Much property and casualty insurance, and with it reinsurance, is renewed in the last 60 days of each calendar year, to run for the following year. By 1 November, insureds have generally carried out their search for the right coverage and premium. For the insurers, and then the reinsurers, all that remains is the writing and binding.
The European storms which wrought such dreadful damage late in 1999 - in Denmark, early in December and then, over the Christmas period, in France and Germany - occurred too late for their full impact to be felt in the 2000 renewal period. European rates increased slightly for 2000, although for 2001 premium rates are expected to increase by as much as 200% in France, according to Herbert Haag of PartnerRe. Both he and Henry Keeling of XL Mid-Ocean Re are expecting a general hike of about 30% across Europe in 2001.
Even if the 2000 rate increases were not going to be significant, the chief executive officers of the Bermuda reinsurance companies were able to pepper their 1999 financial statements with such phrases as “long overdue correction” and “welcome stabilisation of premium rates”.
The year 2000 began with a whimper, as the potential for computer calamity evaporated. Many firms opened their doors and turned on their computers on 1 January for testing; the real test occurred on 4 January, when the world returned to work from its extended Christmas break.
On 5 January, with attention still focused on whether or not Y2K would carry a sting in its tail, A.M. Best assigned a financial strength rating of A- (Excellent) to Max Re, a Bermuda start-up. The rating assignment followed the completion of an initial private offering by the insurer's parent organisation, Maximus Capital Holdings (since renamed Max Re Capital), through which it raised $331m of equity capital. Best also anticipated that the parent would complete further offerings in the first quarter of 2000, thereby raising additional equity capital. In March, a further $178m was raised.
Max Re intended its operating activities to focus on traditional, finite and specialty risk reinsurance of long-tail liabilities that carry relatively predictable payout patterns, such as annuities, structured settlements, life insurance, disability income, workers' compensation and medical malpractice insurance.
“Max Re is a convergence company,” said CEO Bob Cooney. “We are integrating the underwriting of insurance or reinsurance risk with reinvestment or asset risk.” Max Re will invest 60% of its portfolio in traditional, high-grade fixed income investments - the industry standard - with the balance invested in alternative investments managed by one of its lead shareholders, Moore Capital, under a mandate intended to significantly enhance investment returns. Suitable downside protection is in place. “We believe this approach will allow us to offer some very innovative crediting structures in profit-sharing arrangements with clients on long-tail liability risks,” he explained.
In due course, Max Re would come to epitomise what has been an unexpectedly strong year - the best ever in terms of incorporations, Registrar of Companies Jeremy Cox has hinted - for a Bermuda reinsurance market feeling the heat of over-capitalisation as the year got underway. Five themes have marked the year 2000 in the Bermuda property and casualty market: international investigations into the island's financial and regulatory system; the incorporation of new companies and relocations; the assimilation of acquisitions by the largest companies and other, newly-announced acquisitions; developments in e-commerce; and a gentle recovery from what turned out to be a sorry first half-year.
Bermuda has always prided itself on a high degree of integrity. The island's reputation has long been considered its main selling point. Careful scrutiny of those seeking to do business from Bermuda has always been a key element in the arsenal; as a result, companies which have passed muster tend to view Bermuda as an élite club. For their part, Bermuda banks have long pursued the “know your customer” policy on which anti-money laundering relies.
A raft of separate international initiatives has simultaneously focused on the fiscal and regulatory infrastructure of the world's economic behaviour, concentrating on the smaller jurisdictions and in some cases catching in their nets larger countries such as Russia and Israel. In the process, the offshore jurisdictions have been held to international standards that the countries doing the investigating have themselves not always been able to achieve, bringing forth accusations of a double standard and a secret agenda.
The result has been a haphazard grading of the world's offshore jurisdictions into two classes: those whose financial and regulatory systems meet or will meet “the highest international standards”, the ‘A-list' of international financial service providers, and a second inventory of jurisdictions which must extensively change their ways or face exclusion from the international family of nations. For those in the latter group unwilling to mend their ways, the future looks bleak.
Bermuda and Cayman may end up as the only two jurisdictions on the A-list (“Level One”, in OECD parlance). Both headed off problems with the most important investigation, that of the Paris-based Organisation for Economic Development & Co-operation (OECD), by “caving in to OECD demands” and “acknowledging their tax haven status”, according to The Wall Street Journal. Both agreed to amend existing legislation to suit the OECD, and vowed not to introduce new legislation that would offend.
“The Government of Bermuda undertakes to implement such measures (including through any legislative changes) as are necessary to eliminate any harmful aspects of Bermuda's regimes that relate to financial and other services,” Finance Minister Eugene Cox (Jeremy's father) wrote to the OECD, in a letter released to the public. For domestic reasons, Cox would not disclose the list of legislation to be amended, which rattled the island's international business sector. The domestic sector, however, should be more concerned: chief among the changes will be the abandonment of ring-fencing laws which have for the best part of a century protected Bermudian business from international competition.
With the OECD seen off, the other international agencies lost some of their power to worry Bermuda, which emerged almost free of criticism from the report in May of the Financial Action Task Force on Money Laundering (FATF), a body empowered by the OECD.
The FATF report was highly critical of several offshore jurisdictions, but said: “Bermuda appears to have effective regulations and supervision for financial institutions operating in its territory, as well as an efficient mandatory system for reporting, monitoring and sanctioning for the failure to comply with the obligation to report suspicious or unusual transactions.” The one criticism the report contained was that “financial institutions (in Bermuda) are not required to identify the beneficial owners of all companies for which transactions are undertaken.”
Another body, the Financial Stability Forum (FSF), a grouping of financial regulators, finance ministries and central banks, was created in April 1999 by policymakers from the Group of Seven (G7) leading industrialised nations, ostensibly to prevent a repeat of the Asian and Russian financial crises.
Late in May, the FSF published a list of 25 offshore financial centres whose standards of supervision and transparency placed them in three categories, reflecting their perceived quality of supervision and perceived degree of co-operation with international regulators. The groupings were “based on responses of the Offshore Finance Centre (OFC) supervisors and the impressions of a wide range of onshore supervisors”. Although the FSF report stated that its findings did not “constitute judgments about any jurisdiction's adherence to international standards”, the report was nothing if not judgmental.
Bermuda was placed in the middle category, reserved for jurisdictions “generally perceived as having legal infrastructures and supervisory practices, and/or a level of resources devoted to supervision and co-operation relative to the size of their financial activities,” the report stated.
Late in October, a review of financial regulation in Britain's six major offshore territories, known as “the KPMG report”, was published. The review was originally to be completed by July 2000, but was delayed for at least two months when the territories rejected the first draft of the report, which was extremely critical of all six jurisdictions.
The second and final draft was generally positive. KPMG called for greater independence for the Bermuda Monetary Authority (BMA), and for the Bermuda Stock Exchange to fall under the BMA's control. One other key recommendation, which Finance Minister Cox may not implement, was greater regulation of the insurance industry.
The year was also marked by a tussle between the Bermuda re/insurance sector and a handful of American insurers, which attempted to influence Congress into introducing taxation of, specifically, Bermudian re/insurers. Brian Duperreault of ACE led the charge from the front, while Brian O'Hara of XL Capital worked less conspicuously against the measure, in the background. The threat, which was taken with enormous seriousness, has been averted, at least in the short term. Early in November, the announcement that an extended study was to be launched was met with approval all round.
Bermuda is curiously reluctant to release information on incorporations, particularly in its re/insurance sector. A hint here, a nod and a wink there - the release of even good news is delayed so long that it has lost its meaning by the time actual numbers filter out. That said, it is plain that 2000 is going to prove a very good year indeed for the incorporation of new companies in the Bermuda market.
The largest incorporations made the headlines and showed a broadening of the market. Max Re was the first; the company would go on to write “almost $300m of business” in its first six months of operation, not far shy of its entire first year forecast of $325m.
The arrival of Tokio Millennium Re (TMR), the first Japanese company to start business on the island, meant that Bermuda had cracked the last international frontier. “The reason why we came (to Bermuda) is not because of tax, but because of the infrastructure and capable people,” chief executive officer Shin-Ichiro Okada told Global Reinsurance. “A lot of challenging spirits are gathering here from the US and European countries. TMR has just started as the first commercial reinsurer from Japan located in Bermuda. We are very excited about being domiciled in Bermuda. Our mission is not only to make a profit, but also to be more innovative in meeting our clients' needs.”
Once the OECD matter had been settled, the pace of Bermuda incorporations began to pick up, and the relocation of US insurers restarted, after a summer recess, with the news that the Arch Capital Group (chairman Robert Clements, whose Bermuda connection precedes his pioneering roles in ACE and XL Capital) was to move to Bermuda.
The future for Bermuda indeed looks rosy, as Finance Minister Cox said. The horizon is not entirely unclouded, however: the island is, to all intents and purposes, full. Traffic has become ugly, schools are jammed and the housing market is saturated. Although re/insurance is a clean industry, environmentally speaking, the pressure it places on the infrastructure can be intense in an already busy island of just 22 square miles.
The likely outcome will be a greater increase in non-physical presence companies and renewed pressure on the re/insurance industry to move Bermudians higher up the corporate ladder to enable them to share individually in the island's continuing economic success.
Acquisitions and sales
For the Bermuda giants, 2000 has been a year of consolidation. ACE and XL Capital became multi-line insurers in 1999 with the purchase of US insurers Cap Re and NAC Re, respectively. ACE and XL spent much of 2000 digesting their purchases and putting in place the revised management structures necessary to support their new heft.
ACE appears to have emerged faster than XL, although XL's profitability has survived with less pressure. It took ACE a while to re-establish its growth pattern: in the third quarter of 2000, it reported net income of $140.8m, compared with $14.8m a year earlier. Net premiums earned for the nine months ended 30 September 2000 were $3.4bn, compared with $1.5bn for the same period last year. ACE is plainly on its way to prospering in its new shape.
XL took two bites to set up its new management structure, announcing in the third quarter of 2000 that it would shed 7% of its global workforce, the first time it has lost jobs. Although the cuts were more as a result of the sale or cessation of businesses than of specific culling, the company had taken almost a year to realign itself, with a greater focus on the capital markets.
The differing management styles of the “two Brians” - chief executive officers Duperreault and O'Hara - is reflected in the construction of the two companies' new headquarter buildings, being constructed side-by-side on the former site of one of Bermuda's top hotels. XL House is flatter than ACE's building, which reaches a little higher. Construction will be completed by first quarter 2001, when Bermuda's two largest insurance companies relocate from offices scattered all over Hamilton.
Overseas Partners (OPL) has faced the loss of 60% of its premium income following last year's US tax court ruling that United Parcel Service of America set up OPL in 1984 to avoid tax. OPL has since established Overseas Partners Cat, a reinsurance subsidiary whose business is underwritten by RenaissanceRe. Late this year, OPL purchased Reliance Reinsurance Company and retained its staff of 50 followed quickly by the announcement of a strategic alliance with Stockton Re to form OP Finite. Despite the loss of its carrier reinsurance business, OPL remains a significant presence in the reinsurance sector and is likely to emerge from this year's shuffle with its appetite for risk intact.
In the second quarter of 2000, PartnerRe sold its life business to the French reinsurer SCOR Group for $155m and expanded its agricultural reinsurance service capabilities worldwide through the addition of a professional team from Agricultural Risk Management, formerly a subsidiary of Aon Risk Services. The market took the news that chief executive officer Herbert Haag was to retire, effective December 1, in its stride. New chief executive Patrick Thiele gained extensive experience with The St. Paul Companies. Despite vowing to make changes, Thiele is unlikely to rock PartnerRe's boat too violently; why change a winning formula?
With Bermuda's smaller market makers also active, barely a month passed without news of acquisitions, but the most arresting report was the $2.1bn purchase by White Mountains Insurance of the US property and casualty operations of CGNU.
With Bermuda's larger companies now all essentially recast, progress in 2001 looks assured.
Reinsurance is largely a wholesale business, so the impact of e-commerce on Bermuda's reinsurance sector was always likely to be most strongly felt in peripheral areas. Centre Solutions, the Bermuda ART subsidiary of Zurich Financial Services, appears to have been the first Bermuda insurer to fully grasp this; it established in 2000 an “internet incubator” to encourage the development of electronic business concepts through equity investments and the provision of office and technological facilities. eVentureCentre is the Bermuda-based incubator jointly owned by Centre Solutions and Bermuda- and Toronto-based technology consultancy Paragon.
The second product eVentureCentre brought to market in 2000 is called Ignition, “the offshore ASP”. An ASP is an application services provider. Application serving, also known as server-based or multi-user computing, is an information technology (IT) business management tool. Client companies can outsource applications or their entire IT infrastructure to an ASP, which offers clients, via the internet, a centrally-managed facility which hosts, trouble-shoots and provides access to shared computer applications. Within the Windows world, application serving can be likened to an “application utility company”. Ignition uses the first eVentureCentre product, Quo Vadis, a public/private key encryption process. Like a true incubator, eVentureCentre aims to have its clients out on their own as soon as possible.
With Bermuda proving friendly to e-commerce - its pioneering legislation is set to be amended in 2001 to reflect changes in the marketplace - and e-commerce a non-labour intensive industry, further developments in this field look highly probable.
The Bermuda sector's second quarter and half-year results to 30 June 2000 were something of a mixed bag.
Commenting on his company's second quarter results, ACE's Duperreault said: “As we celebrate the first anniversary of the ACE/INA acquisition, the evidence is clear that the transaction and subsequent restructuring efforts have firmly established ACE as a truly global enterprise and significantly enhanced the profit potential of the group. We continue to experience solid growth in top line production and earnings per share.”
XL Capital's second quarter and first half 2000 net income exceeded that of ACE. O'Hara, president and chief executive officer, said he was “pleased to note that we are seeing improvements in market conditions and pricing in nearly all areas of our insurance and reinsurance businesses. However, we believe that this is only the beginning of an anticipated property-casualty underwriting cycle change and it will require a prolonged period of upward pricing before all of our operations reach a more appropriate level of return.”
Haag, PartnerRe's president and chief executive officer, commented of the second quarter: “It was a positive quarter overall for PartnerRe, with visible strengthening in pricing and conditions for many business segments and markets, which will benefit the company in the quarters to come. The difficult 1999 underwriting year continues, as expected, to influence our performance. Despite a number of larger individual losses incurred during the quarter, the absence of new major catastrophes has resulted in significant improvements over the comparable 1999 period.”
Haag added: “We are encouraged and energised by the undeniable trend of stronger pricing and added underwriting discipline throughout the industry, and our optimism for the 2001 renewals has increased measurably. Whilst we realise that the effect of such changes will not be felt in our results before 2001, and that further efforts are needed to return to satisfactory profitability for our industry, we are increasingly positive about our own future.”
RenaissanceRe had the lowest combined ratio in the reinsurance world last year, at 65%. First-half results this year were also good. James N. Stanard, chairman, president and chief executive officer, noted: “I am pleased to report that we have achieved the highest quarterly operating earnings per share in our history as a public company, along with continued growth in both gross and net reinsurance premiums. Although the sharp growth in quarterly premium was partially due to timing on renewals booked in the second quarter this year, versus the third quarter last year, and from reinstatement premium on last year's events, we are on track for growth in both gross and net written premium for the full year.”
Stanard continued: “We expect that industry-insured losses on European storms Lothar and Martin will grow to approximately $8bn and $5bn respectively, and Typhoon Bart to $5bn, which are more than 50% above figures generally estimated in the first quarter of this year. Our prudent IBNR position and comprehensive retrocessional protection have allowed us to avoid the impact of this industry development to our bottom line.”
LaSalle Re Holdings reported strong earnings for the second quarter. Guy D. Hengesbaugh, president and chief executive officer, said: “We have benefited from an increase in premium rates as well as our prudent reserving practices. We are seeing an increase in rates for our core property catastrophe line of business, which is indicative of an improving market. We expect stronger pricing to continue through the 2001 renewal cycle in our catastrophe business. Our prudent reserving practices allowed us to avoid further impact of the dramatic development of catastrophe losses, particularly storms in Europe, which took place last year.”
At the half, Everest Re chairman and chief executive officer Joseph V. Taranto said: “The company continues to perform well even in a difficult environment. Our combined ratio, investment income and earnings all showed improvement over 1999. We expect our Gibraltar acquisition to close in the third quarter” - which it did - “and our Bermuda subsidiary is now active and reviewing new business opportunities.”
At Mutual Risk Management, chairman and chief executive officer Robert A. Mulderig and president John Kessock, Jr. took the view that better times were just around the corner. “Operating results for the second quarter and first half of 2000 produced substantial improvement in fees, operating income, profit margins and return on equity, compared to our last three quarters,” they said. “However, comparisons to the first half of 1999 continue to reflect the decline in operating results, which took place in the 1999 third quarter. The commercial lines insurance market has finally improved after many years of decline and this is beginning to help our corporate risk management business segment, which has been adversely affected by depressed commercial lines pricing.”
Mulderig and Kessock added: “Our programme business segment produced good fee growth of 11% for the second quarter, aided by premium increases. We believe that these operating results demonstrate continued progress toward a return to our historic levels of growth and profitability.”
IPC Holdings has a new president and chief executive officer, Jim Bryce. He saw the soft market turning. Second quarter results, Bryce said, “reflect further increases in the market loss estimate for the storms of late December 1999. In addition to the impact previously advised for the companies in France, we have seen an increase in the reported losses emanating from companies in Switzerland and Germany. Clearly the magnitude of the events was such that it has taken months to measure the full impact. We believe that the increases in losses from these events will favourably affect the pricing of reinsurance renewals in the remainder of 2000 and in 2001.”
Gerald L. Radke is chairman, president and chief executive officer of PXRE Group, another major insurer that relocated to Bermuda this year, starting its new life with a New Year's hangover from the effects of the winter storms. “We are very disappointed with the company's overall results for the second quarter, as continued loss development unfortunately masks the significant progress we are making with our diversification program and PXRE's strong underwriting results from business underwritten in 2000,” Radke said at the half year results. The company recovered significantly in the third quarter.
“This continued development of the extraordinary catastrophic events in 1999 has been particularly damaging to PXRE's book of backup business,” he said. “Given the industry estimates of these storms at year-end 1999, we believed we had adequately reserved for these losses at that time. It is now clear that those industry estimates were far too low. More than 75% of the $40m development in the second quarter represents second, third and fourth loss positions. Given the impact of these losses on the industry, we are seeing price increases with coverage terms noticeably restricted,” he commented.
Evidencing his Bermuda insurance laboratory credentials, he added: “We are pleased with the emergence of premiums in the structured products/finite segment. While we have worked on several transactions over the past year, we did not begin to generate significant premium volume until the second quarter.”
Life insurance, not traditionally an island specialty, has begun to make an appearance in Bermuda's quiver. Lawrence S. Doyle, president and chief executive officer of Annuity and Life Re (Holdings) said of his company's second quarter: “We were pleased to see our operating results return to normal. The margins on our life business improved by six points from last quarter. Our US subsidiary, with licenses in 43 states, is now up and running. New business opportunities continue to expand as we receive greater recognition in the marketplace.”
And finally, at American Safety Insurance Group, retooling distorted the first-half figures. Lloyd A. Fox, president and chief executive officer, said: “The continued growth of our insurance operations during the second quarter resulted in a 68% increase in net premiums earned and a 40% increase in total revenues over the same period in the prior year. For the first six months of 2000, net premiums earned increased 88% and total revenues increased 46% over the same six-month period in the prior year.
“The net operating loss sustained during the second quarter was in large part attributable to additional overhead and expense for new operating units that we have added, including the reinsurance underwriting management group that was added during the second quarter. The significant investments that we have made in experienced personnel in our insurance and financial services units are beginning to show increased production, and we expect that these underwriting groups will result in profitable operations as they continue to build their businesses this year.” Legislative changes in Bermuda this summer included permitting the incorporation of segregated cell companies without the cost and delay inherent in an Act of Parliament. Bermuda is playing catch-up in this regard to Cayman and Guernsey, but looks set to remain a centre of innovation in the insurance industry, providing only that it can find a way to accommodate the demand for its services and deal with its own success.
And there is rating light on the horizon. In August, Lehman Brothers (whose subsidiary Lehman Re opened its Bermuda structured products book this year with a $150m California earthquake securitisation) reported seeing “a glimmer of hope for reinsurance prices”.
A glimmer may not be much, but it is a start.