sarah Goddard is the editor of Global Reinsurance.