Bermuda Re: five years and counting

In an early edition of Bermuda Re/insurance magazine, we examined 41 of the Island’s reinsurers with more than half a billion dollars in capital. The piece generated considerable interest, with many industrywatchers surprised at the number and size of the companies in Bermuda. This article returns to a similar theme, with CEOs from some of the leading re/insurers in Bermuda talking about their companies in the context of an industry that is older, wiser and more diversifi ed than it was back in 2005/6.

Looking at the ongoing success of the industry in Bermuda over the past fi ve years, it seems the Island and Bermuda Re/insurance magazine have a lot to celebrate. A degree of consolidation was likely among the 41 companies listed fi ve years ago, and has begun in the past two years or so. Nevertheless, the public companies continue to be valued, as they have been throughout the past fi ve years, at less than book value, devaluing the currency of the acquiring company and making acquisitions that much less desirable.

In the past five years, Bermuda has seen the arrival of the Class of 2005 and, more recently, the development of greater interest in cat bonds and insurance-linked securities. In the meantime, companies enjoyed first a relatively profi table period, and then Hurricane Ike and this year’s odd inversion of the claims cycle—with the second half of 2009 resulting in relatively few insured losses, while the fi rst half of 2010 saw claims at a record level.

Many observers today would regard redomiciliation from Bermuda as one of the most important recent developments. These changes are generally not operational, but corporate. Success is relative, and although Switzerland is in the headlines, the reality is that Bermuda’s major re/ insurers are using the soft market to rationalise their activities. It seems that when the next hard market rolls again, the industry will be ready.

ACE
2009 results(Group)
Gross Premiums Written: 19,164 million
Net income: $2,549 million
Combined ratio: 88.3%

In 2010 ACE is celebrating a milestone anniversary. Over the past 25 years, ACE has experienced significant growth from its early beginnings in Bermuda in 1985, through its acquisitive growth period, to its current status as one of the world’s leading global commercial property and casualty insurance organizations.

The birth of ACE is an industry legend. At the time, there was an availability crisis in the U.S. insurance marketplace for excess liability and directors and officers coverage. Recognizing the need, a handful of forward-thinking pioneers helped form a consortium and pooled the capital to create a new kind of insurance company, and ACE was born. ACE’s founding sponsors constituted an impressive list of 34 blue chip companies from a broad range of industries. The strength of these relationships endures: all of our founders or their successive organizations are still ACE clients today.

ACE Limited was incorporated on 30 August 1985 and wrote its first insurance policy in November 1985. Today, ACE Limited, the Swiss-incorporated parent company of the ACE Group, is listed on the New York Stock Exchange (NYSE: ACE) and is a component of the S&P 500 stock index. From its humble beginnings with six full-time employees in Bermuda, the ACE Group now has operating subsidiaries in 53 countries and customers in more than 170 countries, and employs over 15,000 talented and dedicated people worldwide. ACE maintains successful insurance and reinsurance underwriting operations in Bermuda—ACE Bermuda, the original insurance company of the group and ACE Tempest Re. ACE has executive offices in Zurich, Bermuda and New York, among other locations.

Allied World
2009 results
Gross written premiums: $1,696 million
Net income: $607 million
Combined ratio: 76.1%

A member of Bermuda’s “Class of 2001,” Allied World started out as four Hamilton based employees who focused on insurance and reinsurance solutions for large accounts during the post-9/11 capacity crisis. Less than 10 years later, our company wrote roughly $1.7 billion in annual premiums in 2009, with equity in excess of $3 billion and has over 700 employees in 16 offices across eight countries and three continents. Our Bermuda platform has become a leading insurance provider and in addition to re/insurance expertise, Allied World’s diverse product offerings include direct policies that span primary and excess specialty liability covers, to property, general casualty, healthcare and credit insurance. The remarkable expansion in both size and breadth is the result of key strategic decisions over the past five years: in 2006, Allied World’s IPO raised over $300 million, affording us the capital base that has been the prerequisite to the rapid growth that followed. Market-wise, Allied World focused on expansion; opening a European platform with offices in London and Dublin, and building out its US Branch network, creating a nine-office network that stretches across the US. In 2008, the launch of Allied World Re and the acquisition of Darwin Professional Underwriters combined to double our North American presence, with the Darwin transaction solidifying us as a leading provider in the healthcare liability market. On the international front, we are moving into attractive markets on the Continent and in Asia, with offices opened recently in Hong Kong and Singapore. Our most recent strategic advance, the creation of Lloyd’s Syndicate 2232, offers the promise of additional growth, through even further global reach and access to attractive new markets.

Allied World recently announced plans to move our holding company domicile to Switzerland, while retaining a very significant operational presence in Bermuda. Our June 2010 launch of Lloyds Syndicate 2232 and the upcoming headquarters move to Zug will expand our existing international presence and facilitate our entry into new international markets and geographies. These steps dramatically represent our corporate commitment to becoming a truly global risk-transfer enterprise over the coming years. As one example of the many new paths now opening to us, Allied World has received approval from Lloyd’s Asia, which will allow Syndicate 2232 to conduct business throughout the Asia Pacific region.

With North American operations now firmly positioned for growth, Allied World will move forward in both established international arenas and in emerging markets in Latin America and Asia, as we continue to seek out new structures, partnerships and transactions that offer the opportunity for diversification and profitable growth.

Alterra
Harbor Point 2009 results
Gross written premiums: $608 million
Net operating income: $181 million
Combined ratio: 80.6%

Max Capital 2009 results
Gross written premiums: $1,375 million
Net operating income: $209 million
Combined ratio: 88.1%
* Figures taken from Alterra’s merger presentation showing combined 2009 results for Max Capital and Habor Point

Alterra 2009 results*
Gross written premiums: $1,983 million
Net operating income: $390 million
Combined ratio: 85%
* Figures taken from Alterra’s merger presentation showing combined results for Max Capital and Harbor Point

Max Re was established in 1999 with a focus on structured and specialty risk reinsurance of long-term liabilities. Over time, Max transformed itself into a more traditional and diversified specialty insurance and reinsurance underwriter, expanding its operations to include Bermuda, Ireland, six US cities and Lloyd’s. Harbor Point Re was established in 2005 as a property catastrophe reinsurer, formed with shareholder equity of approximately $1.5 billion. In April of 2010 the shareholders of both companies voted overwhelmingly in favour of a ‘merger of equals’, with the move resulting in the creation of Alterra.

Alterra boasts a highly diverse portfolio of specialty insurance and reinsurance business, including a mix of long- and short-tail lines— formed this year following the merger of Max Re and Harbor Point Re. As a result of the merger, we expect that Alterra will have less volatile underwriting results than either of its individual components, as well as more flexibility to efficiently manage capital. With $3 billion in capital, the size and financial strength of the company will mean Alterra is well positioned to take advantage of profitable growth opportunities in the P&C insurance and reinsurance markets moving forward. With 26 offices across ten countries, we aim to leverage our human capital and presence in the coming years to maximise returns on a wide variety of business lines.

Amlin
2009 results
Gross written premiums: $628 million
Net income: $391 million
Combined ratio: 56%

Arch
2009 results
Net written premiums: $2,763 million
Net income: $928 million
Combined ratio: 88.3%

Argo
2009 results
Gross written premiums:$1,989 million
Net income: $118 million
Combined ratio: 96.9%

Ariel Re 2009 results
Gross written premium: $484 million
Net income: $383 million
Combined ratio: 47.1%

Ariel was formed in late 2005, and our most significant accomplishments since then have been establishing quality underwriting operations in lines of business which we believe offer attractive returns for the risks assumed. These include our Property and Marine business underwritten in Bermuda, our Lloyd’s business Atrium, and our Surety and Credit business underwritten in Zurich. These are a set of businesses where we believe we have developed the talent and tools to compete effectively and produce attractive returns over the long term.

Ariel does not presume an outcome independent of market conditions, but intends to react flexibly to the presence (or absence) of attractive market opportunities. We aspire to maintain a disciplined and rational approach to assuming risk and aim to be the best underwriter in those classes of business where we compete. To do so we will continue to invest in our existing underwriting businesses; building our team, our skills and our tools to evaluate risk. We will further use those resources to explore areas for expansion where we believe the market offers reasonable returns for the risk assumed and where we have or can develop the talent and tools to compete effectively.

Aspen
2009 results
Gross written premiums: $2,067 million
Net income: $474 million
Combined ratio: 84.1%

The events of 2005 underlined the importance of a robust risk model and we have continued to invest heavily in this area. Integrated risk management is at the core of what we do and is embedded throughout the Aspen group—it is not simply a post-action check. Since 2005 we have successfully targeted reduced earnings volatility and have reported growth in book value—even in 2008, despite investment volatility and catastrophe losses from Hurricane Ike.

Aspen is a specialty insurer and reinsurer and diversified by product peril and country. In the last five years we have made considerable progress in developing our business, particularly in building out our insurance lines and have invested in our franchise. We launched Syndicate 4711 at Lloyd’s in 2008 and have opened offices in Dublin, Cologne, Paris, Zurich, Singapore and Miami. New reinsurance lines have included Credit and Surety and Agriculture as well as the establishment of non US Property and Casualty Facultative teams. Within our insurance operations we have set up new underwriting units for Financial & Political Risk, Professional Liability and Excess Casualty. We are selectively building out our US insurance operations with the addition of admitted markets capability and strengthened our UK platform through the development of a regional offering and the addition of selected lines. In reinsurance we are continuing to focus on the under-penetrated regions of Asia and Latin America and exploring opportunities in the Middle East. We clearly don’t know when the cycle will turn, but when it does it will likely happen quickly and our continued investment in developing our underwriting platforms and product capability means that we will be extremely well placed to benefit from the market turn.

Axis
2009 results
Gross written premiums: $3,587 million
Net income: $464 million
Combined ratio: 79.3%

Conopius
2009 results
Gross written premiums: GBP425.2m
Net income: GBP41.5m
Combined ratio: 96.6%

Catlin
2009 results
Gross written premiums: $3,715 million
Net income: $509 million
Combined ratio: 89.1%

Endurance
2009 results
Gross written premiums: $2,021 million
Net income: $536 million
Combined ratio: 84.0%

The last five years have been marked by significant accomplishments for Endurance. We launched our onshore US insurance platform in 2005. Today, the company has a $900 million book of specialty insurance, selling diverse products ranging from multi-peril crop protections for farmers to complex liability covers for Fortune 1000 companies.

In 2008, we created underwriting offices in Singapore and Zurich for our reinsurance business, for the first time underwriting risk outside the traditional Bermuda, US and London markets. With the addition of these new underwriting teams, Endurance truly began its journey to being a global company.

Also in 2008, Endurance was recognized for superior Enterprise Risk Management with an “Excellent” rating by Standard & Poor’s, making Endurance the youngest of only 5 P&C companies in the world to achieve that standing. Given the company’s strong focus on risk management since our inception, it was very gratifying to receive this public acknowledgement of our efforts.

Finally, since the beginning of 2006, Endurance has grown book value per share more than 100%, delivering a very strong return on capital over a five year period marked by one of the worst financial crises in history. We are very proud of this achievement, which has benefited both our shareholders and our employees.

Given the cyclical nature of the specialty re/insurance business, it is almost certain that the next five years will include very competitive underwriting environments as well as constrained capital markets. Weathering the tough times while positioning Endurance to flourish in the better times that will likely follow is an overarching theme behind many choices the company makes today.

As a re/insurer we are focused on multiple constituencies: our clients and producers, our shareholders and our employees. Recognizing that each of these parties has different needs and priorities, our single highest ambition for the coming five years is to manage the company to provide stable capacity to our clients and a positive working environment for our staff while at the same time generating a strong return for our investors.

Flagstone Re
2009 results
Gross written premiums: $988 million
Net income: $242 million
Combined ratio: 74.7%

We were formed in December 2005 and began writing business on January 2006 - that was the beginning of our company.

After 18 months we had experienced such rapid growth that we had actually executed our initial business plan faster than we had envisioned so we began plans to go public. We were able to have an initial public offering in March 2007.

In September 2008 we merged our operating companies and our capital into one entity which was our Swiss entity - Flagstone Réassurance Suisse SA

What we did was merge our Bermuda operating companies with our Swiss companies to have on single balance sheet and pool of capital. That’s where our rated company is. The merger was very well received by our European clients.

In October 2008 we added another piece of the puzzle by purchasing our Lloyd’s platform—Marlborough Underwriting Agency Syndicate 1861. Giving us a Lloyd’s presence to compliment the rest of our global platform.

Spring 2010 saw the redomestication of our holding company from Bermuda to Luxembourg - which was one of the final pieces of our maturation as a global company.

The latest in our successes was in September 2010—when we received an award for the reinsurance company of the year in the Worldwide Reinsurance Awards.As a mature company we’re looking at taking what we’ve built, our global platform and infrastructure and making it more efficient and having it produce even better business than what we’re already seeing. We’re going to take what we’ve built and make it even better. We want to continue to be the best in class underwriter in our markets and continue to work with our clients and intermediaries to continue to provide them with excellent service and grow our relationships by not just providing a service, but helping them by leveraging our analytical and technological platform.

Hannover Re
2009 results (Non-Life results for Hannover Re (Bermuda))
Gross written premium: $434 million
Net income: $286 million
Combined ratio: 31.5%

One of our strategic targets is to grow continuously in life and health reinsurance. Therefore, the acquisition of the US ING life reinsurance portfolio in 2009 was without doubt one of the major milestones of recent years. This acquisition not only strengthens our US individual life reinsurance business, an area in which we had hitherto been under-represented; it also marks a major stride towards ensuring that life and health reinsurance now accounts for a larger share of the total portfolio, both in respect of the top line as well as in respect of its contribution to the bottom line.

Furthermore, we have expanded our business through cooperation agreements and new branches in emerging and promising markets, such as China, Brazil, India, Korea and Bahrain. Our stronger presence in these markets enables our clients to access all services from a concentrated source.

In Bermuda, where we have concentrated our catastrophe business for quite some time now, we established a new subsidiary for life reinsurance business in 2007 to strengthen our global network.

Over the past years we have also been one of the pioneers in the use of equity substitutes as part of our capital management, including for example the transfer of risks to the capital market (securitisation).

The first transaction of this type was completed as far back as 1994, and more followed. The K-transactions complement our traditional programme of protection cover, which we use to protect against peak exposures such as natural catastrophes. Furthermore, we have extended our activities in the area of Insurance-Linked Securities over the past three years by establishing a dedicated unit in 2008; here we not only place transactions to protect our own portfolio, but also transfer the business of our clients directly to the capital market.

We are well positioned for the future and thus expect to see further profitable growth. However, our main goal is to reduce the volatility of our earnings. We will therefore further increase the life portion ofour premiums and profits and we intend to improve the diversification within our business groups. In non-life business we will continue to manage the peak-zone exposures depending on price movements. Continued conservative loss reserving and asset allocation should further stabilise our earnings.

In non-life reinsurance we see an unchanged need to adhere to systematic cycle management—the key to profitable growth in a largely saturated market. In times when soft markets prevail, we exercise underwriting discipline and are prepared to relinquish premium volume. We strive to identify and exploit market opportunities when they present themselves as a result of a hardening market. With the introduction of Solvency II we expect further demand for reinsurance. Furthermore, we expect to cultivate new opportunities in specialty and emerging markets which show an underlying growth trend.

For our life and health business, we expect to see a favourable development and further growth in the years to come. We are well- positioned for the future and will strive to further strengthen our position as the third-largest professional life reinsurer. As a pioneer of products aimed at the 60+ generation, we shall continue to offer flexible concepts geared to the specific needs of elderly people. In the United Kingdom it is our assumption that business involving the biometric risk of longevity will prove to be a significant growth sector.

In the major emerging markets, the growth of the “urban middle class” will support long-term expansion of all kinds of life and health products, with a special emphasis on the BRIC countries.

Hardy
2009 results
Gross written premiums: £384 million
Net income: £32 million
Combined ratio: 78.1%

Hiscox
2009 results
Gross written premiums: $2,254 million
Net income: $440 million
Combined ratio: 86%

Hiscox Bermuda’s fifth birthday was in October this year. Born from a 100 year-old group and of a rival market it appeared a daunting challenge to become fully accepted as part of the Bermuda market. In fact Bermuda is such a friendly and inclusive market that this seemed to happen in double quick time. Secondly as a group we liked it so much on the Island that we brought our listed holding company here four years ago.

Our principal business today is property reinsurance and we would like to continue our expansion into those other areas where the Bermuda market has substantial amounts of business. This aspiration would require a hardening of the casualty markets which seems very necessary from the outside. The Bermuda market will face various challenges in the coming years and we expect to play our part in helping to work through those. Whatever happens we want to remain a core player in a very strong Bermuda market.

Ironshore
2009 results
Gross written premiums: $839 million
Net income: $105 million
Combined ratio: 92%

Lancashire
2009 results (Group)
Gross written premiums: $627 million
Net income: $385 million
Combined ratio: 44.6%

Montpelier Group
2009 results
Gross written premiums: $635 million
Net income: $464 million
Combined ratio: 62.2%

Since the end of 2005 we have more than doubled our book value per share while growing our platform organically, establishing operations in London, Switzerland and the US. We have remained true to our core strategy, writing risks that we understand and staying away from those that we don’t.

As was the case in our very first year, our primary goal remains to grow book value per share for our long-term shareholders. In the next five years, we will stay focused on our core areas of expertise, continue to look for new opportunities that fit with our existing platforms and make sense for our clients and shareholders and actively manage our capital around those underwriting opportunities.

Oil
2009 results
Premiums earned: $891 million
Net income: $1,100 million
Combined ratio: 61.7%

In 2005 the issue of Gulf of Mexico windstorm exposure rose to the top of the agenda for our mutual membership. By offering $250 million, OIL is the “cornerstone capacity” for many of the world’s major energy companies. So we needed to find a solution that would work for all of our members whether they had Gulf of Mexico wind exposure or not. OIL’s shareholders approved both revised terms for our windstorm coverage and our new lock-in plan leading to further transparency and predictability. We were also successful in addressing and updating our rating and premium plan and refining our capital planning to support our business exposures. The company remains on a very sound financial footing and in a position to add new global energy members.

Over the last couple of years we have been implementing a new strategic plan that has successfully brought our energy mutual up to date with the changing and growing needs of our global energy customer base. We will be looking to broaden and diversify our membership base and attract between three and five new members per year over the next five years. In addition, we are currently evaluating how we offer our core property coverages by focusing in on the size of the limit and the appropriate deductibles for those limits. This project is intended to make sure that OIL remains relevant to our existing membership and to future prospects such that OIL maintains its leadership position in the energy insurance market place.

We remain providers of the largest single block of capacity in the energy insurance industry and as a mutual the price of our products over the long-term is typically the most competitive in the market. We currently offer seven products including Property (Physical damage), Pollution (3rd party liability), Terrorism, Control of Well, Cargo and Construction with other significant additional coverage features. We are also in a strong position to respond to new capacity needs for insureds required by the US and other jurisdictions following the recent Macondo loss in the Gulf of Mexico.

PartnerRe
2009 results
Net written premiums: $3,949 million
Net income: $1,537 million
Combined ratio: 81.8%

PartnerRe has had a very successful five years and today is stronger than it has ever been. Our risk management framework and systems have been tested during that time. Hurricane Katrina was the largest insured event in history and produced claims of $45 billion for the insurance industry and $511 million for PartnerRe. In 2008, the highly leveraged banking models collapsed creating enormous dislocation in the financial markets and capital losses.

Despite impact from the hurricane and the financial crisis, PartnerRe’s capital and reserve positions remained strong and we were able to offer continuity of capacity to our clients. This is because we manage our investment risk in the same way we manage our underwriting risk, through limits and diversification to ensure that PartnerRe remains intact, stable and well positioned to meet future opportunities.

In 2009, PartnerRe acquired Paris Re and became a top-five reinsurer worldwide. The acquisition added additional capital, financial flexibility and new talent into our organization bringing added security and making us a stronger partner for our clients in volatile times.

PartnerRe has exceeded our long-term return target of 13 percent over the last several years but reaching the same performance over the next couple of years will be more challenging. It’s a generally stagnant, no-growth re/insurance environment and when risk-free interest rates are 2 – 3 percent, achieving a 13 percent return is a challenge.

Longer term, the situation is less clear. With western economies entering uncharted waters of unprecedented debt levels, significant consumer debt deleveraging, as well as a shift in the centre of economic power to the east, performance will be highly dependent on what economic environment we find ourselves in. Given the high level of uncertainty, I would not like to define what will constitute superior performance but one thing is sure, superior performance will be PartnerRe’s goal.

We enter this environment as a larger, stronger, more stable and more secure company than we were a year ago after the successful acquisition of Paris Re. Although we are larger we still retain the same strategy, values, infrastructure and most importantly the same approach to valuing, evaluating and managing risk that have seen us through the shock events of recent years.

Platinum
2009 results
Net written premiums: $899 million
Net income: $383 million
Combined ratio: 76.7%

During the past five years we remained focused on producing strong financial results for shareholders through disciplined underwriting and investing as well as active capital management. We expect to continue in this manner over the next five years.

RenaissanceRe
2009 results
Gross written premiums: $1,728 million
Net income: $838 million
Combined ratio: 45.3%

White Mountains Re
Sirius International Insurance Corporation Bermuda Branch [White Mountains]
2009 results
Gross written premiums: $1,086 million
Net income: $134 million
Combined ratio: 86%

The launch of White Mountains Re’s Bermuda platform occurred in the fall of 2006. Anyone involved in a start-up knows just how much time, effort and perhaps a little bit of luck is required for a successful launch. Our execution was virtually flawless on all fronts —thanks to the excellent team that we have put together. We were warmly embraced by the established Bermuda community and were most fortunate to have the loyal support of our brokers and clients right from the start. This has allowed us to achieve our short-term goals and despite the challenges that “Mother Nature’ has thrown our way in 2007, 2008 and 2010, achieve results that have exceeded our long-term expectations.

In our relatively short history, we have built a solid foundation from which to grow and prosper over the next five years. With that said, we recognize that current market conditions may make it increasingly difficult to achieve these aspirations. We also recognize that we cannot control the marketplace, but do control our own response to the marketplace. Fortunately for us, we have no pressure to grow the top line, but are committed to underwriting discipline and a bottom line focus. Capital/capacity will be deployed when and where appropriate. We believe that this approach will ensure long-term success in the ever changing competitive reinsurance world we operate in.

Tokio Millennium Re Ltd.
2009 results
Net written premiums: $361 million
Net income: $200 million
Combined ratio: 54.8%

Validus Re
2009 Group results
Gross written premiums: $1,621 million
Net income: $897 million
Combined ratio: 68.9%

XL Re
2009 results
Gross written premiums: $1,860 million
Underwriting Profit: $286 million
Combined ratio: 82.1%

The XL Re companies have much to be proud of during the past five years. Some of our major milestones include setting up the first and successful post-Hurricane Katrina sidecar, Cyrus Re, in 2005; integrating our European reinsurance platform in Dublin in 2006 to provide a broader array of products and clients solutions, and at the same time being the first reinsurance company to act on the European Union Merger Directive, which was first implemented by Ireland. More recently, we were the first reinsurer in Bermuda to qualify as an Eligible Reinsurer in Florida under the state rule allowing the Florida Office of Insurance Regulation to establish lower collateral requirements for foreign reinsurers that are highly rated and financially sound. Finally, our team has produced outstanding financial results at XL with excellent combined ratios for a global, multiple line reinsurer.

We expect to remain a dynamic and disciplined reinsurer with the best underwriting talent. We also expect to remain the reinsurer of choice in our selected markets by continuing to provide our clients with innovative solutions, dependable and transparent underwriting, and excellent service, while delivering optimal returns on equity to our shareholders over time.