Capital Pouring Into Insurance Ventures

London

Capital continues to pour into the insurance and reinsuranceindustries to take advantage of the business opportunities in thepost-Sept. 11 market. However, some observers are getting worriedthat too much capital might create another era of overcapacity orat least substantially reduce the size and length of the hardmarket.

Other executives are less concerned, stating that the WorldTrade Center disaster created a capital crunch, coming afterseveral years of bad industry results.

Among the capital raising announcements, in the order of themost recent:

A proposed Bermuda property-casualty insurer and reinsurer,Endurance Specialty Insurance Ltd., which is seeking capitalizationof some $1.2 billion. Aon is due to supply $200 million of capitalto the venture, with another $200 million supplied by ZurichFinancial Services and an independent investment company called CapC, in which Zurich has an interest. The remainder of thecapitalization will be supplied by private equity, a Zurichrepresentative said.

The formation of a new Bermuda holding company, Talbot Holdings,established by the management team of Alleghany Underwriting Ltd.,a Lloyds managing agency, and investors led by Heidi Hutter and JayNovik from Black Diamond Group LLC, a recently formed NewYork-based merchant bank and advisory company specializing ininsurance company restructurings. (Among her prior positions in theindustry, Ms. Hutter was director for the Equitas project atLloyd's, as well as CEO of Swiss Re's U.S. and Canadianoperations.)

Talbot Holdings was created to facilitate a management buyout ofAlleghany Underwriting Ltd. from Alleghany Corp., which wanted toexit the Lloyds business. AUL plans to have premium income of 140million ($204.4 million at current exchange rates) for the 2002year of account, compared with premium income this year of 220million ($321.2 million), said Michael Carpenter, chief executiveof AUL in London.

“The Lloyds operations of Talbot Holdings are expected to formpart of a more broadly based insurance group which will includeinsurance and reinsurance activities based in Bermuda,” accordingto a Nov. 6 announcement discussing details of the sale.

American International Group has formed a new Lloyds syndicate,managed by Ascot Underwriting Ltd., to write general insurance. Thesyndicate, which will be capitalized by 100 million ($146 million),was already in the process of being formed before the World TradeCenter disaster.

Alea Group Holdings AG, a global reinsurance enterprise,announced a $100 million capital injection from Kohlberg KravisRoberts and Company LLP, the U.S.-based private equity firm, whichis Aleas parent company.

A proposed Bermuda-based p-c reinsurer with expected capital ofat least $1 billion will be formed by White Mountains InsuranceGroup Ltd. The company intends to focus initially on propertybusiness through the broker market. The Bermuda-based WhiteMountains will be a founding shareholder and is expected to investat least $200 million in the venture.

Folksamerica, a broker-market reinsurance company headquarteredin New York City, announced on Oct. 29 that it will receiveadditional support from its parent company, OneBeacon InsuranceGroup, which is owned by the White Mountains Insurance Group Ltd.The injection will boost Folksamericas capital to the $1 billionlevel, doubling the size of the company.

The influx of capital is “rather alarming, actually,” accordingto Martin Reith, chief executive and active underwriter with AscotUnderwriting Ltd., the managing agent of the new syndicate beingset up by AIG. “The fact that weve got all this mammoth capacitycoming in, it doesnt look good to me.”

The market was hardening steadily prior to Sept. 11 because of arealization among insurers that they had to return the business toprofitable levels, said Mr. Reith. “Then Sept. 11 comes along andnot unsurprisingly everything accelerates dramatically,” he said.“What youre going to find now is that there is going to be a hugesurplus of capacity, all trying to–and its awful to say it thisway–exploit the opportunity that Sept. 11 creates.”

Mr. Reith said the previous disciplined hardening of the marketis disappearing, “and its just becoming a frenzy of activity to getyour pole in the ground and start taking the business.”

He emphasized that Ascot was in the works well before Sept. 11.“We are making a controlled and disciplined entry into the market,”he said. “Weve got arguably the best capital in the market backingus. Were not coming in with a $500 million or a $1 billionsyndicate to really go to town. Were coming in at a goodmedium-sized level, and I think that sends out very positivemessages about us that were not looking to come in and undermine alot of the good work that is being done in the market.”

Looking at the situation from a different perspective is HeidiHutter at Black Diamond, who said: “There is certainly a level ofcapital that needs to be replaced, and I think to some extent, someof the capital thats coming is to enhance companies abilities toaccept the exposures.” She added that companies are also “lookingat their exposures quite differently than they did before Sept. 11,and certainly capital is needed for that.”

“I think its right to be concerned,” said Mr. Carpenter at AUL.“But on the other hand, I would point out that if the World TradeCenter loss is of the order $30-50 billion, I think so far weveonly had talk of maybe $10-$15 billion of new capital coming intothe insurance sector.”

As a result, he didnt think there was reason for too muchconcern. “It still sounds to me as though theres going to be a netreduction of capital,” he said. “Lets not forget that this eventhas followed two to three years of some pretty heavy losses in manyproperty-casualty insurance companies. So I would say there hasbeen a fairly significant reduction in capital and were stillexpecting the upturn in the cycle to be pretty strong and prettylong.”

Although there is a lot of talk about fundraising, Mr. Carpentersaid his impression is that “quite a number of insurers are notfinding it easy to raise capital. Thats not to say they wont raisethe money–I think they will–but its not been easy. A number ofcompanies that wanted to have rights issues have not yet emergedwith them. I imagine shareholders are expressing some reluctance.So just because people are talking about $10-$15 billion enteringthe market, it doesnt automatically follow that that amount ofmoney is going to be forthcoming.”

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, November 12, 2001.Copyright 2001 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.

Contact Webmaster