It's just over a year since the Class of 2005 entered the Bermuda market. Lindsey Rogerson takes a look at how they have faired in their first year and what prospects lie ahead.

Getting your hands on information on how the bulk of the 2005 start-ups are doing is akin to finding office space in Hamilton at short notice. Owned by private equity and hedge funds, there is very little information on them. Flagstone Re's decision to launch an initial public offering will provide investment managers and analysts with more substantive data on its business, but for now only those attached to listed companies have given any real understanding of what and how much they have been writing.

Hiscox, Amlin, Omega and Lancashire are listed and if their experience is typical of the entire 2005 group then things do seem to be going well. Yes, Lancashire may have suffered due to the early departure of Alex Richards, the group's senior retrocession underwriter, and seen its "A-" rating put on negative watch as a result, but in a trading update last month it was decidedly upbeat.

A Merry Christmas

Announcing that GAAP gross written premiums for 2006 were expected to be in the range of $615m to $625m, Richard Brindle, chief executive officer and chief underwriting officer said: "Lancashire has enjoyed a very successful year so far. We are extremely pleased to have developed relationships with a high quality base of insurance clients across all segments; relationships we aim to develop further in years to come. As 2006 has progressed we have made large strides in broadening our underwriting team." He added: "This operational readiness, including our recently launched UK underwriting operation, will enable us to take full advantage of what we believe will be an attractive trading environment for Lancashire in 2007."

The news is no less cheerful over at Hiscox. Chairman Robert Hiscox said it had seen a "strong start" to its Bermuda business and attributed much of the success (the start-up is on course to have written $325m by the end of the year) to the presence of Robert Childs, as chief underwriting officer. Hiscox said: "I was always told that rule number one for opening an overseas office was 'don't', and if you choose to break rule number one, rule number two was to 'send one of your most senior people' as it is the most difficult thing you will ever do. We have obeyed rule two to great benefit."

Indeed Hiscox's chairman has hit the nail on the head when he says that the success of new business ventures hang on the quality of the underwriters. A talent shortage - there is simply not enough quality people to go around - has been cited by some analysts as a cause for concern.

That many sidecars have been set up in the last year further supports the idea that there is a shortage of experienced quality underwriters. Nick Martin, investment analyst on Hiscox's £70m Insurance Portfolio Fund explained: "The whole advent of sidecars is indicative of the lack of underwriting talent. Because they have run out of talent (to start new companies) what private equity companies have done, to their credit, is go to existing reinsurers and ask to operate alongside them through a sidecar."

Martin sees merit in the sidecar arrangements and not only from the private equity companies' point of view. Bermudian-based reinsurers are charging considerable fees for access to their underwriting expertise and taking profit commission on top of that - good news for shareholders in insurance groups with respected underwriters.

Catastrophe jackpot

In the last month, Bear Sterns, Bridgewell Securities, Numis and Credit Suisse have all raised their targets for Amlin. In a recent broker note Merryleas Hyde and George Shippam, analysts at Credit Suisse, raised their price target from 295 pence to 340 pence. Summing up their new stance the pair said: "The company has increased its exposure to catastrophe business through the establishment of Amlin Bermuda and the growth of its reinsurance book. This looks likely to reap substantial rewards following a benign claims experience in 2006."

However whether the upbeat view can be extended to the prospects for the rest of the Class of 2005 is not certain. Nick Martin for one believes that a note of caution should be sounded. He points out that while many of the Class of 2001 were quick to IPO, the relative quality of the business on their books did not become apparent until Hurricane Katrina hit.

This produces an interesting point, one which could potentially catch out investors who do not know what to look for. So much money is flowing into Bermuda at the moment - and with no end in sight for either the increased demand or rate rises, which are expected to be anywhere from 20-40% at the January 2007 renewals - it is difficult for inexperienced investors to know how to judge the relative merits of any companies that may come into the market.

Whether more of the 2005 companies will follow Flagstone's example to a quick IPO is anyone's call. Private equity firms always talk about the long-term nature of their investments and few talk of anything less than a five-year turnaround time when in communications with their own investors. Hedge funds however are renowned for their short timeframes and there are a significant number of hedge funds backing the Class of 2005.

The other side of this is that just because a company decides to IPO does not necessarily mean there will be buyers around for its shares at flotation. As Martin explains: "There is clearly an appetite for these things and we will always take a look. But of the Class of 2001 who went public, we only invested in one - Arch - and that was because they had a long term track record, and a proven underwriter who we personally knew."

Whether investors looking for rich returns from Class of 2005 start-ups will ultimately be rewarded for their somewhat blind faith, only time will tell.


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