Startups account for most of the new capital thats poured in since Sept. 11–roughly half of the $14 billion in capital by one estimate. (See NU, Nov. 26, page 29 for a breakdown.)

The newest Bermuda insurer/reinsurer is Allied World Assurance Company, Ltd., a wholly-owned operating subsidiary of Allied World Assurance Holdings, Ltd. AIG put $291 million into the holding company, while Chubb and GS Capital Partners 2000, L.P., an investment fund managed by Goldman Sachs & Company, have each contributed $250 million. Outside investors supplied the rest of the $1.5 billion, according to a joint statement.

“Basically, the company was put together to offer capacity and to take advantage of the market,” said Michael Morrison, AWACs president and chief executive officer. “The market has been greatly depressed ratewise for a number of years. And the events of 9/11 drove it home to everybody. Some companies will be hurt fatally; others will be wounded severely, so there is a great need for capacity,” he added.

“If you want to be a real player, you have to have major financing. I don't think any one company would want to put up $1.5 billion by themselves,” he said, responding to the question of why competitors AIG and Chubb did not invest in separate ventures.

“It is not an AIG company. The investors are led by AIG, but it is an independent company. If anyone had stepped up with $1.5 billion, it wouldn't be an independent company,” he said.

“You can put up capital, but unless its put to use, there's no sense raising it,” he added, noting the importance of exposure to the broker community. He said AWAC will work with brokers that have operations in Bermuda and London, where AWAC will have a representative office. Other business can come through Risk Specialists Company (Bermuda) Ltd., a wholesaler that he said has an arms-length relationship with AIG.

“We believe that because we are backed by the people who back us that we will attract a lot of attention,” he said.

“Ironically, the biggest weakness [of these new entrants] may be that they have too much capital–and that they have to generate a return on it,” S&Ps Mr. Watson observed. With all that capital, “there is pressure to write a lot of business,” he said.

Noting that the reinsurance industry is operating at a premium-to-surplus ratio slightly under 1-to-1, “it's highly unlikely that they will write $1.5 billion–or even 50 percent of that. It would be remarkable if they could,” he said.

“If youre not fully utilizing the capital, its difficult to produce the returns investors expect,” he added, noting that the newcomers may ultimately be forced to cut prices.

According to Michael Murphy, secretary and company spokesperson, AWAC will write much more than reinsurance. AWAC has a “broad mandate” in terms of the types of risks it will write that includes p-c direct business, and direct excess for large and complex risks.

Mr. Watson, who said that tax issues related to ownership percentages might explain why the commercial lines giants didnt invest in separate companies, also said that they could partner to bring in underwriting talent–one of the biggest difficulties for a startup.

In addition to Mr. Morrison, two other industry veterans (property underwriter John Murphy, and casualty underwriter Jordan Gantz) will join the AWAC team by Dec. 3–the date the company plans to start operating. Mr. Morrison spent over 30 years at AIG, serving as president of AIGs Commerce & Industry, then American Home, and ending up in Shanghai as manager of AIGs China operations.

If any of the new Bermuda companies choose to pursue ratings, S&P analysts will have to evaluate management teams and fully understand business plans and return expectations, Mr. Watson said.

Why will business flow into this company “as opposed to those with track records? As opposed to those that paid the WTC losses?” he said, citing a key rating question. “I don't buy the argument that there isn't enough capacity.”

The four largest reinsurers wrote 45 percent of the industry reinsurance premium in 2000, he noted, pointing out that in spite of having $10 billion of WTC losses, they can still write that much business, because $10 billion relative to their capital base is less than 10 percent.

He did say that there are lines nobody wants to write, “but I dont see these new companies writing them either. I dont see them writing terror. I don't see any of the new players saying they're willing to write a Chase Manhattan with 10,000 employees in signature buildings in New York City. You can write that if you share it among 50 different companies.”

As for terrorism coverage in general, he said, both new and existing players are waiting for Congress to act on a bill to provide some backstop for insurers before they jump into the market.

But Mr. Morrison said AWAC would contemplate writing terrorism risks. “Our initial posture will be to put in exclusions for terrorism coverage, but to allow a buyback of the risk. We want to specifically charge for terrorism, just as we charge for earthquake,” he said. As for taking on risks of major corporations, “I would imagine that we would try to be parallel to Lexington–that we might fill a layer of capacity,” Mr. Murphy said, referring to a domestic AIG company.

Both said Bermuda reinsurer IPC Re would act as AWACs underwriting manager for high-layer excess property-catastrophe reinsurance, adding that such business would be a small part of the total book. AWAC will not have production relationships with any other AIG company, he said. (AIG has less than a 25 percent stake in IPC Holdings.)

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, December 3, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

Contact Webmaster