The "Class of 2005" has seen a flood of new capital into the industry, but will it still be there in 18 months? asks Lindsey Rogerson

Seldom known to miss an opportunity, hedge and private equity funds have been lining up in recent weeks to capitalise on the expected leap in reinsurance premiums triggered by the most expensive hurricane season on record. Hurricanes Katrina, Rita and Wilma are now expect to cost as much as $60bn, and the investment community is clamouring to profit out of this adversity.

However, the jury is still very much out on whether any of the raft of new ventures unveiled in the last month, will ultimately prove successful.

High on the list of concerns voiced to Global Reinsurance was simply that there are not enough good underwriters to go around, and even if the suitable personnel could be found, there are doubts about whether it would be in time to get access to the best business this renewal season.

Some sources also called into question the motives of those setting up new Bermuda reinsurance groups. Alastair Lockhart Smith, of JLT Risk Solutions summed up the sentiment, "A lot of the money that is coming in is looking for a quick buck, and I make no distinction between hedge fund managers and private equity houses. It's rather like setting up a bar in the City of London - you get the punters in and then flog it - and a lot of the money that is coming in is not going to be around in 18 months."

Opportunity knocks

Intentions aside, the consensus is that the amount of capital required for a new venture will need to be at least $1bn for it to stand any chance of getting out of the stalls. Nick Martin an analyst on Hiscox Insurance Portfolio fund said: "You are always going to get some opportunist money coming into the market, especially after large catastrophes and at a time when these companies (hedge and equity houses) have got a significant amount of cash and there are not that many other opportunities to do anything with it.

"But we are pleased to see that they are significant launches, because you need at least a $1bn behind you if you are going to play in Bermuda, or else must have a backing of an established player behind you."

Next the credentials of those at the front of the Bermuda 2005 launches have to be considered. Martin is quite relaxed about the entry of several Lloyd's groups into Bermuda, as they already had well-stated plans to open for business on the island, and have simply fast-tracked entry to take advantage of the opportunities now on offer.

Indeed many of the names jumping in with new vehicles are not exactly new kids on the reinsurance block and have a track record of capitalising on past market opportunities. Don Kramer, the man behind Ariel Reinsurance, set up catastrophe reinsurer Tempest Re over a decade ago in the wake of Hurricane Andrew. For its part, private equity group Cypress previously backed Montpelier Re and White Mountain, launched after the terrorist attacks of 9/11. Citadel, whose latest venture is New Castle Re, already has CIG Re.

Brokers, analysts and fund managers alike will be playing a waiting game, keen to see what ratings the new Bermuda reinsurers are given, as well as keeping a watchful eye on what business they choose to write. Diversity appears to be what most are hoping to see.

Lockhart Smith said, "There is a movement away from cat orientated businesses to ones that are more diversified, so if companies were showing a bit of diversity in their business plan then that would play well because otherwise, if say someone was setting up to take a chunk of the energy market, that would look horribly like a 'get rich quick' scheme."

Even then, Lockhart Smith thinks it may be difficult to convince some clients to place business with some of the newer companies, as clients' own security systems would preclude placing business with such untested companies. A point echoed by Martin, although in the post Katrina world he does not think it will merely be the new boys who lose access to business.

"Going forward companies are going to be very careful who they buy their reinsurance from, thinking very carefully about whether they trust the capital behind them," he predicts. "Partner Re have got through the storms okay and people will go to them, but Montpelier lost one third. Insurers have to ask, 'Do I really want to place business with them? Possibly not, and if I do I want a lot of guarantees that if anything happens I will get my money.'"

There is a perception that established players Hiscox, XL Capital, Amlin and especially Chubb will fair better than most in the new tranche of Bermuda launches, not least because of the access to personnel they have from their existing operations. Chubb's venture Harbor Point is to be headed up by John Berger, currently chief executive of Chubb Re. "A big concern is that there is a scarcity of underwriting talent and I would not be surprised if a couple of the proposed vehicles do not get off the ground because they have a lack of talent," Martin said.

"Talent is all the more important at the moment because a lot of the models that have been used by companies have been found to be broken, and underwriters are going to have to work from basics and not just go out and buy software packages and plug them in. So that means you have got to have decent underwriters."

In fact, Chubb's statement that they will feed future reinsurance business to Harbor Point has gone down well with Martin, who said it was the only one of the new ventures he would buy if he could (although he cannot buy Hiscox, because of internal company rules).

- Lindsey Rogerson is a freelance journalist.

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