TRIA BALANCE? Finding an accommodation between the needs of post-9/11America and the limitations of our industry isn’t easy. We examine TRIA’s extension and beyond Page 10

ALL THE Q3RESULTS & ANALYSIS

KRAMER,KING OFSTARTUPS

BERMUDALEAPS OVERLONDON

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BERMUDAINSURANCEQUARTERLY© 2005 Bermuda Media in association with

Q3F i s c a l 2 0 0 5

BERMUDAINSURANCEQUARTERLY

EditorCharles Barclay

Art DirectorPaul Shapiro

Contributing EditorChris Gibbons

Associate PublisherFaye Farley

PublisherIan Coles

Published by Bermuda Media, Suite310, The International Centre, 26Bermudiana Road, Hamilton HM 11,Bermuda. Postal address: PO Box HM2032, Hamilton HM HX, Bermuda. Tel:292-7279 Fax: 295-3189 Email:submit@bm.bm. Printed in Bermudaby Island Press.

Published four times a year In associa-tion with PricewaterhouseCoopers.

Cover image courtesy of Getty Images

Q3F i s c a l 2 0 0 5

Published December 2005

Our catastrophe losseswere within our tolerancelevel … Exclusive of hur-ricanes Rita and Katrina,earnings were excellentfrom both underwritingand investment income.— Evan Greenberg, ACE

Although we sustained significant losses, ourexposure management programme sufficientlyprotected our capital position.

— Scott Carmilani, AWAC

My stated managementgoal has always been, at aminimum, preservation ofcapital and I believe wehave achieved this.— John Charman, AXIS

Diversification allowed us to produce betterresults in Q3 than most of our competitors.

— Robert Cooney, Max Re

In the light of [Katrina and Rita] losses, we arealready seeing significant rate increases fornumerous classes of insurance and reinsurance.

— Stephen Catlin, Catlin Group

Our capital position is strong and balanced andwe believe we [can] take advantage of potentialfuture market opportunities.

— Kenneth LeStrange, Endurance

We are taking steps to reduce the potential impactof very large events by managing both our grossand net exposures … post-Katrina.

— Anthony Taylor, Montpelier Re

It is entirely true, as Bermuda MonetaryAuthority chief Cheryl Lister and internation-al business leader David Ezekiel have said

recently, that the island runs into a lot of unfaircriticism when one bad egg of a company isfound to have a local connection.

The opportunity is taken by major media andour rival jurisdictions and businesses (more thanoccasionally hand in glove) to give the impres-sion that Bermuda as a whole is rotten, crookedand a blight on an otherwise honorable businessworld.

In fact, Bermuda’s regulation of insuranceand other financial endeavours is generallybeyond reproach in both theory and practice.But that’s not a message which will fly in thepapers or politics. It’s too boring.

As a journalist, I can see the temptation forwriters to have a go at Bermuda as rich, smug,greedy and ready to bend the rules. It definitelyis rich, after all, and that alone invites trouble.

Officialdom here is clearly becoming con-cerned about unwarranted bad news involvingBermuda, and so should the re/insurance com-panies that continue to flock here.

The Bermuda market has reached the pointwhere it is a valuable brand to be used by its par-ticipants. It is therefore in their interests to pro-tect and burnish that brand. Obviously, the bestway is to do a good job, and Bermuda has notbeen let down very often by the re/insurancefirms based here.

But having the respect ofthose you do business withwill not help when, for exam-ple, an Eliot Spitzer comesgunning for you in the laymedia: the People versus theInsurance Industry in Generaland a Bunch of Lotus-Eating,Non-Taxpaying Islanders inParticular.

That’s when a better gen-eral understanding or image of Bermuda isrequired, to ensure that the Court of PublicOpinion isn’t so easily persuaded against us.

There was a stage when men wearing pinkBermuda shorts at RIMS had a purpose, draw-ing attention to a cheeky upstart jurisdictionwith some clever ideas. But Bermuda is on thecusp of joining the financial establishment now,and perhaps it is time to present the more accu-rate image of a proper international businesscentre within a sophisticated, democratic andresponsible country, albeit a small one.

Before Andrew, before 9/11, before Katrina,the island was a happy-go-lucky beach umbrel-la for bright opportunists. Now it is somethingvery significant and incredibly valuable andyet, due to its staggering progress, increasinglyvulnerable to attack upon and devaluation ofthe brand.

We suggest a continuing major internation-al media campaign to get it across to the

world’s business and political opinion formersthat we are for real; that we have the same val-ues and concerns as everyone else; that we areno less entitled to succeed than, say, Dublin orDes Moines.

We hope you agree this publication is a stepin that direction; but much more is required,along with many millions of dollars a year, ifBermuda is to start properly looking the part.

Until recently, we would have said Bermuda’simage was solely Bermuda’s issue and not that ofthe Bermuda re/insurance market, but it isincreasingly uncertain if one could prosperwithout the other.

Nothing can ever guarantee the protection ofthe Bermuda brand from tarnish but failure totry hard enough is surely courting trouble … forall concerned.

PS Before Bermuda market participantspanic that the Bermudian begging bowl is com-ing out yet again, the local Government has anenormous media budget that is currently direct-ed at attracting tourists. With a little friendlypersuasion, at least part of it could be diverted tosupport something a bit more promising.

FROM THE EDITOR

THE QUOTES OF THE QUARTER

PROTECTING A PRICELESS BRAND NAMED BERMUDA

BY CHARLESBARCLAY

[ 1 ]

“Here it is — the plain, unvarnishedtruth. Varnish it.”

[ 2 ]

NEWS REVIEW

Pop group Katrina and TheWaves were a one-hit wonderback in the 1980s but the 2005

Katrina is making waves that willimpact the Bermuda market foryears to come. As we went to press,at least 11 major new reinsurancecompanies were being set up,bringing more than $10 billion infresh capital to the Bermuda prop-erty/casualty market. These com-panies had been granted theBermuda Class 4 licences reservedfor highly-capitalised ventures:

Amlin Bermuda, Ariel Re-insurance, Arrow Capital, Flag-stone Reinsurance, Harbor PointRe, Hiscox Insurance (Bermuda),Lancashire (Bermuda), New CastleReinsurance, Validus Reinsurance.

The new money matched that

which flowed in following 9/11with companies like AWAC,Montpelier and AXIS, and A MBest was moved to comment: “Thedraw of capital to Bermuda in thewake of huge market losses (andthe corresponding anticipatedimprovements in pricing andterms) appears to point to theisland’s strengthening position inglobal insurance markets.”

Investors are backing startupreinsurers because of the opportu-nities presented by the rate increas-es, perhaps as much as 50%,expected when policies are renewedin January, in response to the $60+billion in capital lost in the hurri-canes. By comparison, 9/11 sucked$35 billion from the industry.

Amlin CEO Charles Philipps

said: “This is an opportune time tomake this move.”

The Dow Jones MarketWatchwebsite commented: “Unlikeestablished rivals, these startupsaren’t burdened with huge catas-trophe losses, a big advantagewhen vying for 2006 businesswhich is being negotiated now. Ifsome of these firms end up withprofitable books of business nextyear they could quickly sell sharesin initial public offerings, generat-ing handsome returns for theiroriginal backers.”

At the same time, the new com-

panies are good news for brokersseeking to keep price increasesunder control. With many estab-lished reinsurers hoping for 40 to50% rate hikes to rebuild capital,loss-free newcomers have thechance to offer highly competitiverates. They will also benefitbecause established reinsurers arecutting back on storm exposuresand rating agencies are calling forcompanies to put aside more capi-tal to back catastrophe risks.

As one analyst put it: “The newentrants will probably help makesure that prices don’t get ridiculous.”

Amlin Bermuda: formed by Amlin, a major UK-listed Lloyds insurer, with initial capitalisationaround $1 billion. Headed by John Andrews.Ariel Reinsurance: $1 billion venture formed byACE and Tempest veteran Don Kramer. Hastaken over infrastructure but not the legacy busi-ness of Rosemont Re.Arrow Capital: owned by Goldman SachsGroup, which also owns Arrow Re, a Bermuda-based property casualty captive insurer.Flagstone Reinsurance: $1 billion companyset up by Bermuda-based hedge fund West EndCapital Management. CEO is former Centre Rehead David Brown with Guy Swayne, ex-Lloydsunderwriter from ACE Tempest Re, as CUO.Harbor Point Re: just after Chubb Re closed itsBermuda offices, many key staff, including CEOJohn Berger, are back to head up $1.5 billionHarbor Point, formed by an investment group ledby private equity firm Trident III and Chubb.Hiscox Insurance (Bermuda): $500 millionventure by Hiscox, one of the largest listed insur-ance firms at Lloyds. Robert Childs will be CEO.Lancashire (Bermuda): former Lloyds under-writer Richard Brindle and Capital Z FinancialServices Partners are behind $1 billion Lancashire,which will write aviation, marine and energy, prop-erty catastrophe and direct property business, aswell as retrocessional reinsurance risks.

New Castle Reinsurance: the second Bermudareinsurer formed by hedge fund manager Citadel,which started CIG Re in 2004. New Castle Re willbe capitalised with $500 million and plans to pro-vide property-per-risk, workers’ comp catastropheand terrorism coverage in addition to its core prop-erty catastrophe line of business. CEO will be CIGRe boss and former ACE Tempest Re Presidentand CEO Chris McKeown. Best has already givenNew Castle Re an A- (Excellent) rating.Omega Specialty Insurance: London-basedOmega Underwriting Holdings plc has set up aBermuda insurance and reinsurance arm to under-write predominantly short-tail lines. Due to beginoperations in Q1, 2006.Validus Reinsurance: former Marsh &McLennan CEO Jeffrey Greenberg has formedValidus to sell short-tail cat coverage, with thebacking of private equity firms Venturion andGreenberg’s own Aquiline. Ed Noonan, formerCEO at American Re, will head the new venture.Initial capitalisation: up to $1.5 billion.Cyrus Reinsurance: property catastrophe unitformed by XL Capital and backed by up to $1billion provided by a group led by Highfields, aBoston-based hedge fund manager in which XLCapital has a stake. XL is expected to transfersome of its property catastrophe risks and retro-cessional business to the new firm.

“My new business model is to ride on the coattailsof somebody else’s new business model”

Bermuda stakes its claim aspost-Katrina billions pour in

With Bermuda’s office space andhuman resources already at a

premium, the influx of companies islikely to send the stratospheric rents inHamilton even higher while competitionfor talent is getting fierce.

Even the well-heeled post-9/11startups have been complaining aboutaggressive hiring tactics as new com-panies scramble to be in business byJanuary. Morgan Stanley noted: “Theonly market hotter than property rein-surance is the market for knowledge-able property underwriters. Thephones in Bermuda are ringing off thehook [with] new ventures apparentlymaking generous offers to employeesof incumbents.” But the challenges ingetting going here probably meanmost startups will have little impact onJanuary 1 renewals. “They represent acompetitive threat some six to 12months away,” said Morgan Stanley.

The new capital

Bermuda’s $10b class of 2005 Star warsas startupslure talent

DEFIANT XL SEEKS A STEADIER COURSES

marting from a series of heavylosses and an “extremely disap-pointing” decision in its long-

running dispute with Winterthur,XL Capital has set up a Bermudasidecar venture, and President &CEO Brian O’Hara hasannounced new capital-raisingplans to reduce volatility and“restore the strength of our balancesheet”.

XL, which lost$1.05 billion in Q3and expects to post a$830 million loss forQ4 as a result of theWinterthur decision,has established CyrusRe, a Class 4 startupproperty catastrophereinsurance retroces-sionaire, with initialcapital of $500 million.

Mr O’Hara saidthat XL’s previously announcedproperty catastrophe quota-sharestrategic initiative “is on track”.Under a quota-share counterpartyagreement, Cyrus Re will act as areinsurer of XL property catastro-phe and retrocessional business.Lead investor in Cyrus is Boston-based Highfields CapitalManagement, in which XL hasheld a stake since 1999. XL said itis not taking any direct ownershipin Cyrus (named after the sixthcentury emperor who foundedPersia) and has initially funded acollateral trust of $500 million tosupport its reinsurance activities.Industry analysts said the venturewill reduce XL’s risk exposurewhile releasing capital to sell morepolicies.

Cyrus Re will be based in theIAS Building on Church Street,Hamilton where IAS is providingmanagement services to a numberof start-ups including Validus,Amlin, Hiscox and Lancashire.

In a statement on the draftreport of the independent actuary(IA) appointed in connection withXL’s acquisition of WinterthurInternational (WI) fromWinterthur Swiss Insurance in2001, Mr O’Hara said: “Whileextremely disappointing, [it]

removes the uncertainty that hasexisted since the IA review processbegan.

“The IA draft report, which weare still reviewing for manifesterrors, requires Winterthur Swissto pay XL $575 million (includinginterest) for the net losses andunearned premium balances relat-ing to the acquired business and isexpected to result in XL recording

a net charge of approxi-mately $830 million inthe fourth quarter of2005. I do believe, how-ever, that this draftreport reinforces thesoundness of XL’sreserving policies andpractices on this book.”

It means XL mustnow fund millions ofdollars in reserves tocover claims from prior-

year policies acquired under theWinterthur deal. The reportprompted Standard & Poor’s todowngrade XL Capital to “A+”from “AA-”. S&P also lowered itscounterparty credit and financialstrength ratings on XL’s core oper-ating companies. Outlook on allthe companies is stable.

Despite the report’s findings,Mr O’Hara maintained theWinterthur deal was a “strategicand a financial success” and thatthe outcome should be viewed inthe context of the final cost of theWinterthur International acquisi-tion. “While XL paid $330 millionfor the Winterthur Internationalbusiness in 2001, the companynow expects to receive $575 mil-lion (including interest) fromWinterthur Swiss as a result of theIA draft report as payment for theseasoning of reserves and unearnedpremiums for business in forceprior to the acquisition date.

“The original transaction wascompleted just ahead of a majorhardening of the market for prop-erty and casualty insurance. Theacquisition was a critical strategicmilestone in XL’s development as aglobal company. It gave us thevaluable competitive advantages ofa global network, strong customer

relationships and intellectual capi-tal. The assets, resources and reachof the Winterthur Internationalbusiness allowed us to optimise thegrowth opportunities we have seensince 2001.

“Winterthur International hasbeen a significant generator ofrun-rate profitability to XL overthe past four years as we have suc-cessfully integrated and built uponthe business and network weacquired in 2001. ViewingWinterthur International on astand-alone basis, I believe the netcost to XL of the WI purchasecontinues to represent an attractiveprice to earnings multiple.”

Mr O’Hara added the companywas working with advisorsGoldman Sachs and CitigroupCorporate & Investment Banking

on plans for raising new capital,which “will have significant equitycontent and will be in an amountsufficient to redress the capitalimpact of the IA’s draft report andthe recent catastrophes, respond torating agency requirements, and,importantly, support our growth in2006. We … are committed toraising the capital we need torestore the strength of our balancesheet.”

Meanwhile, Moody’s down-graded the financial strength ratingof XL Capital’s principal insurancesubsidiaries to “Aa3” from “Aa2”. Italso lowered XL Capital’s seniordebt rating to “A3” from “A2”, say-ing they reflected XL’s “relativelyweak operating earnings” and its“relatively higher operating lever-age compared to its peers”.

NEWS REVIEW

“The suggestions are supposed to go in the box.”

[ 3 ]

Brian O’Hara: tryingto restore calm aftera stormy time

PartnerRe chief Patrick Thielesays the firm’s total losses from

the Q3 hurricanes and Europeanfloods could be $62 million morethan the original $615 million esti-mate. He also anticipates claims inthe region of $200 million forHurricane Wilma, with approximately 30% of the loss comingfrom Mexico. Nevertheless, Mr Thiele’s financial plan for 2006anticipates a mid-teens operating return on year-end 2005shareholders’ equity and fully diluted book value per sharegrowth above 10% after dividends.

Thiele plans fora good 2006

PXRE boosts its renewal hopes

NEWS REVIEW

[ 4 ]

JANUARY 22-24Property Casualty Insurers’Association of AmericaExecutive Roundtable SeminarRitz-Carlton Golf Resort,Naples, Floridajoanne.orfanos@pciaa.net

FEBRUARY 21-22World Insurance ForumFairmont SouthamptonHotel, Bermudawww.worldinsuranceforum.bm

MARCH 1-3Reinsurance ExecutiveRoundtable, hosted by ACLIMandarin Oriental, Miamiwww.acli.com

MARCH 8-10CICA International ConferenceOrlando, Floridawww.cicaworld.com

MARCH (DATE TBC)Bermuda Insurance Club sessionon “Economic Capital:Integrating Finance and RiskManagement,” hosted by PwCFairmont Hamilton Princessfiona.hunter@bm.pwc.com

APRIL 23-27RIMS annual conferenceHonolulu, Hawaiiwww.rims.org

APRIL (DATE TBC)Bermuda Insurance Club sessionon “Internal Audit Trends”,hosted by PwCFairmont Hamilton Princessfiona.hunter@bm.pwc.com

MAY 9-12RMS client conferenceBroadmoor Hotel, Coloradowww.tinyurl.com/d6qg8

MAY (DATE TBC)Bermuda Insurance Club session on“Enterprise Risk Management”,hosted by PwCFairmont Hamilton Princessfiona.hunter@bm.pwc.com

To include your event, email cgibbons@cwbda.bm, with “BIQ calendar” in the subject line

WHAT’S ON

PXRE Group, which posted a$317.3 million Q3 loss, hasentered into a $300 million

collateralised reinsurance agree-ment with Atlantic & Western Re,a Cayman-based reinsurance com-pany. The new reinsurance cover-age is designed to protect PXRE“from extreme catastrophe lossesarising from hurricanes in theEastern and Gulf coasts of the US,windstorms in Northern Europeand earthquakes in California overthe next five years”.

Jeffrey Radke, President & CEOof PXRE, commented: “With thecompletion of this transaction, weare supplementing our risk manage-ment programme to provide furtherinsulation for our equity from largebut remote catastrophe events.Combined with our existing capital,[it] provides us with significantadditional resources to meet ourobligations to our clients in even themost extreme loss scenarios.

“I fully expect our ability to exe-cute this transaction so quickly fol-

lowing hurricanes Katrina, Rita andWilma at an 8.7% annual cost of cap-ital will prove a competitive advan-tage in the coming renewal season.”

Meanwhile, Standard & Poor’shas removed PXRE from creditwatch and affirmed its “A-” coun-terparty credit and financialstrength ratings. S&P also removedholding company PXRE Corp andPXRE Group from watch andaffirmed its “BBB-” counterpartycredit ratings. The outlook on all ofthe ratings is stable.

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[ 5 ]

NEWS REVIEW

WHY BERMUDA BEATS BRITAINThe island’s reputation as a tax-

neutral jurisdiction got a mas-sive boost when the chairman

of one of the largest listed insur-ance firms at Lloyds of Londonsaid a punitive tax policy in Britainwas behind his company’s decisionto start a Bermuda company.

Indeed, the 300-year-oldLloyds market is preparing a planto fend off growing competitionfrom overseas, stating that it mustadapt or die.

Robert Hiscox, Chairman ofHiscox, told The Times of Londonthat the UK Government’s over-zealous attitude towards taxationand regulation is forcing increasingnumbers of London insurers tojump ship and set up in more busi-ness-friendly jurisdictions. Hiscoxis one of three Lloyds-listed firmsto incorporate Bermuda compa-nies in recent months, along withOmega and Amlin.

Mr Hiscox said that the regula-tion and taxation issue had causedthe London insurance market toshrink, while the Governmentpropped up “useless” industriessuch as shipping, mining and agri-culture.

“The Government has nevermade one move to do anything buttax the insurers,” Mr Hiscox said.“They’ll never back a winner andnow the London market is driftingaway to better financial and regula-tory climates.”

And he hinted that evenHiscox’s parent company mayreincorporate in Bermuda. “Wehave watched the growing marketin Bermuda and for some time

considered that we need to under-write there to increase the spread,balance and distribution of bothour global reinsurance and retailaccounts. Bermuda is a fast grow-ing reinsurance market, which nowsees business not shown inLondon, and has pricing advan-tages and a favorable regulatoryregime.”

In November, Hiscox ann-ounced a $300 million rights issueto help finance the $500 millionoperation in Bermuda to exploitstrong demand for insurance in thewake of 2005’s hurricanes. It haswarned that 2005 hurricane losseswill cut its profits by £60 million

this year, although it is expecting abrighter outlook because insuranceprices surged in the wake of thestorms.

Analysts’ reaction to Hiscox’smove has been mixed. Accordingto The Times, Numis Securitieshas called the new venture “anexciting development” butBridgewell Securities said that itwould not be big enough to com-pete with other insurers on theisland with $1 billion or more instart-up capital.

Mr Hiscox said he did notintend to compete immediatelywith the large players for big catas-trophe risks. The new company

will build on some £90 million ofexisting business that he plans totransfer to Bermuda — includingkidnap and ransom and fine artrisks.

Meanwhile, Lloyds market hassaid it will unveil a three-year planearly in 2006 to counter overseascompetition, claiming that its verysurvival is at stake.

“Lloyds is operating in a fierce-ly competitive market in whichcapital and expertise is mobile,”said Julian James, director ofworldwide markets for Lloyds. “Itis easy for capital to move to othermarkets in London, elsewhere inEurope or further afield.”

Mr James added that theLloyds survival plan will focus ondelivering “some very real and tan-gible benefits to market partici-pants”. Lloyds needed to changeits capital flexibility, costs of doingbusiness and business processingstandards.

“Being the platform of choicewill require changes in behaviour,resourcing, structure and manage-ment, and an effort of will fromeveryone on the market. I want toleave you in no doubt that thestakes are high.”

Tax pact wins support

The OECD has hailed an agreement between Australia andBermuda to share tax information as a step “to counter abuse of

the financial system”.Under the pact, the first such accord by Bermuda with any

OECD country other than the US, each party may request informa-tion from the other on a specific tax matter under investigation oraudit. The chairman of the OECD’s committee on fiscal affairs, BillMcCloskley, said the Australia-Bermuda agreement reflected agrowing trend towards greater transparency and international coop-eration in tax matters. “I congratulate both parties for strengtheningtheir bilateral relationship and for joining together to counter abuseof the financial system. I hope others will follow this example.

Three key men quit Quanta

Bermuda insurer Quanta Capital Holdings, already reeling fromheavy storm losses in 2004 and 2005 and the departure of its CFO

and COO, has lost three more senior executives. Tobey Russresigned as CEO less than two weeks after David Whiting,President, Quanta Bermuda Reinsurance, and Rick Pagnani, globalhead of Quanta’s reinsurance operations, quit to “pursue otheropportunities”, according to a company statement. Quanta saidindependent director Robert Lippincott has assumed the role ofinterim CEO. The Bermuda office will be run by Mark Cloutier.

Quanta posted a net loss of $59.1 million, for Q3, 2005 and, fol-lowing a net loss of $37.4 million in 2004, had cut back on its catas-trophe coverage. It is now concentrating on its specialty lines business.

Downtown Hamilton: the rents may be breathtaking but so are theviews … and the business opportunities

Thirteen of the world’s top 40 reinsurers are now basedin Hamilton, Bermuda, according to Standard & Poor’s.S&P added that Bermuda is the fourth largest reinsur-ance market after Germany, the US and Switzerland andthat Bermuda-based reinsurers’ total net written reinsur-ance premiums have overtaken those of London-basedreinsurers. Reinsurance net written premiums in 2004grew 3.3% globally, while Bermuda-based companies

grew by 15.9%. “This demonstrates the growing impor-tance of the market,” Lloyds reinsurer Hiscox said in abulletin to investors. Hiscox, one of several London play-ers now setting up here, added: “In respect of US busi-ness, the acquisition costs have historically been signifi-cantly lower in Bermuda than in London, which hasgiven Bermudian reinsurers a pricing advantage thatHiscox Bermuda will in future be able to enjoy.”

It’s official: Hamilton leaves London behind

[ 6 ]

NEWS REVIEW

AM Best has placed the financialstrength rating of “A” and issuercredit ratings of “a” of the rein-

surance subsidiaries of PlatinumUnderwriters Holdings (PlatinumBermuda) under review with nega-tive implications. It has also placedthe ICR of “bbb” of Platinum andall of the group’s debt ratingsunder review with negative impli-cations. This follows Platinum’s$135 million net losses stemmingfrom Hurricane Wilma.

Platinum Bermuda, which

assumes a significant amount ofbusiness from the group’s otheroperating companies, “has realiseda disproportionate reduction in itscapital position as a result ofHurricane Wilma,” said Best.“Inter-company reinsurancearrangements designed to protectPlatinum Bermuda’s capital werenot sufficient to address the fre-quency of hurricanes experiencedin 2005.”

Best said it will meet withPlatinum’s management to review

Platinum’s plan to strengthen thegroup capital and “to specificallyaddress the capital allocation issuesbetween the group’s affiliate com-panies”.

IPCRe downgradedover challengesStandard & Poor’s has lowered itsrating for the Bermuda-basedproperty cat reinsurer IPCRe andits Dublin-based affiliate, IPCReEurope, to A from A+. The down-grades relate to catastrophe losses

recorded in 2005. Parent companyIPC Holdings reported a loss of$548.6 million for the nine monthsended September 30 comparedwith a profit of $130 million in theprior-year period, largely due toQ3 cat losses.

S&P said it has a negative out-look on the companies, reflectingchallenges “in an industry withpossible exposures to higher lossfrequency and severity events andour concerns [over] the industry’slong-term pricing adequacy”.

Platinum’s lacklustre performance

AXIS seekingextra $250m Bermuda-based AXIS CapitalHoldings plans to raise $250million through a share issue.AXIS will use the net proceedsfor general corporate purposes,primarily to enhance the fundingof its insurance and reinsurancesegments. AXIS reported a netloss of $143.4 million for thefirst nine months of 2005, large-ly due to hurricanes Katrina andRita.

Alea sells rights Alea Group Holdings (Bermuda)is selling renewal rights to someof its US business to AmTrustFinancial Services Group, andexpects to receive between $20and $40 million for them overthe next five years. The rights arefor portions of US programmebusiness written by AleaAlternative Risk. Any remainingAAR business will be placed inrunoff.

WGI rating dipsBermuda-based Western GeneralInsurance has been downgraded to“B++” from “A” by A M Best fol-lowing WGI’s decision to enterrunoff.

AWAC staff soarsAWAC has transferred 47 AIGstaff to its payroll as the firms’agreement ends and AWACbecomes, as one commentator said,“more of a standalone company”.AWAC now has 220 staff world-wide, 144 of them in Bermuda.

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P R O P E R T Y / C A S U A LT Y I N S U R A N C E & R E I N S U R A N C E L I F E / A N N U I T Y

A.M. Best’s A - (Excellent) Fitch A (Strong)

[ 7 ]

Katrina,mother ofre-invention

ANALYSIS

With more than $60 billion in losses, HurricaneKatrina was the largest and most complex hit eversuffered by the global property and casualty insur-

ance and reinsurance industry. But as oneproperty cat reinsurance underwriter com-mented about Katrina and all the otherrecent losses: “That’s what we’re here for.”The industry, and Bermuda in particular, isfar better capitalised than post-HurricaneAndrew or 9/11.

And, while Katrina may have been oneblow too many for a few companies,Bermuda’s established players have proved to be fight-ing fit. Benfield noted that Katrina “has eroded signif-icant capital, although the speed at which some com-panies have been able to recapitalise suggests that, sofar at least, the capital markets retain their appetite forreinsurance investments”. Add to this companiesentering Bermuda (11 new Class Four reinsurers hadbeen approved at last count) and it certainly seems as ifthere’s no shortage of capacity.

By early October, big Bermuda companies likeACE, Montpelier and En-durance had raised some $3billion in new capital, abouthalf their Katrina losses.Many of the same companies(especially the post-9/11startups) had returned “excesscapital” to shareholders earli-er in the year. Said TheReview: “These actions, com-bined with a marked declinein business expansion in2004, indicate that the man-agement teams were beingproactive in managing there/insurance cycle.”

Established companies expect this extra injection ofcapital to help them underwrite new business at high-er prices. But with the recent influx of companies, rein-

surers may end up competing too aggres-sively for business, thus limiting increases.Benfield concluded: “Pricing will increasesubstantially in loss-affected classes such asenergy and marine, and for US wind cover[but] the knock-on effect on the marketoverall is unclear.”

In its November Marketplace Realitiesnewsletter, Willis Re said: “Most of the

large global and national commercial property insurersexhausted their catastrophe reinsurance programmeswith Katrina, but since many of those reinsurance pro-grammes do not renew until mid-year 2006, theexpected sharp increases in reinsurance pricing maynot be fully manifested until we are well into 2006.

“We anticipate that the combined effect of reinsur-ers reducing their property exposures and ceding com-pany clients seeking to increase their reinsurance lim-its will not be offset completely by new reinsurance

capacity coming into thebusiness. It is likely that loss-affected reinsurance pro-grammes will experience sig-nificant increases, althoughthe extent of the increasedreinsurance premium outlaymay be mitigated by cedingcompanies taking increasedretentions. Also, the imple-mentation of non-concurrentterms (with differing termsapplying to new markets thatdid not incur any losses)could mitigate the increase inceded premium outlays.”

Hopes and fearsDELUGE OF NEW CAPITAL COULD DAMPEN HIGHER PRICE EXPECTATIONS

Katrina et al will affect morethan pricing. Willis forecast“dramatic change … as cedingcompanies look for more verti-cal and horizontal protectionwith enhanced reinsurancesecurity”.

Rating agencies, too, are tak-ing a more critical look, particu-larly at the difference betweenpure property cat companiesand multi-line reinsurers. AfterKatrina, many of Bermuda’sbiggest names suffered the tem-porary ignominy of downgradesand credit watches as theytapped new capital, but someanalysts predict that pressurefrom the rating agencies forgreater capital support for mono-line reinsurers may result in manyof them cutting back their catas-trophe exposure. The ratingagencies are also concerned atthe quality of, and reliance uponcatastrophe modeling.

And reinsurance buyers willwant greater assurances aboutreinsurers’ security, whetherthey have retrocessional protec-tion and whether quota share orother additional resources areavailable.

‘Overallknock-oneffect isunclear’

“Really, I’m fine. It was just a fleeting senseof purpose — I’m sure it will pass.”

[ 8 ]

ANALYSIS / PRICEWATERHOUSECOOPERSOPERATING RATIOS

INSURANCE RATINGS

QUARTERLY LOSS RATIOSQ3 2005 Q3 2004 Q3 2003

ACE1 92.5% 79.4% 64.6%Arch 89.9% 76.4% 64.4%Aspen 180.0% 103.3% 53.5%AWAC 163.3% 115.0% 67.7%Axis 167.8% 85.4% 46.3%Endurance 177.8% 75.3% 59.2%Everest Re 137.6% 84.4% 70.6%IPC 412.9% 116.0% 20.3%Max Re 122.9% 90.4% 78.1%Montpelier 412.0% 125.5% 21.5%PartnerRe 127.5% 70.0% 66.9%Platinum 131.5% 100.4% 57.7%PXRE 594.3% 174.1% 51.2%Renaissance Re1 190.2% 216.7% 34.9%White Mtn 94.6% 79.4% 76.2%XL Capital 154.6% 85.9% 71.3%

QUARTERLY EXPENSE RATIOSQ3 2005 Q3 2004 Q3 2003

ACE 1 24.0% 24.7% 26.8%Arch 27.8% 27.0% 25.4%Aspen 27.1% 22.7% 26.7%AWAC 18.0% 17.5% 18.5%Axis 17.6% 24.3% 22.9%Endurance 26.6% 27.7% 29.3%Everest 24.6% 24.0% 24.4%IPC 11.3% 15.2% 16.1%Max Re 12.4% 11.0% 26.6%Montpelier 10.7% 19.7% 27.7%PartnerRe 28.8% 32.9% 29.3%Platinum 24.4% 24.4% 27.7%PXRE 28.8% 18.7% 18.3%Renaissance Re 1 25.5% 24.2% 26.8%White Mtn 36.1% 43.3% 28.4%XL Capital 27.6% 30.3% 30.1%

QUARTERLY COMBINED RATIOSQ3 2005 Q3 2004 Q3 2003

ACE 1 116.5% 104.1% 91.4%Arch 117.7% 103.4% 89.8%Aspen 207.1% 126.0% 80.2%AWAC 181.3% 132.5% 86.2%Axis 185.4% 109.7% 69.2%Endurance 204.4% 103.0% 88.5%Everest 162.2% 108.5% 95.0%IPC 424.2% 131.3% 36.3%Max Re 135.3% 101.4% 104.8%Montpelier 422.7% 145.2% 49.2%PartnerRe 156.3% 103.0% 96.2%Platinum 155.9% 124.8% 85.4%PXRE 623.1% 192.8% 69.5%Renaissance Re 1 215.7% 240.9% 61.7%White Mtn 130.7% 122.7% 104.6%XL Capital 182.2% 116.3% 101.4%

1. Restated quarterly data not available for 2003

A M BEST RATING S&P RATINGJuly 1, 2005 Nov 30, 2005 July 1, 2005 Nov 30, 2005

ACE A+ A + A+ A+Arch A – A – NR NRAspen A A – A AAWAC A+ A + NR NRAxis A A A AEndurance A A – A – A –Everest A+ A + AA– AA–IPC A+ A A+ AMax Re A – A – NR NRMontpelier A A – A – A –PartnerRe A+ A + AA– AA–Platinum A A NR NRPXRE A A – A A –Renaissance Re A+ A AA– A+White Mtn NR3 NR3 NR NRXL Capital A+ A + AA– A+

Notes: NR3 — Not rated by A M Best; NR — Not rated by S&P

Renewalsl It is expected that renewals willprogress slowly and end late.l Most Bermuda reinsurers arepredicting a significant increase inpricing for short-tail business.l Reinsurers are also expressingthe view that these price increasesneed to continue for several years.

Q3 losses and earnings outlookl Q3 was overshadowed by hurri-canes Katrina and Rita, losses whichwere significantly borne here.l In addition, there were threeAsian typhoons, six airline acci-dents and Indian and CentralEuropean flooding.l Most companies have had torevise their earnings estimates as aresult of these losses, and loss ratioshave been significantly higher thanin previous Q3s despite Q3 tradi-tionally being the quarter with themost catastrophic losses.

Ratingsl Short-tail property catastrophereinsurers have seen their ratings

cut, particularly by A M Best.l It will be interesting to learn theratings assigned to the new entrantsto the market. Several existing rein-surers consider themselves wellplaced to compete with the newcompanies.l The shortcomings of existingcatastrophe models were exposedby Katrina, and it is expected thatrevised models will be available inthe spring.

Capital raisingl Several companies are planningto raise additional capital to replen-ish after the hit taken from Q3.l Also, several companies will usevarious “side vehicles” to provideaccess to extra capital and improveexposure and volatility management.

New ventures and capitall There are 12 new entrants to themarket with total anticipated capi-tal over $8 billion.l Several new ventures are beingset up by hedge funds rather thanthrough more traditional channels.

Q3, 2005: quite a quarter

Q3 2005 Q3 2004 Q3 2003

ACE 1 4,261 3,988 3,451Arch 1,048 928 928Aspen 494 349 332AWAC 322 403 417Axis 795 688 634Endurance 371 368 325Everest 1,081 1,217 1,240IPC 166 61 46Max Re 288 281 189Montpelier 290 184 146PartnerRe 780 805 750Platinum 2 425 442 –PXRE 236 126 95Renaissance Re 1 383 273 313White Mtn 1,256 1,403 1,000XL Capital 2,381 2,172 2,289

Q3 2005 Q3 2004 Q3 2003

ACE 1 3,091 2,859 2,398Arch 748 735 609Aspen 379 293 207AWAC 313 326 323Axis 617 522 397Endurance 441 409 336Everest 959 1,140 1,046IPC 207 100 78Max Re 282 331 179Montpelier 281 210 163PartnerRe 915 944 888Platinum 429 383 272PXRE 69 90 69Renaissance Re 1 348 350 278White Mtn 982 992 788XL Capital 1,800 2,026 1,7851. Restated quarterly data not available for 2003 2. Quarterly premium written analysis not available

QUARTERLY GROSS PREMIUMS WRITTEN $M

QUARTERLY NET PREMIUMS EARNED $M

[ 9 ]

Net income (loss) attributable to common shareholders ($m) Fully diluted earnings (loss) per share ($)Q3 2005 Q3 2004 Q3 2003 Q3 2005 Q3 2004 Q3 2003

ACE 1 (112) 2,269 355 (0.43) (0.03) 1.22Arch (86) 562 83 (2.48) 0.25 1.22Aspen (362) 303 33 (5.22) (0.62) –AWAC2 (204) 375 72 (1.35) (0.43) 0.48Axis (468) 446 147 (3.32) 0.04 0.90Endurance (377) 308 57 (6.26) 0.40 0.83Everest (418) 963 100 (7.41) 0.20 1.77IPC (657) 116 62 (13.57) (0.37) 1.29Max Re (41) 299 39 (0.89) (0.20) 0.89Montpelier (875) 263 91 (12.16) (1.26) 1.34PartnerRe (297) 661 112 (5.48) 1.46 2.08Platinum (176) 385 38 (4.02) (1.62) 0.81PXRE (319) 156 20 (11.17) (5.48) 1.01Renaissance Re 1 (287) 739 113 (4.07) (4.97) 1.59White Mtn (66) 788 (52) (6.16) (0.94) (5.33)XL Capital (1,049) 1,758 99 (7.53) 0.16 0.71

1. Restated quarterly data not publicly available for 2003 2. Basic EPS data only available

Net income (loss) attributable to common shareholders ($m) Fully diluted earnings (loss) per share ($)9 months 2005 9 months 2004 9 months 2003 9 months 2005 9 months 2004 9 months 2003

ACE 1 792 875 973 2.63 2.95 3.46Arch 156 210 197 2.09 2.91 2.91Aspen (208) 123 98 (3.00) 1.71 –AWAC2 (68) 94 201 (0.45) 0.63 1.34Axis (143) 314 372 (1.01) 1.89 2.46Endurance (171) 242 175 (2.81) 3.58 2.68Everest (56) 402 304 (1.00) 7.07 5.59IPC (549) 130 195 (11.34) 2.69 4.04Max Re 18 47 84 0.36 0.96 2.08Montpelier (692) 138 307 (10.49) 2.03 4.58PartnerRe (43) 334 339 (0.79) 6.17 6.30Platinum (35) 35 95 (0.80) 0.78 2.04PXRE (257) (20) 59 (10.02) (1.49) 2.97Renaissance Re 1 (71) (58) 445 (1.01) (0.84) 6.27White Mtn 257 254 85 23.73 24.44 18.08XL Capital (470) 838 686 (3.39) 6.05 4.97

1. Restated quarterly data not publicly available for 2003 2. Basic EPS data only available

Q3 2005 Q3 2004 Q3 2003

BOOK VALUE MARKET VALUE BOOK VALUE MARKET VALUE BOOK VALUE MARKET VALUE

ACE 35.68 47.07 33.37 40.06 29.97 33.08Arch 66.23 49.59 61.27 38.94 58.15 33.07Aspen 17.65 29.55 20.49 23.01 – –AWAC 10.06 n/a 13.64 n/a 12.67 n/aAxis 20.29 28.51 20.22 26.00 17.37 24.95Endurance 26.00 34.11 28.71 32.15 24.85 29.20Everest 63.62 97.90 62.99 0.00 54.44 75.16IPC 22.30 32.65 34.01 38.01 31.07 35.04Max Re 20.69 29.55 18.54 20.00 17.46 17.02Montpelier 12.69 24.85 26.89 36.68 24.76 30.15PartnerRe 57.07 64.05 53.18 54.69 46.18 50.67Platinum 24.75 29.89 25.30 29.28 23.87 28.10PXRE 14.96 13.46 39.53 23.41 42.63 17.95Renaissance Re 35.26 43.73 35.05 51.58 30.97 45.63White Mtn 360.40 604.00 337.61 526.00 310.43 397.03XL Capital 50.09 68.03 53.18 73.99 53.92 77.44

1. Book value has been calculated by dividing shareholders’ equity at Sept 30, 2005 by shares outstanding at Sept 30, 2005

Company name Key investors Expected capital base ($US)Amlin Bermuda Ltd Amlin plc 1 billionAriel Re Consortium led by Don Kramer 0.75 billion – 1 billionArrow Capital Reinsurance Co Ltd Goldman Sachs n/aFlagstone Re West End Capital 1 billionHarbor Point Re Ltd Chubb Inc and Stone Point Capital LLC 1.3 billion – 1.5 billionHiscox Insurance Company (Bermuda) Ltd Hiscox plc n/aLancashire Insurance Co Ltd Cypress/Capital Z 1 billion – 1.5 billionNew Castle Re Citadel Investment Group plc 0.5 billionOmega Specialty Insurance Omega Underwriting Holdings plc 0.16+ billionRockridge Re Ltd Montpelier Re Holdings Ltd and 0.091 billion

West End Capital Blue Ocean Re Montpelier sponsored vehicle 0.5 billionValidus Reinsurance Ltd Aquiline Capital Partners (with Jeff Greenberg) 1 billion – 1.5 billionCyrus Re Highfield Capital will provide quota share 0.5 billion – 1 billion

reinsurance to XL Capital

2005 NEW VENTURES & EXPECTED CAPITALISATION

COMPARISON OF BOOK VALUE & MARKET VALUE PER SHARE ($)

CUMULATIVE YEAR TO DATE EARNINGS DATA

QUARTERLY EARNINGS (LOSS) DATA

The Bermuda market has gener-ally welcomed the decision bythe US Congress to extend the

Terrorism Risk Insurance Act foranother two years. Renewal ofTRIA was considered vital toAmerican business and the insur-ance industry.

TRIA was originally enacted inthe wake of 9/11 as a federal back-stop of temporary reinsurancerelief to stabilise the market andhelp insurers manage ongoing ter-rorism risk. Under the Act, insur-ers were required to cover terror-ism claims up to a certain point,based on their annual earned pre-miums in certain commercial lines.The US Government acted as areinsurer, paying 90% of claimcosts up to $100 billion.

The Terrorism Risk InsuranceExtension Act 2005 contains newprovisions that give the private sec-tor insurance industry more respon-sibility. It significantly reduces thebackstop, increasing the “triggerpoint” for TRIA protection from $5million to $50 million in 2006 and$100 million in 2007.

The Senate bill also removescertain lines of insurance, such ascommercial automobile and pro-fessional liability, from TRIA pro-tection and does not add group lifeinsurance to the lines covered.Meanwhile, the House FinancialServices Committee passed theTerrorism Risk Insurance RevisionAct, which would also create “silos”to segregate coverages such asworkers’ compensation and grouplife and subject them to differentdeductibles before an individualinsurer could tap the backstop.Both bills call for a special com-mission drawn from all areas of theinsurance business to come upwith long-term solutions.

One of TRIA’s original goalswas to give the insurance industry

time to build the capitalnecessary to handle majorterrorism losses. But thathasn’t happened and ana-lysts say if TRIA had notbeen extended, the lack ofmarket capacity would havemeant a critical loss of rein-surance coverage.

The estimated $1.8 bil-lion capacity currentlyavailable in the standaloneterrorism insurance market(companies offering terror-ism cover separate from all risksplacements and regardless ofTRIA protection) doesn’t comeclose to replacing the $100 billionfederal programme, which ofcourse is free for insurers. Indeed,some industry figures, like JohnCharman, CEO of Bermuda-based terrorism-risk specialistAXIS Capital, think TRIAinhibits the growth of the privatemarket and he had forecast “anexplosion of activity” if it was notextended.

Others believe the extensionwas necessary to give the market

more time to mature. At present,Bermuda alone provides $250 mil-lion in terrorism capacity in addi-tion to the $225 million providedglobally by ACE and AIG. Lloydsprovides around $350 million withBerkshire Hathaway supportingpolicies up to $1 billion.

Jon Hughes, a terrorism under-writer and VP at Bermuda-basedMontpelier Re, which has around$50 million available to underwriteterrorism risks, said: “Capacity hasgrown since 2001 but it is unlikelythat the standalone terrorisminsurance market will have suffi-

cient capacity to satisfy theincrease in expected de-mand [without TRIA].

“In addition, certain risksare still beyond the scope ofthe commercial market.Nuclear, biological andchemical terrorism can rep-resent a virtually limitlessexposure, which insurers arerightly averse to cover; how-ever, it is illegal to excludethese or any other perilsunder workers’ compensa-

tion. Following on from this, someWCA insurers may feel they havelittle choice but to non-renewsome policies because they wouldnot have sufficient reinsuranceprotection given the unlimitedstatutory nature of the originalpolicies. As others have comment-ed with regard to WCA, ‘a marketsolution can’t work when you don’thave a free market. Insurance is aregulated business’.”

Henry Keeling, CEO of XLCapital’s Reinsurance Operations,agrees. “Since we do not know thebounds of terrorism … this risk

IN DEPTH

TRIA and error?BACKSTOP IS EXTENDED BUT MAJOR CONCERNS PERSIST. CHRIS GIBBONS REPORTS

[ 10 ]

Henry Keeling: lack ofspread is yet anothersignificant problem

Jon Hughes: certainrisks are beyond thescope of the market

‘Nuclear, biologicaland chemical terrorism can represent a virtuallylimitless exposure,which insurersare rightly averse to cover’

[ 11 ]

IN DEPTH

He’d already made more comebacks than Frank Sinatra, and when reinsurance veteran Don Kramer announced his retirement from ACElast May, just about everyone in the industry took it with a pinch of salt.

Even he jokes: “I failed retirement 101.”So it was no surprise when the 67-year-old revealed in October that he

was to form a new Class 4 reinsurer, Ariel Reinsurance Company, the first ofthe “class of 2005” startups keen to fill the capacity vacuum created by the

severe hurricane losses of Katrina, Rita and Wilma.Fittingly, his email moniker is “fastcat”.

Mr Kramer had been doing some consultingsince retiring from ACE but it was not enough, hesays, “to sap my energy, so when this opportunitycame along, I couldn’t resist.

“The storms created a massive supply/demandimbalance and the existing companies don’t havethe appetite for increased exposure. The reallygood companies took a loss and went on abouttheir business. The not-so-good ones took losses,got themselves downgraded and found themselvesup against some serious pressure from the ratingagencies. It was clear they weren’t going to haveany appetite for additional catastrophe exposure inthe new year so there was room for myself and, it

seems, up to a dozen other players to come in. We’re not taking marketshare from anybody; all we’re doing is filling the increased demand.”

The last time Mr Kramer “retired”, he formed Tempest Re the day afterleaving NAC Re, which he had founded and which was later bought byBermuda-based XL Capital. Tempest, which had been formed in 1993 in thewake of Hurricane Andrew, in turn was bought by ACE. In 2001, he was akey figure in helping ACE raise more than $1 billion in new capital to meetthe demand for reinsurance after 9/11. This time round he raised a billionrelatively easily: by mid-November, Mr Kramer revealed that Ariel was over-subscribed.

“The amount of capital coming into the Bermuda market and the numberof Lloyds syndicates getting Bermuda affiliates is a testament to how impor-tant Bermuda is now,” he says. “It is currently the most important market foranyone placing large risk.”

Inevitably, the company name has Mr Kramer’s personal stamp on it. Akeen supporter of the arts (he counts movie star Elliott Gould among hislong-time friends and is chairman of the Bermuda Dance Foundation), MrKramer named Tempest Re after The Tempest, Shakespeare’s play inspiredby a 1609 Bermuda shipwreck. Ariel, named after the sprite in the sameplay, continues the Shakespearean theme.

Ariel is being built from the remnants of Rosemont Re, which Mr Kramer

will continue to evolve and proba-bly stay one step ahead of what wethink will happen next.”

ACE CEO Evan Greenberg,writing in the Financial Times, stat-ed bluntly: “Catastrophic terrorismrisk is uninsurable because its truedimensions are incalculable,whether you live in London,Madrid or New York. Insurancecompanies such as my own are will-ing to do their part but that is afraction of what is needed. Thispresents the US federal governmentwith a stark choice: continue TRIA,or something like it, or let it lapse,compel the private sector to go italone on terrorism and watch as oneinsurer after another reduces expo-sure in the largest US cities andcurtails coverage, leaving America’sworkers and property exposed tofinancial loss.”

Ultimately, he wrote, “TRIA isnot an insurance issue — it is aneconomic and national securityissue. Under the current USGovernment programme, terrorisminsurance is a risk shared by thepublic and private sectors. TRIAprotects the insurance industryfrom the risk of ruin over a cata-strophic terrorist event. Even withits backstop protection, however,the industry assumes more than$30 billion in terrorism exposure.”

Without TRIA, according to MrKeeling, the market “would beunable to determine a price for thisuncertainty. All we can do is deter-mine a level of exposure that we areprepared to bear, and charge forassuming this risk. The result is thatthe few commercial insurers pre-pared to risk funds are only preparedto do so at prohibitively high levels.

“Until terrorism cover becomesmandatory and clear limits are seton (re)insurer exposure, I believethere will be no chance of a broadcommercial market developing.Even if steps such as public/privateschemes for terrorism were intro-duced, the reinsurance marketcould never provide 100% of thenecessary capacity due to the mag-nitude of a terrorist attack.”

Given that Bermuda has madeits name by plugging catastrophecapacity shortfalls, why has it notbeen able to do so for terrorism?

“The market has grown to alevel where this new trigger pointwould be practical,” saidMontpelier Re’s Mr Hughes.“Anticipated required capacity

would be in excess of $100 billion.Not all reinsurers are comfortableoffering significant terrorismcapacity due to the difficulty inassessing and pricing the exposurerepresented by terrorism with themodelling of this unique exposurestill in its infancy.

“Capital markets generally do notlike dynamic, volatile exposures liketerrorism where the peril changesvery quickly, often within a year’spolicy. The current estimated capac-ity of $6 billion is a reflection of this.[However] I would expect Bermudato show increasing capacity in 2006and beyond, especially with theintroduction of alternative capitalproviders such as hedge funds.”

Mr Keeling said the lack ofspread is also inhibiting the market.“What we have is a situation wherefew businesses are taking out coveragainst terrorism, but a massivemajority of those that do are situat-ed within a few miles of each otherin New York, Washington andBoston. With a lack of spread, it isalmost impossible for the insurers tomitigate their exposures: if one ofthese centres is attacked, the insurerswill face disproportional pay-outs.

“Furthermore, with take-up solow, there has been a very limiteddemand for TRIA, so the argumentbecomes circular: commercialinsurance has failed to developbecause of TRIA, thus limitingdemand for TRIA.”

Meanwhile, a recent report by theRand Corporation said failure toextend TRIA would have con-tributed to the problem of uninsuredlosses instead of reducing it. It claimsthat US Government concerns aboutits financial liability under TRIA areunwarranted and projected that onlythe most devastating terrorist attackswould trigger the federal backstop.

Rand added that TRIA is notthe taxpayer bailout of the insur-ance industry some critics haveclaimed and that reducing unin-sured losses may ultimately reducetaxpayer liability. “As demonstratedmost recently with HurricaneKatrina, governments often feelcompelled to compensate unin-sured victims after a disaster. Assuch, the expectation of post-disas-ter assistance can actually under-mine the demand for insuranceagainst future catastrophes. Thus,facilitating the purchase of insur-ance may decrease the ultimate tax-payer burden.”

Perfect time,perfect placeSO DON KRAMER RETURNS FROM RETIREMENT,HUNGRIER THAN EVER BEFORE

Don Kramer:“We’re not takingmarket share fromanybody”

and a major private equity group(unnamed at press time) boughtfrom troubled parent companyGoshawk Insurance Holdings for areported $2.5 million in October.Rosemont had gone into runoffafter a ratings downgrade when itfailed to replace capital drained byheavy Q3 hurricane losses.

Ariel is to take over Rosemont’srenewal options and much of theinfrastructure at its offices in QueenStreet, Hamilton, but not its out-standing claims. “Rosemont’s prob-lems stemmed more from lack ofsize after the hurricanes,” MrKramer says. “The problems of theirparent weighed against them interms of the ability to raise capital.”

By buying Rosemont’s infra-structure, Ariel has the best of bothworlds. As Mr Kramer points out:“Bermuda is resource strainedalready. Space is at a premium,people are at a premium, plus thereare a whole lot of technical issues.Here we have all of the computer

facilities, accounting facilities, dataprocessing capabilities and all thepeople to function as a going con-cern. Setting up new is daunting.I’ve done it once and I know howdifficult it is. Having this already inplace just allows us to catch the2006 season. The ability to hit the

decks running becomes exceedinglyvaluable.

“We brought enough capital toget financial credibility, a manage-ment team that has an outstandingrecord and we put that over anexisting infrastructure that is verycompetent.”

Former Rosemont CEO RussellBrooke and CFO Jonathan Beckwill be employed as COO and CFOrespectively at Ariel. Also on boardare “special advisor” George Rivas,who founded Tempest with MrKramer, and former ACE BermudaPresident Mark Herman, who will bePresident of the new company. MrKramer will be Chairman and CEO.

“My real strength has alwaysbeen on the strategic end,” says MrKramer. “I seem fortunate to findmyself in a good spot at opportunetimes and this opportunity was solarge. But I believe that propertycatastrophe as a sole business isnot really a great strategy. You’vegot to diversify and I’ve managedto recruit a team willing to go outand do both.”

Mr Kramer expects Ariel tobroaden into some of the liabilityclasses as well as direct insuranceunder a team led by Mr Herman.“Beyond that we’ll look to try to getaccess to both US and UK marketson a direct basis,” he says.

Surveying the current influx ofstartups, Mr Kramer sees inevitablecomparisons with the class of ’93.“Then there were eight companiesformed within a few weeks of eachother with almost identical sponsorsand the same mission in the samemarket. And yet, with the benefit of12 years of hindsight, we’ve hadeight different outcomes and therange between the best and theworst is absolutely amazing.

“The difference was manage-ment strategy. One company wasfocused on financial returns so theypulled as much money off the tableas they could. Another was highlyleveraged, took risk but managedthat risk very effectively so they hadthe best ROE. Tempest wasfocused on diversification and theresult was we couldn’t do it on ourown and we merged with ACE.

“Given the number starting uptoday, I think we’ll see the samedifference in outcomes and I’d liketo think, being highly competitive,we’ll be at the top of the range.”

— Chris Gibbons

[ 12 ]

IN DEPTH‘The amount of capital coming into

the market … is a testament to howimportant Bermuda is now. It is

currently the most important marketfor anyone placing large risk’

As the largest and most complexinsured loss ever experienced bythe global property casualty

industry, Hurricane Katrina’srepercussions will go much deeperthan just company balance sheets.

Many observers say the lessonslearned from Katrina will affecteverything from modelling to riskmanagement to ratings. It was, asone analyst called it, “a market-mov-ing event” that virtually paralysedsome of its biggest players as theirsophisticated computer modelsfailed to accurately predict losses.

In a recent interview withReinsurance, Kenneth LeStrange,Chairman & CEO of Bermuda-based Endurance SpecialtyInsurance, said he believed therewould now be an “extremelydynamic” change in market condi-tions as companies reassessed theirmodels. The industry is underincreasing pressure from ratingagencies to ensure both more accu-rate and efficient modelling andincreased capital to cover big catas-trophe losses.

He said: “[It] revealed somesevere deficiencies in the modelsthemselves and also the way theyare used. The models are tools.They do some things very well.And it is well known there areother things they don’t do verywell. Some organisations did notpay attention to the fact that themodels are only limited in theirutility for certain exposures, likeflood or business interruption. Butapart from that, even organisationsthat compensated for those gaps… found that whatever they didwas insufficient.

“No company performed asexpected in this event and that isreally the bracing part of Katrina,even more than the size of thefinancial loss. What implicationsdo we draw from the fact that we

had a much larger loss as an indus-try from this kind of an event thanwe expected? That realisation, andthe reaction to it by the differentcompanies in our industry, is goingto create an extremely dynamicpicture in terms of insurance andreinsurance market conditions aswe move into 2006.”

Leading modelling firm RMS,which recently established anoffice in Bermuda, said Katrinahad raised some fundamentalissues about hurricane coverage,including whether hurricanes caneven be covered by the privatemarket alone.

Katrina’s complexity insurance-wise was that, aside from the hur-ricane damage itself, much moredevastation was dueto storm surges andfloods, claims thatmay not have beenbuilt into models.

In a post-Katrinareport, RMS said theindustry needed toexamine closely howit considers stormsurge and flood lossesin its hurricane lossscenarios. “The ambi-guity of what isintended to be cov-ered relative to what actually getspaid reflects the weaknesses of asystem in which coverage is pro-vided for only certain agents of thehurricane peril. In this environ-ment, claims payment dependsheavily upon trying to determinethe agent of damage.

“What happened in HurricaneKatrina has helped define a newparadigm for understanding SuperCat losses, suggesting a new over-arching methodology to connectprocesses that were previouslyincluded as ‘exceptions’ withincatastrophe models. Instead of see-

ing fire following earthquake anddemand surge as add-ons to stan-dard models, these can be integrat-ed as core components of a holisticSuper Cat risk assessmentmethodology.”

RMS said Katrina, and the cat-astrophic flooding that occurred asa result of the storm surges, hadunderlined the potential for tech-

nological failures tri-ggered by naturaldisasters, such as oiland chemical spills,nuclear power stationfailures or collapses.

The flooding ofNew Orleans alsoshowed how eventsthat had previouslybeen considered in-dependent becomeclosely correlated inthe case of a SuperCat. In RMS’s US

Hurricane Model, extreme surgeswere modelled extending into NewOrleans (for Category 3 stormsand above) but these assumed thatthere would be no significantbreaching of the city’s levees andthat flooding would be limited bythe city’s pumps.

However, in Katrina, the pump-ing capacity was non-existentbecause the personnel that operat-ed the pumps had been evacuatedand then the storm knocked outthe electrical power. And when thecity flooded after the evacuation,the pump operators could not

return to their stations.“Therefore,” said RMS, “all

those factors that led to the failureof the pumps turned out to behighly correlated with the catastro-phe event and its flood conse-quences. This has important les-sons for risk assessment at otheractive flood defence systems pro-tecting major cities, such as theThames Barrier protecting centralLondon from catastrophic winddriven storm surge floods. Giventhese lessons, Hurricane Katrinawill expand the scale of risk man-agement for Cat following Catevents in the future.”

The report added that Katrinawould certainly lead companies toaddress issues such as the manage-ment of multi-line accumulation,already an industry priority after9/11; improved accuracy of data oninsured exposures; more differentiat-ed analysis and underwriting of indi-vidual risks; taking a more scientificand strategic view of hurricane activi-ty; and building a more holisticassessment of their portfolio exposureto extreme Super Cat events intotheir risk management processes.

RMS said the hazard and lossexperience of Katrina and otherrecent hurricanes would be incor-porated into future catastropherisk models of “increased precisionand differentiation. The unprece-dented amount and quality of lossdata from these events provides awealth of information for detailedmodel calibration and expansion.”

IN DEPTH

MANY PRE-KATRINA CONCEPTS NO LONGER HOLD WATER

“We’ve done a computer simulation of your projectedperformance in five years. You’re fired.”

‘No companyperformed asexpected inthis eventand that isreally the

bracing partof Katrina’

Without a trace

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IN DEPTH

According to Jeremy Cox, therecent overhaul of his insurancedepartment at the Bermuda

Monetary Authority (BMA) showsthe island is serious about maintain-ing international standards andsharpening its supervision.

With post-Katrina startups setto add to the existing 1,300-pluscompanies and $235 billion inassets it already regulates, theBMA’s insurance wing has bolstered

staff, revamped its structure andrevised and strengthened its regula-tory framework.

It now includes a unit, led byDeputy Director Shelby Weldon,dedicated to onsite inspections, andanother, headed by co-DeputyDirector Shanna Lespere, concen-trating on licensing and authorisa-tion. By 2008, Mr Cox will have aninsurance team of 40, up from fourin 1992.

Mr Cox said these measures arenecessary due to tougher interna-tional standards and the more com-plex company structures now seen atthe licensing stage. Amendments tothe Insurance Act and the issuing ofguidance notes on corporate gover-nance and market conduct wereprompted by reviews of Bermuda’sfinancial services industry by theIMF and KPMG.

“International regulatory stan-

dards have changed significantly,” heexplained, citing in particular theInternational Association ofInsurance Supervisors’ standards forsupervision of reinsurers in 2003.Monitoring such events and adjust-ing supervision of the Bermuda mar-ket based on industry changes areessential for credibility, Mr Cox said.

One example: “Over the last twoyears, we have added a more enhancedmonitoring process that is beingimplemented by the BMA itself[rather than by approved auditors] forthe Class 4 reinsurers we considerhigher from a risk impact perspective.

“We’ve had no problem gettingthe information needed to do ourjobs,” added Mr Cox. “And so far sogood: we haven’t found any issues.”

Now it’s super-vision

With sustainable development high onthe Bermuda Government agenda,some outside the insurance industryare concerned that the recent influx ofstartups will place even greater strainon the island’s infrastructure. ButJeremy Cox believes people shouldnot be too concerned.

“Most of the new entities you sawpost-9/11 were leaner and meaner.They are much more mobile, anduse technology to its full potential.You don’t necessarily see companiesforming today that are going to havethe significant impact that the ACEsand XLs had. [It’s] not because theyare ‘here today and gone tomorrow’but because that’s a model thatseems to work; they are able to takeadvantage of opportunities muchmore quickly.

“I don’t see the new group ofcompanies being much different. Ithink in the early years they will takeadvantage of a lot of the sophisticat-ed infrastructure that has been builtup, such as the back office servicesof some of the managers that arehere. They will take their time build-ing their operations up and that timewill allow Bermuda’s infrastructure todevelop appropriately as opposed tobeing stretched to the point where itbecomes a problem.”

Room for lean,mean startups

BERMUDA IS INVESTING HEAVILY IN HIGHER QUALITY REGULATION. JEREMY COX EXPLAINS

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PEOPLE

ACE: The ACE Group of Companies has announcedthat Bill O’Farrell, Senior Vice President,Reinsurance Recoverables, will assume the post ofChief Reinsurance Officer. Reporting to Brian Dowd,Chairman & Chief Executive Officer of ACE USAand Chairman of ACE Westchester Specialty Group,Mr O’Farrell will be responsible for overseeing corpo-rate reinsurance programmes for the ACE Group.AWAC: The following underwriters have been pro-moted from Assistant Vice President to VicePresident: Sal Cantarella, Tracey Gibbons, ScottKreuzer, Paul Manguson and Lorene Phillips.Meanwhile, Raymond Tannock is promoted fromAssistant Underwriter to Underwriter.R E N A I S S A N C E R E :Following the resignationof James Stanard, therehave been considerablemanagement changes atRenaissanceRe: see page16 for details of severalsenior appointments. Mean-while, the company ann-ounced that COO &CFO John Lummis hasindicated his intention toretire at the end of hiscontract term on June 30,2006. In addition, MartyMerritt, who was Controller, has left RenRe.PLATINUM: Platinum Underwriters Holding hasappointed Michael Price as its President & ChiefExecutive Officer. Having served most recently as thecompany’s Chief Operating Officer — and before thatas President & Chief Underwriting Officer ofPlatinum Underwriters Reinsurance — Mr Price willsucceed Gregory Morrison, who has been namedVice Chairman of Platinum’s board of directors. Also,Platinum announced that it has extended the term ofits Chairman of the Board, Steven Newman, untilNovember 2007.OIL: Douglas Kline has retired as Senior Vice

President & Chief Operating Officer of Oil Insurance.He served 12 years at OIL after a long career at SunCo. Mr Kline will be succeeded as COO by GeorgeHutchings, who has also assumed responsibility forsEnergy Insurance, a unit of the OIL Group ofCompanies. Mr Hutchings previously was SVP andCOO of Oil Casualty Insurance. Succeeding him inthat post at OCIL will be Jerry Rivers, formerExecutive Vice President and Director of Sales &Marketing at Bermuda-based brokerage the Park Group.WHITE MOUNTAINS: Ray Barrette has retiredas Chief Executive of Bermuda financial services andinsurance group White Mountains. He has beenreplaced by the head of the group’s reinsurance units,

Steven Fass. Mr Barr-ette made a personal deci-sion to retire and had notbeen asked to leave, WhiteMountains said in a state-ment. He also steppeddown from the board. MrBarrette will, however,continue as lead director ofMontpelier Re Holdings, aBermuda reinsurer thatWhite Mountains helpedto form in 2001. Mean-while, White Mountainshas elected Allan Waters

as a Director of the company. Mr Waters is Founder &Managing Member of Mulherrin Capital Advisors, afinancial services consulting firm with primary emphasison the property and casualty insurance business.INTEGRO: Ben Fidlow has been appointedPrincipal & Head of the Risk Modelling and ActuarialPractice at Integro (Bermuda). Mr Fidlow was previ-ously Vice President & Senior Actuary for AXISCapital. Meanwhile, George Leite has joinedIntegro as Principal and Head of the ManagementRisk Practice for the Bermuda office. He was former-ly Senior Vice President of Marsh Global Markets(Bermuda).

Bill O’Farrell steps upRESPONSIBILITY FOR ACE GROUP’S CORPORATE REINSURANCE PROGRAMMES

Marc Grandisson (above)has been promoted toChairman & CEO of ArchWorldwide Reinsurance Group.Mr Grandisson, who succeedsDwight Evans, began as anactuarial assistant withTillinghast-Towers Perrin beforerising to VP for non-traditionalunderwriting with F&GReinsurance. At BerkshireHathaway, he was a VP andactuary until founding ArchReinsurance, a unit of ArchCapital Group, in 2001 with MrEvans, Paul Ingrey and JohnRathberger.

Dinos Iordanou, President &CEO of Arch Capital, said: “Ourability to promote from within isan indication of the depth andstrength of the managementteam we have built at Arch.Under the guidance of Marc andthe other members of the seniorteam, the strategic direction ofthe company will not change.”

Nicholas Papadopoulo,the current CUO of Arch Re,succeeds Mr Grandisson asPresident & CEO of Arch Re.Maamoun Rajeh becomesCUO and Matt DragonettiHead of US Property.

Archsupportsits own

Please send Bermuda-related awards, appointments and promotions with digital pictures to cgibbons@cwbda.bm, writing “BIQ People” in the subject line

“I’d like you to head up the new team of recently let go.”

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QUARTERLY QUESTION

RenaissanceRe will surely look back at2005 as an annus horribilis. InNovember, CEO and founder James

Stanard, one of the most respected exec-utives in the Bermuda market, resignedamid finite risk-related probes and pos-sible civil charges from the SEC.Earlier, RenRe had to restate its figuresfor 2001-2003 due to accounting errorsassociated with its use of finite insur-ance contracts with Inter-Ocean, a rein-surer it part-owned.

Following Mr Stanard’s resignation,another RenRe founder, Neill Currie,52, was made CEO with independentactuary and consultant James Mac-Ginnitie, 67, as non-executive Chairman.

“Jim worked tirelessly to build thiscompany into an industry leader, andassembled a first-rate team,” said MrMacGinnitie. “We are fortunate to havein Neill an executive with the industryexperience, knowledge of Ren-aissanceRe and talent to lead this com-

pany into the future. Neil played a cen-tral role in founding this company andestablishing its business platform, andthe board is confident in his ability tolead RenaissanceRe to new levels ofgrowth and success.”

Mr Currie added: “This is an impor-tant time in our industry; a time whenthe expertise and industry-leadingunderwriting and services we offer arein increasing demand among brokersand clients.

“RenaissanceRe has an extraor-dinary breadth of people, expertiseand proprietary systems to meetthese needs, together with a provenbusiness model that has led thecompany to industry-leading resultsover the past decade. Since Irejoined RenaissanceRe [in mid-2005], I have been extremelyimpressed with the depth of talentand commitment throughout itsranks.”

A l r e a d y,it seems, thegroup’s luck isimproving. InN o v e m b e r ,Renaissance-Re Holdingsrevised its pre-viously reported third-quarterresults, cutting net loss for the firstnine months of 2005 by $34.8 mil-lion to $71 million.

According to a company state-ment, the loss was reduced due to “areinsurance recovery within (Ren-aissanceRe’s) reinsurance segmentthat was triggered by the publicationof a final third-party industry lossestimate”.

As a result, the company’s netloss attributable to shareholders forthe first nine months of the year hasbeen reduced from $105.8 million to$71 million, compared with a restat-ed loss of $58.4 million in the year-earlier period.

Meanwhile, the company hasnamed Kevin O’Donnell as Pres-ident of Renaissance Reinsuranceand Ian Branagan, currentlyManaging Director of RenRe’sEuropean operations in Dublin, ashead of the group risk modellingunit in Bermuda.

Launching RenRenReCAN RENAISSANCE LIVE UP TO ITS NAME AND COME BACK CONFIDENTLY? CHRIS GIBBONS REPORTS

© 2005 ACE Limited, ACE Group, Insuring Progress and the ACE logo are trademarks or registered trademarks of ACE Limited and/or its affiliates in the U.S. and/or other countries.

www.acelimited.com

PROGRESS.NOW INSURED LOCALLY.

The history of the world is the history of progress. Progress in the face of risk.Progress achieved by people with bold ideas and unwavering confidence.

We don’t come to work in the morning just to write policies. We come to work to havean impact by taking risks that others won’t. This is what makes us different.

The ACE Group was founded in 1985 to provide Excess Casualty and D&O coverageat a time when other carriers would not. Twenty Years later, ACE is one of theworld’s leading global commercial property and casualty companies with offices in53 countries and correspondents in another 92. We are A+ rated by Standard &Poor’s and A.M. Best as well as a component of the S&P 500 stock index.

ACE is in the business of working with global and national clients on a local level all over the world. We provide specialized coverages in marine, aviation, property,energy, directors and officers, construction, mortgage disaster liability, casualty, andaccident and health.

We thrive on creating innovative ways to insure revolutionary ideas. That’s the rea-son people want to work with us. Risk does not scare us. It inspires us to work evenharder.

Because we know that when we take on the responsibility of risk, our clients can takeon the responsibility of innovation, accomplishment and change.

In a word, progress.

Ace_Globe_bdaquarterly 6/14/05 2:57 PM Page 1

Neill Currie believestalent, commitmentare already in place

‘Alreadyits luck isstarting tochange’

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