Bermuda’s “class of 2001” sees sunny days

Bermuda start-ups in the post-9/11 environment have benefited from strong pricing and a lack of legacy claims issues, according to a new report from Fitch Ratings.
In 2003, the “class of 2001”, which includes Axis, Allied World, Endurance, Montpelier and Olympus Re, brought in net premiums of US$8.9 billion and produced net income of nearly US$2 billion. At yearend, shareholders’ equity stood at US$10.5 billion for the group.
The new Bermuda insurers have capitalized on the hard market, on their lack of exposure to legacy issues such as asbestos, and relatively low catastrophe losses since 9/11. “To date, the start-ups have made few apparent managerial missteps,” notes the Fitch report. “In particular, our market intelligence generally indicates that these companies have not attracted premium through overly aggressive pricing.” Notwithstanding significant cat losses, the group should post excellent results for at least another half year, Fitch predicts.
Whether this impressive track record can be sustained is another question. As rates soften, Fitch expects the best part of the cycle has already passed and ominous signs may lurk in the movement of some start-ups into new lines of business as original lines see declining margins. The question is whether the start-ups have the underwriting expertise to make this transition.
They certainly have the capital to write a great deal of business. The average equity of the start-ups is US$1.75 billion, and the ratio of net written premium to tangible equity is well below one-to-one.
Fitch cautions against using this capital to fund acquisitions, a mistake made by companies in the late 1990s leading to disastrous results. The rater even goes so far as to say that the start-ups could stand to lose some capital. “Fitch believes rational pricing that adequately covers expected loss costs is ultimately a better means to achieve insurer financial strength than inadequate pricing supported by lots of capital.”