oncerns about a capacity crunch in the industry have already led to new capital entering the re/insurance market.

Over the course of the last few months, there has been a noticeable decrease in the level of reinsurance capacity around. Among the recent withdrawals, CNA Re has taken its reinsurance activities back to the USA and HartRe has come out of most of its international business. Doubtless as poor underwriting results take the pain to unbearable levels, others will follow suit. And, as always, the events of 11 September loom, shedding an unfavourable light over the security of yet other market participants.

But as one door shuts, another opens. Within days of the terrorist attacks on the US, Bermudian reinsurer RenaissanceRe Holdings Ltd announced it was increasing the capital and surplus of commercial property insurance subsidiary Glencoe Insurance Ltd from $65m to $100m.

Glencoe's capital injection came from free funds at the parent company, as did the $100m RenRe is putting into new reinsurer DaVinci Reinsurance Ltd.

The new $500m Bermudian property catastrophe reinsurer was announced in early October, and is likely to be up and running some time in November, according to RenRe vp-finance, Martin Merritt. “We believe there will be significant capacity demands in the market,” he said. Among the other investors in DaVinci is US-based State Farm Mutual Automobile Insurance Co, which is providing $200m to the joint venture. The balance is coming from “strategic capital” and so it is probably safe to draw the conclusion that it won't necessarily be insurance industry sources providing the remaining $200m for the venture.

Joint venture
This is not State Farm's first involvement with RenRe. The two organisations already have a joint venture in the form of Top Layer Re, a Bermuda-based reinsurer dedicated to the top layers of non-US property programmes. The venture, formed in 1999, helps diversify State Farm's property catastrophe risk exposures, explained State Farm vp-operations, Jim Ament. By already having a well-established relationship in what has proved a successful venture, State Farm was comfortable joining again with RenRe on the DaVinci project. “DaVinci is really an extension of the RenRe book,” explained Mr Ament. “It will allow RenRe to manage the amount of capital in play,” and in this tightening market, it will give them opportunities to use the capital to the best business advantage.

DaVinci will underwrite alongside RenRe and OPCat – Renaissance's similar arrangement with Overseas Partners – the three outfits effectively operating as co-insurers. “The biggest problems with start-ups is that capital is not hard to come by, but talent is,” commented RenRe's Mr Merritt. “DaVinci uses the current underwriters (at RenRe) so it is quick to set up,” an alacrity aided by the Bermudian location of the business.

DaVinci is not alone in attracting State Farm's commercial interest. Lloyd's agency Amlin will be extending its capacity for the 2002 year of account thanks to a £100m letter of credit from the US insurer. “It will be used strictly to support underwriting after the assets are used,” explained State Farm's Mr Ament, affirming his organisation's confidence in the future of the Lloyd's market going forward.

“The key to both of these (DaVinci and Amlin) is that they are organisations we already have relationships with,” he said. State Farm first became involved with Amlin in 1997, when the Lloyd's underwriter was still the Murray Lawrence agency. Again, the involvement at Lloyd's helped diversify State Farm's exposures, said Mr Ament, as well as giving the organisation a wider experience of the international markets. “We have gone from an underwriter-driven company to a financially-driven company” as a result of the Amlin relationship, Mr Ament commented. The decision to extend the LoC, which State Farm issued “on commercial terms”, allows the Lloyd's agency “to meet their commitments and expand their writings in what appears to be a hardening market,” he said.Three strands
Bringing together the three strands of Lloyd's, Bermuda and new capacity is John Charman, former deputy chairman of Lloyd's and former president of ACE International. Mr Charman has teamed up with former Mid Ocean chairman Robert Newhouse Jr to form AXIS Specialty Ltd, a new re/insurer to be based in Bermuda. It has the backing of Trident II, a fund managed by MMC Capital which is providing $200m of the $1bn it is expected to be capitalised with.

The decision to start AXIS was a direct result of the 11 September events, said Teryce James of MMC Capital, and the re/insurer will be fully operational in time for the 1/1 renewals. It will be focusing on specialty lines of insurance and reinsurance, including property, aviation, war and political risk. “We will be opening marketing offices in the major insurance centres,” predicted Ms James.

These will not be the only new players to the market. Currently, HSBC Investment Bank in London is backing a capital-raising exercise for a new European-based reinsurer. Although HSBC is being shy about the venture, it is believed the reinsurer will be capitalised by at least £300m, and probably will initially be domiciled in Dublin, a much faster location in which to obtain regulatory authorisation than more traditional reinsurance centres in Europe. All this activity is leading some commentators to speculate that capital is flooding in too quickly, and could dampen the market recovery. With estimates of WTC-related losses running up to $70bn mark – and rising – it seems unlikely that the new capacity will fill the void. What it does show, though, is that some fairly smart capital believes the industry has a future.