Montpelier Re has taken a different road from many of its 2001 classmates, and remains steadfastly Bermuda-based. Sarah Goddard looks at the company that quenched the US IPO drought last year.
Nestling in the heart of Vermont's skiing country is the city of Montpelier. Not only is it the smallest state capital in the US, it is also the inspiration for the name of Montpelier Re, one of the third wave Bermudian re/insurers set up in the wake of September 11.
It was, apparently, while Montpelier Re's now President and CEO, Tony Taylor, was flying over Vermont that the inspiration hit. He had been looking for a name that would make the association between the new company and one of its backers, White Mountains Insurance Group, and finding that other, more obvious, names had been taken, he alighted on Montpelier. In what may be a case of serendipity, Montpelier was also the name of the area of Bermuda now occupied by the island's arboretum, thus drawing together the two strands of innovative (Vermont is famous for its captive facilities) and steadfastness (the arboretum's grounds date back to the nineteenth century). The latter association also embodies the strong connection Montpelier Re has already made with Bermuda; unlike some of its other 2001 classmates, Montpelier Re stubbornly remains focused on its Bermuda-based operations and is not, according to Mr Taylor, looking at extending its underwriting beyond the island's shores.
But back to the Montpelier Re story.
We are all very familiar with the rush of new capital into the re/insurance sector in late 2001 and early 2002. As Mr Taylor pointed out: "In the aftermath of 9/11 it became clear that the reinsurance market would change dramatically and there could well be a shortage of capital in the entire area." He was approached a couple of weeks after the attacks on the US by a Benfield Greig representative to see if he would be interested in setting up a $1bn capitalised Bermudian reinsurer. Benfield Greig had already been talking to White Mountains, the other original investor in Montpelier Re.
At that time, Mr Taylor was the deputy chairman of Wellington Underwriting plc, a Lloyd's agency of strong reputation. On 26 October 2001, Wellington issued a statement saying Mr Taylor was retiring from his position as deputy chairman at the end of that month and would leave his post as a director of the group at the end of the year. As part of the company statement, John Maxwell, chairman of Wellington, commented: "Anthony has made a very considerable contribution to Wellington, both as a very successful underwriter for syndicate 51 and over the last three years as a senior member of the management team. We all wish him well in his new endeavours."
In fact, Mr Taylor had been the active underwriter for syndicate 51 since its formation in 1984, but had become a member of Wellington's management team when the syndicate merged with two others, 672 and 1028, at the beginning of 1999. He had taken the management role to a part-time position, and freely admits that the Montpelier Re offer attracted him because he wanted to return to a more `hands-on' underwriting role.
A couple of weeks after the Benfield Greig approach, Mr Taylor met with White Mountains, and just eight weeks into the process, business plans had been developed, $1bn had been raised and a licence had been granted by the Bermuda regulator. Montpelier Re started underwriting on 17 December 2001, with about $850m of private equity, including about $200m from White Mountains, $25m from Benfield Greig and a tranche from Securitas Fund 1, and $150m in bank debt. Benfield Advisory was financial adviser to the transaction.
With the high profile (and retirement-phobic) Jack Byrne, chairman of White Mountains and OneBeacon Insurance Group, as chairman of Montpelier Re, the top management looked good enough for the initial investors to offer the new business substantially more than it was looking for. But Montpelier's management stuck to the business plan rather than rake in the dough and face a less certain return on investment for their backers.
Initially, Montpelier Re was writing primarily property reinsurance classes, such as catastrophe, also risk excess, retro, direct and facultative, with only a small amount of proportional treaty in the book, according to its business plan. The team was small and tight, comprising four people in total, and lodged in one room until suitable premises were found. From the outset, "we had tremendous amount of goodwill from brokers and clients," said Mr Taylor, and it soon became clear that there were other specialty areas which were experiencing massive capacity crunches. "We suddenly realised there was a shortage of cat PA (personal accident) and workers comp," he explained. "Both were relatively badly hit by WTC, and they were two classes which had not really been associated with a correlated loss with the property account. This was a wake-up moment." The losses in the PA book in particular, and the associated Unicover problems prior to WTC, had led to an across-the-board withdrawal by insurers. There was "zero capacity," said Mr Taylor. "We suddenly found we were approached because there was no market," and thus the product offerings extended to this type of business, albeit it at "very high rates".
Technological advances have made all the difference to new companies on Bermuda, and Montpelier Re was no different. In the first weeks of operation - and in the heart of renewals negotiations - the company was deluged with emails. "Vast amount of business was coming via email," said Mr Taylor. Each morning would see literally hundreds in the system; "I don't know how we got through the first month." But by mid-December, Montpelier had its own office and was interviewing for more underwriters, both on Bermuda and internationally. The location did provide a drawback for some potential candidates, but by March 2002 Montpelier was fully resourced with seven underwriters, all located on island.
Of all the capital raised in the wake of September 11, Bermuda was the location which received the lion's share of the investment. From Mr Taylor's perspective, there are several reasons why it made sense for Montpelier to set up there. Zero business tax coupled with a regulatory climate which "is very understanding of enterprise" made good business sense, but also backed with the peer review environment operating on the island. In addition, the fact that Bermuda is four hours behind London and four hours ahead of San Francisco gives it an ideal time location for business, and it has a sound business infrastructure supporting all this. "Above all," said Mr Taylor, "Bermuda has become a real reinsurance marketplace. In terms of size and importance, particularly on the property reinsurance side, it clearly rivals London and the US and European markets."
There is little doubt that Mr Taylor's `hands-on' underwriting experience at Lloyd's has a massive impact on the way Montpelier is structured. Unlike many of its contemporaries, its international operations extend only as far as a contact office in London, run by Nicholas Newman-Young, and there are no plans to set up underwriting facilities in different locations around the world. "We want to be an operation which is known as a quality underwriting operation," said Mr Taylor. "I want to do it with a team of underwriters who work very closely together, operating from one office in Bermuda. I don't want the management problems of underwriting authority operated around the world; the secret to good underwriting results is ... to stick by the business plan and underwriting discipline."
His Lloyd's years, when he was one of the highest-profile and most respected underwriters in the market, have shaped his belief in tight underwriting discipline. "In the old syndicate systems, the underwriter had a big involvement in the result and paid heavily" if the syndicate suffered losses, he explained. "That's why Lloyd's underwriters were the best in the world." To a certain extent he has brought that modus operandi into Montpelier, rewarding the underwriters not just with "good" salaries, but based on the return to the company's investors.
Since Montpelier's early days, that investor base has changed. In mid-October last year, the company completed an initial public offering (IPO) on the New York Stock Exchange, finally quenching an IPO drought that had withered the US market for almost three months prior to Montpelier's launch.
In fact, Montpelier had been set to launch in the July, but the market was dropping rapidly at that point and it was decided to delay for a while. Even so, when the IPO took place, the market was still going down, but turned on October 10 - the day Mr Taylor rang the NYSE bell - and carried on going up for a while. "We were the youngest company ever to float on the exchange," pointed out Mr Taylor, and its success proved his belief that "if you have a good story, the market will buy into it." In the weeks leading up to the IPO, Montpelier Re did the roadshow rounds - 64 meetings in Europe and two weeks in the US - while three hurricanes blew through the Atlantic. Since its launch at $20 per share, the stock price has seen a few peaks and troughs, but none below $25, and it has been almost 25% up on its initial price.
The pressure of being a quoted company are not particularly different from its private status before the IPO, said Mr Taylor. The chief operating officer, Tom Busher, a former lawyer with 13 years at Wellington, had already been running Montpelier like a public company. Even so, the reporting requirements demanded by the Securities and Exchange Commission do have the Montpelier management taking a cautious approach to public statements on the business. At a recent presentation to the Association of Insurance and Financial Analysts in New York, chief reinsurance officer C Russell Fletcher III was emphatic in his introduction that his comments should not lead the audience to "draw conclusions about our financial results, the make up of our portfolio or our current or future strategies."
For Mr Taylor, the future strategy is, however, clear. "I want the company to be a quality underwriting operation, and seen as one of the leaders in the world market." Rather than a multiline writer, he wants Montpelier "to be quality underwriting boutique" which takes advantage of opportunities as they arise, but at the same time keeps the discipline of not entering classes of business in which it has no experience. "What I'm really looking to do is expand the book of business whilst conditions are favourable, but I will cut back the book when the market inevitably turns down, and return capital to investors if necessary," he said. One of the problems is finding underwriters of sufficient calibre to truly take advantage of certain market conditions. "I like to employ underwriters who can think for themselves - they have got to take responsibility for the decisions they take," he said. At the same time, the whole organisation has to resist the lure of getting involved in classes it doesn't understand. "It's a very big temptation as markets get difficult," said Mr Taylor, but good discipline should prevail.
Steady on the rock.
By Sarah Goddard
Sarah Goddard is the editor of Global Reinsurance.