Market Reports 2008

State of the Market

Executive Summery

Market Conditions with a focus on Bermuda

For the past ten years most Bermuda companies have outperformed the Standard & Poor 500 in generating shareholder value. Most Bermuda Rating Agency Composites, for this sector of the industry, have shown considerable book value and dividend growth. This financial performance has been driven substantially by Bermuda’s low tax rate, experienced workforce, infrastructure and efficient regulatory regime.

Bermuda faces the challenges of prosperity in 2008. The good fortune of low catastrophe losses in 2006 and 2007 has caused balance sheets to swell, but opportunities to earn the outsized returns, now expected, by investors will be more of a challenge for 2008/9, it is almost inevitable that the average profit rate of Bermuda domiciled companies will drop for 2008.

At 18.4% in 2007, the Bermuda Composite return on equity (ROE) is enviable compared to most investment opportunities in today’s global economy. Retained earnings increased capital by an average 14.2% percent in 2007, creating a challenge to keep this momentum for similar returns for the coming year. Insurers would need to increase earnings by at least that amount to maintain their current rates of return, a testing proposition, given the softness of both insurance and reinsurance markets. In 2007, gross written premiums for Bermuda companies grew at a modest pace of 5.1%.

Underwriting profits were strong for the Bermuda composite in 2007, with the combined ratio recording a record low of 84.9% percent. The low level of insured losses from catastrophes played a major role in delivering these strong results. But, it is unrealistic to expect a third benign catastrophe year in a row.

Sidecar use dropped, as rates receded, from record highs of the 2006 summer and discouraged the entry of new reinsurance capacity into the industry. Sidecars successfully served their purpose, having facilitated the flow of capital into and out of reinsurers without disrupting balance sheets, ultimately making it easier to manage supply. They may regain prominence in the event of high catastrophe losses and a hardening market. We expect companies to come out with new diversified strategies for 2008/9.


With the success of companies such as Arch Insurance Group and ACE Insurance Group who diversified into the primary US market early on in their formations; companies such as these in our opinion will be less likely to be effected by the volatility of pricing to catastrophe reinsurance and property insurance business than other companies such as Montpelier Reinsurance Ltd and other such companies specializing in this sector. Companies such as Max Bermuda have recently formed domestic US subsidiaries (Max Re Specialty) to diversify their business model in order to smooth the earnings curve with a more broad-spread business model, enabling them to avoid the potential volatility of being a specialized insurer, through direct procurement (Insureds coming directly to Bermuda for Insurance coverage) and reinsurer. With business emanating through the Insurance and Reinsurance broker network, both of which have to enter through Bermuda entry point. Having formed a US subsidiary this will give them a US based platform for business production, we expect more Bermuda Reinsurers to follow this trend for higher premium volume.

We expect a growing trend for 2008/9 for programme business (this being business emanating through Managing General Agencies). In order for Bermuda based companies to enhance or diversify their business models, Managing General Agencies, who act as whole sale arrangements with the US based retail market place, can be an efficient way of increasing premium volume in many different insurance classes with out the costly expenditure of having to establish a US based underwriting platform. We expect this sector to grow in the coming year, with the most successful Managing General Agencies being acquired at some point by their Capacity providers in Bermuda. This will again be subject to the market not being affected by a major catastrophe loss for 2008/9, in which case we will expect that most Bermuda Insurance companies will focus their capital allocation on hardening property catastrophe rates in order to take advantage of the market place.

We also expect to see more reverse flow arrangements (reinsurance companies being established by US based insurance companies with large premiums writings) for 2008/9 such as Maiden Insurance Company, who were established with the help of AM Trust Group to act as Quota Share reinsurer on their business and other programme business.

Private Equity

Private Equity in the insurance and reinsurance markets has, in the past five years, enjoyed excellent growth in value – major industry losses followed by a hard market provided the very best conditions for the many start ups of the last several years.

Although we expect Private Equity in all sectors to slow down from the frantic pace of the last few years we believe that it will continue to support the insurance sector although the growth in value is reducing. This is partly because of the softening market and partly because of over subscription in many areas with more and more capacity chasing the same business and we expect that in the next two years we will see average returns more in line with bonds and cash.

We see the need for a change in the Private Equity model, so successful in the recent past, to buying a successful company as opposed to making an acquired company more valuable.

The trend to look for distressed or depressed business with low valuation through poor management or execution mechanism or where there has been an extraordinary trauma that has forced the valuation to decline is going to, as a model, be put on the back burner until this recipe is right once again. The evolved model may look for successful specialist or monoline entities with effective management and business plan but in need of growth support; this is where we will be trading for the next couple of years.

However the comparatively newly educated equity capacity recognizes the cyclical nature of the insurance business and will remain ready to increase commitments as the market turns. In the meantime we envisage an increase in mergers and acquisitions which favor the softer market with the larger companies looking to cut costs and out perform their competitors through increased efficiency and the need to boost premium to surplus ratios shortened by the soft market.

We consider this trend to reflect the average results of the downward cycle. This is not to say that all areas of the industry are in down mode. There will always be the niche, specialist companies that carry higher expertise value and make a market and we will continue to see opportunities to invest in these sectors.

There are many niche areas, particularly the programme market which remains dynamic and has become an increasingly attractive target for new capital – these entities are, we feel, better controlled with fewer of the distractions associated with multi-line businesses.

There continue to be opportunities in most sectors of the industry but in the short term we see the market concentrating on the niche businesses.

The current major providers of capital for small to medium sized private equity arrangements are as follows;


Reservoir, New York City, $ 3 billion under management, the sponsor of Hudson Capital LLC .

Hudson Capital has $300 million currently under management and will vest up to 20% of the fund on any one arrangement. For larger deals Reservoir will act as the co partner for the balance of any transaction.

Highridge Capital LLC and High Ridge Capital Partners, is a fund specializing in the insurance and reinsurance industry. The actual current state of the Fund unknown, but when last investigated the fund had been fully allocated. Last Major deal was Max Re, where Jim Zech still sits as main board director.

Aquiline Financial Services Fund is a $1.2 Billion fund, part of the family of Aquiline Capital Partners LLC specializing in investments in the reinsurance and financial services sectors. Within the financial sector, it prefers to invest in property and casualty insurance, specialty finance, securities, asset management, life insurance, and transaction processing. The fund typically invests in North America and Europe. The main principle of the Fund is Jeffrey Greenberg.

Northhaven, New York City, this is a $400 million fund specializing in the insurance and reinsurance industry, $100 million of the fund is allocated to private equity and $300 million for public companies.

Century Capital Management LLC out of Boston have provided private equity to number of entities including London, namely Lloyds such as DP Man Holdings and Wellington Management , to US and Bermuda based entities such as Discover Re and Cyrus Re and Mid Ocean Re, the latter, before its acquisition by XL Capital. Fox Paine & Co based in Foster City, California, ( size of fund for the insurance sector unknown) largest deal, acquiring control of United National Group of insurance companies, part of the transaction Fox Paine also made was a “substantial capital contribution” into UNG so that the insurer could take advantage of the improving market conditions in 2003/4.

The firm’s principals have been active investors in the insurance business since the early 1990s, Saul Fox, CEO of Fox Paine. Fox co-founded the company in 1997 after previously working as a general partner at buyout firm Kohlberg Kravis Roberts & Co.

Hellman & Friedman also based in San Francisco, one of the Bay Area’s largest private equity firms, also

has been involved in private equity in the insurance sector, as industry conditions improved during the late 2000’s. Flexport Partners, a Chicago based firm currently looks at private equity in the insurance and reinsurance sector, the fund is $250 million in size. Golden Gate Capital based out of San Francisco, California, has a variety of funds, it is a leading private equity firm with $9 billion in capital under management, the most notable investment was Endurance Specialty Insurance in 2001.


Comp Capital Ltd provides this report for general information only. The information contained herein is based on sources we believe reliable, but we do not guarantee its accuracy, and it should be understood to be general insurance/reinsurance information only. Moreover, this document is not intended to recommend any particular reinsurance product or structure or one reinsurer over another generally, or with respect to any company mentioned in this report regarding their business model or strategy in general. Comp Capital Ltd makes no representations or warranties, express or implied. The information is not intended to be taken as advice with respect to any individual situation and cannot be relied upon as such.

Readers are cautioned not to place under reliance to any historical, current or forward –looking statements. Comp Capital Ltd undertakes no obligation to update or revise publicly any historical, current or forward –looking statements whether as a result of new information, research, future events or otherwise.

Statements concerning, tax accounting, legal or regulatory matters should be understood to be general observations based solely on our experience as insurance / reinsurance consultants, and may not be relied upon as tax, accounting legal or regulatory advice which we are not authorized to provide. All such matters should be reviewed with your own qualified advisors in these areas.

This document or any portion of the information it contains may not be copied or reproduced in any form with out the permission of Com Capital Ltd, except that clients of Comp Capital Ltd need not obtain such permission when using this report for their internal purposes only.

The trademark and service marks contained herein are the property of their respective owners.



Highlighted deals for 2007 and 2008 that Comp Capital had an involvement in and or had associated colleagues and companies where involved.

Associated Industries / AmTrust September 2007




NEW YORK, September 10th 2007 AmTrust Financial Services, Inc. (Nasdaq:AFSI) purchased and closed on Associated Industries Insurance Services, Inc., a Florida-based workers’ compensation managing general agency, and its wholly-owned subsidiary, Associated Industries Insurance Company, Inc., a Florida workers’ compensation insurer, also licensed in Alabama, Georgia and Mississippi (collectively, “Associated”) for approximately $41.2 million. AmTrust and Associated enjoyed a close business relationship since 2004 when AmTrust acquired renewal rights to certain business from Associated and entered into a Production and Administration Agreement pursuant to which Associated produces business for AmTrust in the State of Florida. In 2006, Associated produced approximately $130 million in gross written premium, $58 million of which was written by AmTrust’s subsidiary, Technology Insurance Company.

Barry Zyskind, CEO of AmTrust Financial Services, Inc., stated, “The acquisition of Associated is the logical culmination of the close relationship we have had with Associated for the past three years. Associated consistently has been one of the leading providers of workers’ compensation to small businesses in Florida. We are confident that the addition of Associated to the AmTrust family should provide AmTrust with the ability to continue growing our workers’ compensation business.”

Jon L. Shebel, Founder, President and CEO of Associated, stated, “All members of our team are excited about joining the AmTrust family of companies, which share Associated’s commitment to integrity of operations and customer service.”   Comp Capital Ltd consulted for Associated in preparation for a sale during 2006 and 2007.

Midlands Management / PMA October 2008


PMA Capital Corporation (NASDAQ:PMACA) announced in October 2008 the acquisition of Midlands Management Corporation (“Midlands”), an Oklahoma City-based managing general agent, program administrator and provider of Third Party Administrator (“TPA”) services. Midlands is widely known for its expertise in underwriting excess workers’ compensation and related insurance products on behalf of third party insurance carriers.

“The acquisition of Midlands is a natural extension of our business model and builds upon our core competencies in TPA services and workers’ compensation insurance,” said Vincent T. Donnelly, President and Chief Executive Officer of PMA Capital Corporation.

“The transaction is expected to be immediately accretive, adding 7 to 10 cents per share to our 2008 earnings,” said Mr. Donnelly. He added, “There is very limited overlap in business between Midlands and PMA, which creates enhanced opportunities for the cross-selling of services in both companies. Midlands had revenues of $30 million last year, about the same size as our current fee-for-service platform, PMA Management Corp.”

Under the terms of the transaction, PMA Capital Corporation (the “Company”) will pay $19.8 million in cash at the closing of the transaction, subject to certain price adjustments for net worth at closing, with the ultimate purchase price of the transaction ranging from $22.8 million to $44.5 million. The final purchase price will be based on Midlands’ ability to achieve EBITDA growth for its business over the next four years.

Midlands will continue to operate in its current markets and will maintain its headquarters in Oklahoma City. As Midlands has very strong name recognition and brand equity in its markets, it will maintain its independent brand under PMA Capital Corporation. The founders and executive team will remain at Midlands. “Midlands and PMA both have strong service-oriented cultures that are committed to providing their clients with industry-leading customer service and support,” said Mr. Donnelly. He continued, “Our two cultures are highly compatible and we look forward to enhanced growth opportunities as members of the same team.”

Charles Caldwell, President and CEO of Midlands said, “We believe the combination of Midlands and PMA will provide our existing customers with expanded product offerings and services.” Mr. Caldwell added, “PMA’s service-focused culture is a natural fit with how Midlands has run its business since it’s founding in 1990. We look forward to growing our business with our new partners at PMA.”

Matt Bezier who was then at Sandler O Neil was the instigator of this transaction and Comp Capital Ltd is now in contract with Hudson Capital LLC for new private equity arrangements, where Matt Bezier is now one of the main principles of this company.