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By JONATHAN KENT, a Bermuda-based writer.

HAMILTON, Bermuda--It is often said that Sept. 11, 2001 was "the day the world changed." That view certainly rang true in Bermuda. In the three months after the World Trade Center in Lower Manhattan tumbled down under terrorist plane attacks, more than $11 billion in capital poured into the island's insurance and reinsurance market as a slew of new companies were set up to meet the needs of insurance buyers.

Of the companies that formed to take advantage of the hard insurance market that followed Sept. 11, most have survived and thrived. AXIS Capital, Arch Capital, Allied World Assurance Company, Endurance Specialty Holdings and Montpelier Re are all today established companies that have been successful to varying degrees in building their books of business and shareholder wealth.

Two others, Goshawk Re and Olympus Re, were critically wounded by the 2005 losses wrought by hurricanes Katrina, Rita and Wilma. Goshawk Re, which had changed its named to Rosemont Re in 2004, went into run-off in 2006 and was acquired by Enstar Group two years later. Olympus, sometimes described as the first "sidecar," which was set up by White Mountains Insurance Group, saw all of its original investors' capital wiped out by Katrina, Rita and Wilma. DaVinci Re, set up by RenaissanceRe to boost its property and catastrophe reinsurance capacity, is still going strong and raised $100 million in new capital in June 2011.

AXIS is the largest of the Bermuda group celebrating a decade in business this year. Last year, it wrote $3.75 billion of gross premiums and ended 2010 with shareholders' equity of $5.62 billion. AXIS CEO John Charman, an outspoken Briton and industry veteran of 40 years spent mostly in the Lloyd's of London market, recalls how his company was born. Charman was on a business trip in Thailand on Sept. 11. After dinner, he returned to the Oriental Hotel in Bangkok at around 8:45 p.m. "All the staff at reception were crying and I couldn't understand why," Charman said. "I could not get them to explain why. They just said 'America's at war.' "He went up to his room, turned on CNN just as the second plane hit."From that moment, my life changed," he said.

At the time, Charman was working as an adviser to Marsh & McLennan. Amid paralyzed financial markets, fears over the ability of insurers to pay claims and a world in shock, Charman recognized an extraordinary business opportunity. He managed to get back to New York by September 19 and recalls shaking hands on a deal to create AXIS with then-Marsh CEO Jeffrey Greenberg in the broker's midtown offices, as smoke still rising from Ground Zero was visible through the south-facing window. Marsh itself was coming to terms with the loss of 295 employees in the attacks.

Charman then set about recruiting backers, working with Charles Davis, then president of Marsh's private-equity arm MMC Capital and the then Marsh Chairman Bob Newhouse.

They raised $2.5 billion in the space of two-and-a-half weeks. Charman didn't think he could utilize all of it with the new company, so he started AXIS with $1.7 billion. "Had I known what an extraordinary opportunity it was, I would have put it all to use," he said.

Charman believes that the aftermath of Sept. 11 presented the best opportunity he has ever seen for companies to rapidly establish a broad portfolio of business, diversified by business line and geography, a process that would normally take a start-up five to seven years to achieve, by his estimation. "There was huge uncertainty in the marketplace," Charman said. "Clients were so concerned about the solvency of existing carriers that they wanted new unencumbered players to come in. We achieved in two years what it took ACE and XL 15 years to do. That was the nature of the opportunity.

"It took about a month to get licensed by the Bermuda Monetary Authority, who understood the need to get it through in a timely manner, because there was a critical need for more capacity in the market," he said. It took AXIS some three months to get European Union regulatory approval - and another five years to get all the necessary U.S. state approvals in place, Charman said.

Endurance CEO David Cash, who started out as his company's chief actuary just three months after Sept. 11, said the extraordinary opportunity for start-ups was the result of two major factors. First, there was the complexity of the loss. Property, aviation, workers' compensation, terrorism, business interruption life and personal accident lines were all hit at the same time. Second, the attacks occurred at the end of a prolonged soft market, which had weakened balance sheets and reserve levels.

"The combination of these two factors resulted in a perfect storm that put incumbent companies on the back foot and provided the Class of 2001 with a five-year window to build up their companies free from excessive competition," Cash said.

Cash believes that the arrival of the Class of 2001 upgraded Bermuda into a genuine property and casualty marketplace, similar in stature to Lloyd's. "This in turn increased the amount of insurance and reinsurance business that was brought to the island and that in turn attracted further entrants -- in effect, success bred success," he said.

"Beyond their impact on Bermuda as a marketplace I would also say that the Class of 2001 also ushered in the end of the era of U.S. reinsurers.Today there are only two large U.S.-based reinsurers left, Transatlantic Re and Berkshire Hathaway soon that number will be down to one.

"By virtue of their existence in Bermuda, I feel that Class of 2001 tipped the scales away from the casualty-focused U.S. reinsurance model towards the catastrophe and volatility focused model of Bermuda reinsurers that now tends to dominate the practice of reinsurance globally," Cash said.

Endurance's mix of business, for example, is about one third short-tail property and catastrophe, one third specialty (including aviation, personal accident and crop insurance) and one third casualty, as Cash described at a conference in Bermuda last December. Companies with a heavy emphasis on casualty business will feel a more pronounced impact from the insurance cycle, Cash said.

Endurance started out with $1.2 billion in capital under the leadership of Kenneth LeStrange, the former chairman and CEO who retired in March this year. It has evolved through acquisitions and global expansion into a diversified insurer and reinsurer which wrote $2.05 billion in gross premiums last year and ended 2010 with shareholders' equity of $2.85 billion.

Arch Capital CEO Constantine Iordanou was working for Zurich in 2001 and recalls his horror at witnessing the attacks on the Twin Towers from 1 Liberty Plaza, almost next door. In January of the following year he was put in charge of Arch's U.S. insurance company and became the Bermuda holding company's CEO in August 2003.

Iordanou said that previous waves of companies setting up in Bermuda after market dislocations had established the island as an insurance destination. In the mid-1980s, as rocketing damages awards in U.S. civil cases left many Fortune 1000 companies struggling to find excess liability coverage, ACE and EXEL (now known as XL Group) were formed in Bermuda to meet the need for capacity.

In the months after Hurricane Andrew in 1992 caused $15.5 billion of insured losses--still the second costliest US hurricane behind Katrina--a dozen insurers and reinsurers, known as the Class of 1993, incorporated on the island. Iordanou said the Bermuda market's development was accelerated markedly by the Class of 2001's arrival.

"Overnight, Bermuda became the destination to raise capital for writing insurance for Fortune 1000 companies," Iordanou said. "It became a marketplace that no buyer or broker with significant clients could ignore,especially at a time when capacity was in short supply."

For Iordanou, the reason why the majority of the capital raised in the aftermath of Sept. 11 migrated to a 21-square-mile island in the mid-Atlantic Ocean was simple. "It was all about speed to market," he said. "It's a jurisdiction that allows formation to be quick and it allows innovation in product offerings."

Arch has not deviated from its strategy of building up a diversified portfolio of specialty insurance and reinsurance and in Iordanou's words, "the results speak for themselves." The company wrote gross premiums of $3.27 billion in 2010 and had built up shareholders' equity of $4.51 billion.

Allied World is unique among the major surviving 2001 start-ups in that it has changed its domicile from Bermuda, having moved its holding company to Switzerland last year. Created by AIG as a $1.5 billion start-up, Allied has expanded strongly to have shareholders' equity of just over $3 billion by the end of 2010, a year in which it wrote gross premiums totaling $1.76 billion.

Allied was seeking to leap-frog AXIS and Arch to become the biggest of the Class of 2001 through merging with U.S. reinsurer Transatlantic Holdings, a deal that would more than double the company's size. Bermuda rival Validus Holdings sought to derail the merger with a higher offer proposed in July, however, and the outcome was still uncertain at the time of writing.

Montpelier Re has not mirrored the impressive growth rate of some of its fellow post-Sept. 11 start-up survivors. Having started in December 2001 with $1 billion in capital under the leadership of Lloyd's market veteran Anthony Taylor, it ended 2010 with $1.63 billion in shareholders' equity, having written $720 million in gross premiums last year.

The Class of 2001 companies have all been severely tested by a challenging decade for the industry, which included the hefty hurricane losses of 2004 and 2005, the financial crisis of 2008 and consequent recession, and the record first-half losses of 2011. That the majority have come through so strongly is, Charman said, partly due to the unique opportunity they had to establish themselves as diversified players within their first two years and partly due to strong management.

"In the next five years, you will see the second stage of development of the stronger players from 2001," Charman said. "There is going to be some M&A activity and two or three very major global businesses will emerge." AXIS, he added, was focusing on building a major accident and health business which would differentiate itself from competitors through its modern, cost-efficient operating infrastructure.

While Bermuda companies have thrived, the island is facing challenges from rival jurisdictions and from enhanced European Union regulations for insurers that are due to take effect in 2013.

Solvency II, as the new rules are known, will feature higher capital requirements and enhanced standards of corporate governance. The Bermuda Monetary Authority is striving for third country equivalence, a recognition by the EU that its regulatory standards match those of Solvency II.

Failure to achieve equivalence could potentially put Bermuda companies at a competitive disadvantage when writing business in Europe. EU inspectors assessed the island's insurance regulation in May and their decision is expected before the end of this year.

While a few companies have shifted domicile, all of them have maintained significant operations in the Bermuda marketplace, Iordanou said. "I don't see Bermuda diminishing in its importance to world capacity," the Arch CEO said. "It continues to be a good home to us."

Cash is also optimistic for the prospects of his native Bermuda. "In the long run, I would expect to see more incorporations in Bermuda and that its role as a center for start-ups and as a global underwriting hub are not likely to diminish," he said. "If anything, I would expect to see Bermuda companies gain market share."

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September 1, 2011

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