Enter the "Kat Pack", a new class of start-ups formed in the shadow of Hurricane Katrina and jostling for a prime position at this year's renewals Mairi Mallon does the introductions.
Bermuda's 22 square-miles are becoming one of the biggest capital magnets in the world. It has positioned itself well to become a global financial centre - it has low tax, not too much red tape and has had what is often described as a light touch regulatory approach.
But the real coup for this British colony is the roaring success of its insurance and reinsurance sector. It is home to the largest number of captives in the world and every few years a new wave of large insurers sets up shop when the market's capital is squeezed and prices go up. Hurricane Katrina's massive $40bn to $60bn insurance bill (according to RMS) and the expected price hikes in related property catastrophe areas and marine and energy, has got investors interested once again.
This time around the "Class of 2005" is at the starting blocks. To date, the Kat Pack is made up of 11 companies, all ready and waiting to take advantage of the January renewals with a total combined capital of $9bn.
So far, they are Amlin Bermuda Ltd, Ariel Re, Arrow Capital Re, Cyrus Re, Flagstone Reinsurance, Harbor Point Re, Hiscox Insurance Co (Bermuda), Lancashire Insurance Co, New Castle Re Co, Omega Specialty Insurance, and Validus Reinsurance. Up to four others are said to be poised to join the stampede.
"We will have to wait and see how many actually make it past this stage," said Don Kramer, the man behind Ariel Re, named after the spirit in William Shakespeare's "The Tempest" and veteran of the Bermuda market. He set up Tempest Re in 1993 after Andrew, and when it was bought out by ACE Ltd worked at senior level for them, before attempting to retire for the third time in the summer of 2005. "I remember back in 2001 there were about a dozen companies that incorporated, but only half a dozen made it," he recalls. "And it is a difficult business to build up a successful company in."
A BRIEF HISTORY
The Bermuda insurance market started back in the 1960s when captives were invented on the island - there are now 956 captives, according to the most recent figures from the Bermuda Monetary Authority. In the mid 1980s, large US corporations were finding it difficult to buy excess liability insurance. In 1985, ACE Ltd was formed by 34 US companies contributing initial capital of over $200m and a year later EXEL (now XL Capital) was formed based on the same principles.
Then in 1993, post Hurricane Andrew, a number of property catastrophe companies were set up on the island capitalised with more than $4bn. They were Cat Ltd, Global Capital Re, IPC Re Holdings, La Salle Re Ltd, Partner Re, Mid Ocean Re, Renaissance Re Holdings Ltd and Tempest Reinsurance Holdings Ltd. Most of these were swallowed up by larger companies: Mid Ocean Re and Global Capital Re are now owned by XL Capital; Cat and Tempest Re were bought out by ACE; and La Salle Re was bought up by Endurance Specialty. Only IPC Re, Partner Re and Renaissance Re remain.
Following the 11 September attacks in 2001, the capital markets realised there was money to be made in reinsurance due to higher pricing. The "Class of 2001" ended up being AWAC (Allied World Assurance Company), Axis Specialty, Arch Capital, Da Vinci Reinsurance, Endurance Speciality Insurance, Montpelier Reinsurance and Olympus Reinsurance. Together they had $7.3bn in capital.
In their first full year of business, 2002, these companies collectively wrote $5bn in net premiums.
HEDGE FUND CAPITAL
With a history like this, it is no wonder that money has once again been flooding into Bermuda post Katrina. Hedge funds have been lining up to throw money at the start-ups. Citadel Investment Group, a $12bn hedge fund based in Chicago, disclosed that it had formed its second reinsurance company, New Castle Reinsurance Co, with $500m in backing. CIG Re is its other venture and its boss, Chris McKeown, will also head up the new venture.
Behind Flagstone Reinsurance Ltd is West End Capital, a Bermuda hedge fund management company. West End partnered with Montpelier Re earlier this year to form $91m reinsurer Rockridge in Grand Cayman, but is setting up Flagstone as a standalone venture. Plans are to capitalise Flagstone with between $750m and $1bn.
Other hedge funds, including Ritchie Capital Management, Soros Fund Management and Moore Capital, have piled into the sector in recent years.
The $3bn fund Greenlight Capital is the smallest of those involved in the start-ups, and opted for Grand Cayman rather than Bermuda. Greenlight founder David Einhorn said he was starting Greenlight Capital Re with $220m in capital.
The same lure of return on equity has got private equity interested in backing more of the start-ups. Goldman Sachs has been granted a licence for its start-up Arrow Capital Re, but it will not be operational until after the New Year. The investment firm currently will not confirm or deny rumours that Bermudian Kymn Astwood, who runs Arrow Re, would take up the reigns.
Investment firms are also behind the XL Capital quota-share sidecar initiative, Cyrus Re. XL president and CEO Brian O'Hara said it initially funded a collateral trust with $500m to support its reinsurance activities.
Lancashire's backers include Moore Global Fixed Income Fund (Masters), Moore Macro Fund, O2 Europe Master Fund, O2 Master Fund, SAB Capital Partners and SAB Overseas Master Fund. Richard Brindle, formerly at Charman Underwriting Agencies, (the company founded by John Charman now CEO of Axis Capital) is the CEO.
The biggest headlining name so far has been Validus Reinsurance Ltd, the brainchild of the ousted Marsh & McLennan chief executive Jeffrey Greenberg and partners from Venturion, a private equity firm. Greenberg and his partners recently established a private equity firm Aquiline Partners to fund the venture.
Lloyd's of London used to scoff at the Bermuda market. Now its companies are setting up divisions there. Hiscox, which is one of the leading players in the Lloyd's market, said last month it was considering moving its parent company to Bermuda. The company said in an announcement that, "The board notes that as such a substantial amount of the group's business could originate from the Bermudan and US markets, it may be in shareholders' interests to move the domicile of Hiscox's parent company to Bermuda. The board is currently examining this."
Hiscox has set up Hiscox Insurance (Bermuda) Ltd with $500m in capital and has placed experienced underwriter, Robert Childs, at its head. "We have watched the growing market in Bermuda and for some time considered that we need to underwrite there to increase the spread, balance and distribution of both our global reinsurance and retail accounts," said Robert Hiscox, chairman of Hiscox. Childs, who is Hiscox's director of underwriting and is in the process of moving to Bermuda to head up the new unit, said the group doesn't expect its Bermuda staff to grow beyond 15 because of cost and wanting to maintain an underwriting foothold in London. "We'll write $350m in business in Bermuda next year, and in Lloyd's we'll write $1bn," explained Childs.
Last month Amlin Plc's chief executive Charles Philipps strongly denied that it would also move operations to Bermuda. "This is not part of our plans," he told Global Reinsurance. But the company was first off the block in terms of writing business, and on 5 December opened its doors.
Philipps is confident about its future. "We hope to build a highly profitable business in Bermuda that has a solid foundation. We are very focused on what we are trying to achieve and we have a lot of strong relationships. That will help us get off to a good start."
Another London player, Omega Underwriting, has also set up Omega Specialty Insurance. While it will be much smaller than many of the others, with a capitalisation of just £145m ($252m), Omega hopes to use its new Bermuda office to help keep up its unbroken profit record for over two decades.
Richard Tolliday, chief executive officer of Omega said, "By their impact on the insurance industry, Hurricanes Katrina, Rita and Wilma have created extraordinary opportunities. This capital raising enables us to take advantage of these opportunities by increasing our support for Syndicate 958 and launching Omega Specialty Insurance in Bermuda in time for the renewal season."
Private equity is also behind Ariel Re, which got a leg up to do business quickly when it bought out the infrastructure of Rosemont Re, which had seen its rating lowered and its ability to raise new capital dashed. Kramer, who will head up the operation, bought the company from Goshawk Insurance Holdings Plc for £12.5m. He has also kept on Rosemont's staff, including Russell Brooke and Jonathan Beck, who were formerly chief executive officer and chief financial officer. George Rivas, who helped set up Tempest Re with Kramer will be brought in to whip the troops into shape along with Mark Herman, who was previously president of ACE Bermuda. "We have models, we have staff, we have offices in place. And we have a great management team" said Kramer. "We will be able to hit the ground running." According to Kramer, Ariel will initially sell property catastrophe reinsurance but will soon diversify.
WINNERS AND LOSERS
Toby Esser, chief executive of Cooper Gay, said that while the group of start-ups are very diverse, out of the pack he sees Validus, Harbor Point and Amlin Bermuda as the winners. "I think they will write some significant income in the short term and will be profitable in the short term." But he said while a fast buck could be made out of rates going up, long-term success would be dependent on diversification, timing, management ... and luck. "It is a massive opportunity for them to write income - and profitable income," he said. "Validus is really ahead of the game and we know Chubb Re very well so Harbor Point will do well. Amlin is very well established and has its contacts and resources." But he was not so sure about Kramer's Ariel Re. "Rosemont has some issues," he added. "But success is down to the individual players."
- Mairi Mallon is a freelance journalist.
THE KAT PACK: THE BERMUDA CLASS OF 2005
Amlin Bermuda Ltd
Backers: Amlin Plc
Lines: Regional US and international catastrophe insurance, excess of loss
Underwriting Director: John Andrews
Ariel Re Ltd
Backers: Don Kramer and unknown investors. Bought out Rosemont Re
Lines: Property catastrophe to start with then diversification plan to be implemented
CEO: Don Kramer
Arrow Capital Re Co Ltd
Capitalisation: Not known (expected to be at least $500m)
Backers: Goldman Sachs Group
Lines: Not known
CEO: Not confirmed, but expected to be Kymn Astwood, CEO of Arrow Re
Cyrus Re Ltd
Backers: XL Capital - Quota share
Lines: Property catastrophe reinsurance retrocessions
CEO: Not known
Flagstone Reinsurance Ltd
Capitalisation: $750m to $1bn
Backers: West End Capital
Lines: Property catastrophe reinsurance
CEO: David Brown (formerly CEO of Center Re)
Harbor Point Re Ltd
Backers: Trident III, Stone Point Capital and Chubb Corp
CEO: John Berger (former CEO of Chubb Re) Taken over Chubb Re's books
Hiscox Insurance Co (Bermuda) Ltd
Backers: Hiscox Plc
Lines: Mix of reinsurance and retail business
CEO: Robert Childs
Lancashire Insurance Co Ltd
Backers: Capital Z Financial Services, Moore Global Fixed Income Fund (Masters), Moore Macro Fund, O2 Europe Master Fund, O2 Master Fund, SAB Capital Partners and SAB Overseas Master Fund.
Lines: Short tail marine energy, property reinsurance and retro
CEO: Richard Brindle
New Castle Re Co Ltd
Backers: Citadel Re
Lines: Property cat, property-per-risk, workers' compensation and terrorism cover
CEO: Chris McKeown (runs CIG Re and formerly of Ace Tempest Re)
Omega Specialty Insurance Ltd
Capitalisation: $252m (£145m)
Backers: Omega Underwriting Holdings Plc
CEO: Not confirmed but expected to be John Robinson (chief underwriting officer of Omega Underwriting)
Validus Reinsurance Ltd
Capitalisation: Not available, but expected to be $1bn
Backers: Aquiline Capital Partners, backed by Venturion Capital and Jeffrey Greenberg
CEO: Ed Noonan (former CEO of American Re)