aymond Madeiros reviews the past 12 months on Bermuda, and looks to see what the future holds for the incubator island.

The Bermuda business community was appalled and distressed by the events of September 11. Two Bermudians were lost in the World Trade Center attacks, as were numerous colleagues; Bermuda and New York City are closely allied in business terms. Subsequent announcements of significant capital formation in Bermuda have gladdened hearts, but have been tinged with a note of sadness.

Following the significant losses sustained by the insurance industry on September 11, many insurers and reinsurers are reviewing their position, with the result that capacity in several lines of insurance has reduced. Lloyd's reports that it will survive the $2bn in net claims it has assessed it will face, but the events have cut into the London market's momentum. As a result, Bermuda was best positioned for selection as the location for a new wave of capital in the weeks after September 11.

Marsh announced the formation in Bermuda of Axis Specialty, aiming to attract to Bermuda a billion dollars of new capital, to provide insurance and reinsurance coverage for property, aviation, war and political risks. RenaissanceRe Holdings, the Bermuda-based catastrophe reinsurer, and State Farm Mutual Automobile Insurance said they would finance the bulk of the $500m of new capital for DaVinci Re and a further $100m will be made available to Renaissance subsidiary Glencoe. XL Capital is to raise $1.5bn in new equity and ACE will seek $1bn. Bermuda's Arch Capital Group is devoting more than a billion dollars of clean capital to the catastrophe market, including $250m from Hellman & Friedman and $500m from Warburg Pincus, which launched RenaissanceRe in 1993.

The $5bn announced so far is approximately twice the amount of claims the Bermuda market expects to face as a result of the events of September 11. Additional capital may follow, jostling to enter the market in time for the 2002 renewal season.

The Bermuda insurance market has grown in similarly dramatic circumstances twice before in the past 20 years. In the mid-1980s, large awards in lawsuits against corporate officials created a severe shortage of excess liability coverage. In response, Marsh led the formation in Bermuda of ACE Ltd and the company that has become XL Capital Ltd. The two are now both major global insurers. In 1992, Marsh formed Mid Ocean Ltd to provide property catastrophe reinsurance, in the aftermath of Hurricane Andrew which cost the insurance industry $20bn and until September was the most expensive loss to the industry. Other investors saw the opportunity, and more than $5bn was injected into the Bermuda market.

Such dramatic capital flows are the stuff of headlines, but the events of the past few weeks have come at a busy time for the Bermuda insurance market, which boasts capital and surplus well in excess of $100bn.

New this year
Incorporations in Bermuda have held steady at near-record levels in the past year, but in the insurance sector, even before September 11, the year was marked by several Class 4 incorporations (companies with capital and surplus in excess of $100m). Driving these statistics was the turn in the insurance markets that saw the end of the ‘soft' market that had dominated conditions throughout the 1990s.

Early in 2001, Bermuda's White Mountains Insurance Group purchased the US property and casualty operations of Britain's CGNU Group. Another Bermuda reinsurer, Overseas Partners Ltd, bought Reliance Re of Philadelphia and hired the finite reinsurance team of Stockton Re, a large Bermuda reinsurer. Imagine Re, a new multiline reinsurer, was formed in Bermuda at the start of 2001, with $200m of capital from Toronto's Trilon Financial Corporation.

Early this year, XL Capital bought the US surety business of CGU Insurance and Bermuda's Everest Re Group acquired AFC Re, a smaller Bermuda reinsurer. In February, XL Capital announced that it would buy Winterthur International, a subsidiary of the Credit Suisse group, for $600m.

Later in the spring, Willis, the third largest brokerage firm in the world, announced that it would relocate its holding company operations to Bermuda. About the same time, Hampton Re Holdings was formed in Bermuda to underwrite block life reinsurance transactions. JP Morgan is among the principal backers of Hampton Re, with the Morgan Guarantee Bank providing the credit facility for the company's line of credit and letter of credit capacity. Hampton Re raised about $170m from initial public offerings and hopes to raise a further $200m to $300m by year's end.

Hannover Re, the fifth-largest reinsurance company in the world, announced in June that it would form a Bermuda reinsurance subsidiary, just as Tokio Millennium Re, Bermuda's first Japanese reinsurance company, doubled its capital to $250m. In what was becoming almost a parade of new companies, Max Re, the Bermuda reinsurer that pioneered innovative investment tactics, announced that it would form Grand Central Re in partnership with Germany's Bayerische Hypo-und Vereinsbank. In July, Imagine Re announced the acquisition of Enterprise Re, a reinsurer with more than $100m of capital.

Now comes the wave of new capital in the wake of September 11, rounding out a remarkable year for the Bermuda market.

Life increases
The past year has seen steady growth in the captive market, which Bermuda continues to lead. A third of all captives worldwide are based in Bermuda, where captives were first incorporated 40 years ago. Bermuda's captives are largely owned by North American and European interests, but owners in Latin America and Asia have also shown interest in Bermuda.

Commenting late in April this year that “Bermuda is the capital of the global insurance industry”, Scottish Life & Annuity Ltd (SAL) chairman Michael C French announced that his company had applied to the Bermuda Government for permission to move its holding company operations to Bermuda from the Cayman Islands. In addition, SAL is to redomesticate its flagship subsidiary, Scottish Annuity & Life Insurance Company (Cayman), to Bermuda.

A year earlier, SAL had announced that it was joining forces with Crown World Services of Bermuda, a designer and marketer of variable life insurance products, to form Scottish Crown (Bermuda) Group. Crown's principal focus is on international tax law, insurance product design, private banking and investment management. “Scottish Crown will be one of the largest global issuers of offshore variable insurance policies to high net worth world citizens,” French said at the time.

The two-step SAL move underlined a key trend that has defined the Bermuda market in the past 18 months: diversification of lines of business into the life, health and annuity arena.

Bermuda has had domestic life insurers for almost 100 years but its international reinsurance sector has traditionally focused on the property and casualty market. That changed in 1998, with the incorporation of Annuity & Life (Holdings).

In little more than three years, Annuity and Life Re had assumed by 30 June 2001 an in-force life insurance portfolio of $91.1bn; the book was at $55.5bn a year earlier. In addition, the company has collected annuity deposits of $1.6bn. Annuity & Life Re's client base includes more than 40 of the largest and highest quality US life insurers, and it continues to expand. Annuity & Life Re has completed more than 50 life reinsurance transactions in less than three years. The company moved successfully to the New York Stock Exchange on August 1 this year.

XL Capital and Overseas Partners have 13% and 8% interests in Annuity & Life Re, respectively. As early investors in the new lines, both companies have laid side bets that will allow them to focus their own operations on their core businesses.

Most industry forecasts suggest that the life and annuity market will outpace the property and casualty sector in the next five, ten and 20 years. Annuity & Life Re and its almost instant success provided the spark for development of the sector in Bermuda.

The WMA Corp has grown its life business in Bermuda almost as spectacularly as Annuity & Life. WMA, whose executive offices are located in Duluth, Georgia, is the parent of WMA Life Insurance (to be renamed Global Preferred Re), a Bermuda life reinsurer that had nearly $9.4bn of life reinsurance and $310m of annuity contract benefits in force at 31 December 2000. WMA Life reinsures over 340,000 life insurance policies, riders and annuity contracts.

ACE Tempest Reinsurance, a subsidiary of ACE, expanded into life, health and annuity reinsurance last year. ACE says it has already begun working towards offering primary life and health insurance products itself next summer, when its agreement not to compete with Cigna expires. ACE had entered into the agreement after buying Cigna's property and casualty operations in July 1999. ACE is looking forward to “hitting the ground running”, developing strategies and carrying out analysis in preparation for the new insurance offerings, says a company spokesman.

Perhaps the most visible life reinsurer in Bermuda in the past 12 months has been Max Re, which has introduced a new, hedge fund-related investment paradigm to the insurance industry. More than half the book at Max Re, which is less than two years old, is life and health reinsurance-related.

The Max Re model is unusual in two ways, both in the investors to whom it appeals and the way in which their premiums are invested. Max Re raised $511m in two private placement offerings last year. About 40%, some $213m, came from high net worth individuals, who invested a minimum of $5m each. Max Re wrote $401m of net premiums in its first year, 70% of it life and annuity business.

Regulatory steps
Bermuda continually updates its regulatory regime and legislation. Finance Minister Eugene Cox announced this summer that an independent supervisor of insurance was to be appointed and, this fall, the Insurance Amendment Act 2001 updated various aspects of the law. As well as confirming the appointment of a regulator, the Act fleshed out the rules relating to confidentiality of information obtained by the regulators and streamlined the process by which the supervisor may assist foreign regulatory authorities in carrying out their supervisory and investigative duties. As usual, the legislation followed extensive discussions with insurance industry representatives, whose input is routinely sought on proposed legislative changes.

E-infrastructure
Bermuda made an early decision to take charge of its cyberspace. A jurisdiction that relies on its reputation saw an opportunity to set standards, and in 1999 passed an Electronic Transactions Act (ETA), among the first such legislation in the world.

The Act, and a subsequent set of standards, enunciated the Bermuda Government's desire to promote electronic commerce and create an infrastructure to support it. Much as Bermuda serves its 12,000 bricks-and-mortar clients, it facilitates offshore e-business opportunities. The e-commerce sector is establishing itself in Bermuda as a third major service industry, alongside tourism and financial services, diversifying the island's attractions and revenue base.

In the past few years, the capital markets have been converging; much of the capital Bermuda has added this year has come from non-traditional sources in the banking and finance sectors. In part, this has arisen from a re-definition of risk among the larger corporates, which now see the opportunity to manage risk on an enterprise-wide basis. Bermuda has also been developing a presence in the area of hedge fund administration and now sits at the heart of the convergence of markets.

As well as the capital flows it manages, Bermuda has attracted a remarkable pool of intellectual capital. Hamilton, Bermuda's capital, is dominated by international business in a way no other city may claim. Within walking distance of each other are dozens of major undertakings. At lunchtime and deep into the evenings, relationships are forged in Hamilton's social quarters. The result is an unparalleled and integrated pool of expertise. The island's professional firms comprise second- and third-generation professional men and women steeped in international and corporate law. Lloyd's has an impressive office tower in London in which insurance matters hold sway; Bermuda has a whole city.

This summer, ACE and XL took possession of purpose-built headquarters, side by side on the site of the former Bermudiana Hotel. Occupying three-quarters of a million square feet between them, the two companies underlined their long-term commitment to Bermuda. The relocation of the two largest Bermuda companies allowed several other companies to move into vacated space, but it is an indicator of the health of the Bermuda insurance market that office space in Hamilton remains, more or less, fully occupied.

The second half of the year saw a number of Bermuda insurers and reinsurers exporting their expertise.

Stirling Cooke Brown Insurance Brokers, the London-based reinsurance intermediary subsidiary of Bermuda's Stirling Cooke Brown Holdings, formed a new special risks division, specialising in designing and placing insurance and reinsurance programmes involving warranty, residual value and related coverages, primarily on behalf of leasing companies. Overseas Partners US Re announced the opening of its new Chicago area office in October, accompanying a move into the accident and health markets. And PartnerRe has announced it has been granted a branch license in Hong Kong.

In sum, 2001 has been an active year in the growing Bermuda insurance and reinsurance market.

Bermuda has now surpassed Lloyd's, by most yardsticks, as the world's second most important insurance centre. In little more than a generation, Bermuda has experienced the birth and growth of an industry that has gone from zero to tens of billions of dollars in premiums and capital and surplus, providing a stable location for a global industry.

Frequent surveys reveal that those who do business in Bermuda routinely cite several factors in support of their choice of location, chief among them: state-of-the-art telecommunications and internet access; Bermuda's physical location at the crossroads of Europe and the Americas; the high degree of professionalism evident throughout Bermuda's international business sector; appropriate regulation; and a ‘can do' attitude that enables ideas to come quickly to fruition with a minimum of difficulty.

For those who think of Bermuda as a vacation destination, the island offers first-class accommodation. Business travellers often plan their trips to enable them to take in a round of golf or a couple of days off, once their work is done.

At the heart of Bermuda's success, however, lies a partnership between the public and private sectors that has led to Bermuda being christened ‘the world's insurance laboratory'. All the indications are that the formulae developed in the laboratory continue to produce success.