Flagstone and Max were both engaged in a public battle to acquire monoline property-catastrophe reinsurer IPC Re, but IPC's board ultimately voted to go with Validus Holdings in July for roughly $1.6 billion.

The two losing bidders, with jolts from 2008 deals for Lloyd's vehicles boosting their premium volume levels this year, were hardly licking their wounds as they responded to analysts' questions on earnings conference calls earlier this month.

“Clearly there's a lot more commentary today on scale [now] than there has been [in the past], and we probably promoted a lot of that as we entered into the IPC transaction,” said Marty Becker, Max's chair and chief executive officer, referring to statements he made back in March in support of an IPC merger, touting the benefits of a deal that would have created a company with more than $3 billion in shareholders equity.

Since then, analysts have predicted more mergers in the Bermuda market, circling around that $3 billion figure as the magic number in terms of capital required for a relevant participant.

Flagstone Chair Mark Byrne said $3 billion is “a completely artificial number, and my guess is whoever said that is somebody who's got $3 billion. When they have $4 billion, they'll say it has to be $4 billion.”

Mr. Becker said that “most of that commentary is futuristic because at the moment,…we continue to have very nice growth rates in a market that's not growing that much.”

In particular, he noted that Max's mature Bermuda and Dublin insurance and reinsurance platforms–which he described as “probably the best representation” of Max's growth potential–continued to expand, as new platforms in U.S. specialty business and at Lloyd's added more volume.

Max's financial statements reveal that gross premiums for the mature businesses grew by 10 percent overall to more than $550 million for the first half. In addition, newer U.S. specialty business grew 85 percent to $150 million, while the Lloyd's platform, added with the November 2008 acquisition of Imagine Group, put another $90 million of gross premium on the books.

“Aspirationally, there probably is some benefit to scale, but in terms of hard reality of facts at the moment, it would be hard to support that,” Mr. Becker said.

Likewise, Flagstone aspired to be bigger, making a single $1.8 billion bid for IPC just before shareholders met to vote on a deal. While the prospect of a larger capital base remains appealing, it's hardly essential, according to Chair Mark Byrne.

“I think it's mostly nonsense that a $1 billion company is not a meaningful player in this marketplace,” he said, noting that Flagstone grew its top line by over 90 percent in 2007, and by more than 30 percent in 2008 and 2009.

“That doesn't seem to be the growth pattern of a company that's having trouble getting clients to accept its name,” he said during a conference call, during which other executives described growth that came mainly from the Lloyd's platform–Marlborough Underwriting Agency, which was acquired in October 2008–and double-digit price increases in Florida catastrophe reinsurance business.

“We think the reasons given for turning down our [IPC] offer don't make sense. But we've moved on and we think we'll find better opportunities in the future,” Mr. Byrne said.

Also addressing the capital question were executives from two “Class of 2001″ Bermuda companies formed in the wake of the Sept. 11 attacks–Chris Harris, CEO of Montpelier Re, and Michael Price, CEO of Platinum Underwriters. Like Max and Flagstone, these companies each have less than $2 billion in capital.

“Generally, size in isolation is not something that drives clients in their selection of a reinsurer. They want security, quality, service and commitment,” said Mr. Harris of Montpelier, which writes both reinsurance and specialty insurance through Bermuda, London and U.S. operations.

“Our current size suits our specialist business model well, and we enjoy an established franchise in our corner of the market,” he said, adding that clients “value diversity in their counterparties.”

“Business flow is very strong right now. We haven't seen any evidence that bigger is better,” he said–noting, in fact, that the companies that have been struggling over the past year are large ones. “They weren't focused, specialized and stuck to their business models,” he added.

Platinum's Mr. Price said that “if you have significant consolidation, that takes away choice” from clients and brokers, making the argument that insurers are looking to spread reinsurance placements to avoid concentration with any one reinsurer.

Mr. Price also noted that Platinum operates exclusively as a reinsurer, while competitors have mixed insurance and reinsurance models. With nearly $2.0 billion in capital, Platinum is actually bigger when more accurate comparisons to competitors are performed–compared to competitors' reinsurance platforms in isolation.

“I think, in fact, size can sometimes work to your disadvantage,” he added. “You lose nimbleness. You lose the ability to be selective in portfolio construction, and it's just harder to say no because you're got to put this capital to work.”

“Frankly, I believe larger companies are harder to manage effectively,” he said, highlighting Platinum's ability to easily move in and out of profitable market segments with quick underwriting decisions. “You can do that with 150 people. It's hard to do with 1,000.”

Mr. Byrne, however, has said that one reason for pursuing the IPC deal was to put a very efficient operating engine of 37 experienced underwriters and “the biggest supercomputer in the industry” to better use.

“A great deal of investment has built a funnel [that] could easily process and write twice as much business as we have,” he said, adding that the IPC acquisition would have allowed Flagstone to spread its significant investment in infrastructure and technology over a larger capital base.

Mr. Byrne also admits that with a larger capital base, Flagstone would have the luxury of not having to take capital away from one opportunity to pursue another.

“If we want to write more property-catastrophe in Florida because we think the pricing is extremely attractive this year, which we did, we had to do less of something else,” he said, noting that commercial aviation was the segment Flagstone chose to take capital away from.

At Validus, CEO Ed Noonan said the IPC deal–vaulting its capital position from just over $2 billion to roughly $3.4 billion–positions the company to go after whatever business it desires. He was among several Bermuda executives who said his company is eyeing the aviation insurance opportunity which will likely emerge at year's end when the majority of contracts renew.

In the wake of some significant air losses, he predicts rate increases as high as 20-to-30 percent. “Our combined capitalization will position us to allow our non-catastrophe lines, particularly energy and aviation, to grow and seize the opportunity that we see,” he said.

During first-half 2009, non-cat business, accounting for 75 percent of Validus' book, drove most of its growth in premiums and earnings, he said, adding that steps taken last year to enter the onshore energy insurance market and to write in Latin America and Asia fueled even more growth.

According to the company's financial statements, the Bermuda-based reinsurance operations of Validus Re and London-based Talbot insurance operations both had double-digit premium growth in the first half, together pushing total gross premiums up nearly 15 percent to over $1 billion.

Referring to the overall benefits of the IPC deal, Mr. Noonan said that “we see this as a truly transformational move. Our analysis shows that we can significantly increase underwriting margins in the IPC portfolio while simultaneously reducing volatility,” later explaining that Validus had “done significant hedging” as wind season approached in anticipation of the deal.

With the deal, “we become one of the largest global cat underwriters with better access to business [and] a lead position on any deal we seek,” Mr. Noonan said.

“Bottom line,” he said, Validus has “market positioning post-acquisition that will allow [us] to continue to grow at a much faster rate than the market in a very strong rate environment.”

Patrick Thiele, CEO of Partner Re–which did the largest deal of the quarter, acquiring PARIS RE for $2 billion and creating a company with a capital position of over $6 billion–has a seemingly dimmer view of the overall rate environment.

“Going forward, we expect a continuation of the market we're currently experiencing. By that I mean some lines are improving, some are broadly stable, while others are still declining. Overall, it's profitable stagnation,” Mr. Thiele said.

A worldwide global recession continues to put pressure on exposure levels, in turn putting downward pressure on insurance company written premiums, said the CEO of Partner Re, that before its deal wrote more than two-thirds of its reinsurance business on a proportional basis.

“Reinsurance pricing is at adequate levels overall,” he continued, “but certainly there is no marketwide lift-all-the-boats hardening going on. The only improving areas are those that suffered significant losses over the past year,” he said, citing U.S. catastrophe and aviation.

“Looking forward, it is increasingly apparent that we are going to be in the environment of profitable stagnation through Jan. 1, 2010 renewals and perhaps beyond,” Mr. Thiele concluded.

He also noted that for three years running, Partner Re's actual losses have come in much lower than expected, but there is “no guarantee that favorable loss returns will continue into the future,” he said.

(Partner Re and most other Bermuda companies continued to take down loss reserves for prior years during the second quarter, although the magnitude of individual takedowns tended to be lower than takedowns in 2008.)

“We still expect some acceleration of casualty loss frequency and severity over the next few years as the economy recovers and inflation increases from the current depressed level, but probably not enough to cause a broad market turn or subsequent easy growth opportunities for all market participants,” he said.

“That's the context for the PARIS RE acquisition,” he said. “The acquisition will position us well both in terms of capital and diversification, but also in terms of competitive positioning and potential profitable growth.”

When the deal was announced on July 6, the companies noted that, among other benefits, the combination enhances Partners already diversified book by shifting the mix slightly toward short-tail lines in the near term, increasing the amount of non-proportional business and producing a more meaningful footprint in emerging markets.

In the first half, Partner Re's bottom line benefited from a low level of large losses, favorable loss reserve development and an improvement in the global capital markets.

The same factors impacted the results of much of the rest of the market, but Partner experienced the largest year-over-year improvement with a more than $400 million swing in investment results–as over $200 million in realized and unrealized investment losses last year reversed to a similar level of gains in 2009's first half.

See additional Web-only chart: First-Half 2009 Financial Results For Selected Bermuda Insurers