Roger Crombie

October was the best of times and the worst of times in the Bermuda insurance market, which is experiencing intense activity in the wake of the events of September 11.

Ace and XL announced third-quarter net losses of $442.6 million and $840 million, respectively. The losses were expected, with both companies exposed to claims from the terrorist attacks ($558.8 million and $750 million, respectively). XL took a further $100 million charge for other catastrophic events in the quarter, but included the results of its Winterthur acquisition for the first time. In the wake of the results from the market leaders, other Bermuda insurers and reinsurers were expected to release equally sobering third-quarter results.

Ace announced that it would sell $1 billion worth of its shares. A couple of weeks earlier, chairman Brian Duperreault and Brian O'Hara of XL had been among an insurance delegation that met President Bush in the White House to discuss a public-private partnership to provide coverage for acts of terrorism.

On the day after XL released its results, Robert Clements returned an amount equal to XL's net claims estimate to the Bermuda market via Arch Capital Group, a Bermuda company he chairs. Since September 11, Marsh had announced the formation of Axis Specialty, aiming to attract $1 billion of new capital to Bermuda. In addition, Renaissance Re and State Farm Mutual Automobile Insurance said they intended to finance $600 million of new capital for DaVinci Re and subsidiary Glencoe.

Clements led the formation of Ace and XL Capital in the mid-1980s in the wake of the directors' and officers' shortage. Warburg Pincus, which previously launched RenaissanceRe Holdings, the catastrophe market reinsurance leader founded in Bermuda in 1993, and Hellman & Friedman agreed to contribute $750 million to Arch Capital, taking its capital above $1 billion.

The senior management team at Arch Capital Reinsurance includes Paul Ingrey, formerly chairman of F&G Re; Dwight Evans, formerly executive vice president, North American property, for St. Paul Re and F&G Re; and Marc Grandisson, vice president and actuary of the reinsurance division of Berkshire Hathaway.

Clements and Arch Capital president Peter Appel have refashioned the group in the past year. It sold all of its reinsurance business and some of its investments and moved to Bermuda. It bought its once-largest shareholder, a merchant bank specializing in the insurance industry, a regional specialty insurer, and a company in the alternative risk transfer business.

Arch's new pool was accompanied by rumors that AIG and Chubb were to form another $1 billion pool, also in Bermuda. The idea raised eyebrows: Chubb has been leading the charge to tax the Bermuda companies in an effort to "level the playing field." If it indeed associates itself with so substantial a Bermuda pool, the argument will surely have been resolved.

Whether or not the rumor pans out, it is indicative of the mood in the Bermuda market. The solemn business of grieving for friends lost in the September 11 attacks is accompanied by the sense that the market is taking another shortage-driven leap forward, of which Bermuda will be the beneficiary.

At the Bermuda Angle conference, an annual analysts' and bankers' presentation, the consensus was that greatly increased demand for covers would be accompanied by a flight to quality. Customers are likely to seek companies with strong credit ratings, pushing premiums still higher.

Gross written premiums may suffer negative growth as companies reduce lines, but that will likely be compensated for more than adequately by a growth in net premiums written. Over time, that increase will work its way into earned premiums an net income.

In the short- to medium-term, retrocessional cover will not be available at economic prices. Indications are that available retrocession capacity will carry reduced limits and further increased prices. Reinsurance underwriting will essentially be "gross or net."

Roger Crombie is a Bermuda-based journalist who writes frequently for Risk & Insurance.

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