Bermuda (noun, proper). Bermuda was once written off as a speck in the ocean by former SCOR chief executive Jacques Blondeau, but while the international reinsurance market in Paris borders on irrelevant, Bermuda swells. It is home (on paper, at least) to a handful of global reinsurance powerhouses, to several important niche players, and to the newest international launches - the ones that caused so much distress at renewals by exerting a distinct and predictable effect on renewal rates, and their cavalier willingness to grant terrorism cover for free.
Bermuda did not always wield such power. It began as the frontier - a place where companies like Pinnacle could use time and distance policies to accrue tax-free income on the London market's reserves. Something of a conventional market arose, too, but back then no one really thought Bermuda would amount to anything. It was the Sydney of its day - a land of adverse selection where brokers could take business they couldn't place at home. Yet bit by bit, launch by launch, IPO by IPO, Bermuda proved its mettle.
In the Sixties, men in singular short trousers began putting captive insurers in Bermuda, where corporations larger than their insurers could park their reserves away from the prying eyes of the IRS. The captive-boosters were bolstered in 1972 when Oil Insurance Ltd (OIL), the energy sector's biggest mutual, chose Bermuda as its haven of choice. Soon after, Bermuda's Insurance Act 1978 expanded the framework for the easy incorporation of captives on its 21 square miles of mid-Atlantic archipelago. US companies sped across 700 miles of ocean to form tax-efficient insurers on the island, and today Bermuda is the captive capital of the world, turning over more than $10bn a year.
More was to come. In 1985, an egregious shortage of casualty capacity led to the formation of ACE and Exel (now XL), the first signs of a real Bermudian market. Both have become giants through acquisition, straying far from their excess liability roots. They could, now, descriptively be called, respectively, ACE-CODA-INA-Cigna-Methuen-Tarquin-Tempest Re-Ockham-CAT-Westchester, and XL-GCRe-Brockbank-Mid Ocean Re-Latin American Re-Intercargo-Nac Re-Le Mans Ré-Winterthur.
Next came the finite reinsurers, attracted by the ability to accrue investment income sans taxes, for the ultimate experience account. The Zurich's Centre Re was first, followed by Sirius operation Scandinavian Re, low-retention joint-venture Inter-Ocean Re (managed by American Re), SCOR's Commercial Risk Partners, and finally Stockton Re. However, Scan Re was shut last year as ultimate parent ABB faced woes of its own, and SCOR shut down Commercial Risk under similar circumstances. Stockton burned its fingers at Lloyd's and its former president and chief executive Dan Malloy recently surfaced at Benfield Blanch; Centre has pulled out of financial guarantee business. A big slice of Inter-Ocean was sold to GMAC Re, while finite latecomers Arrow Re and Lehman Re appear to have done nothing much at all. Max Re realised that, in the 4% investment world, they were better off writing general liability.
The class of `93 provided the next wave of Bermuda action - seven property cat reinsurers launched at the height of the hard market: CentreCat, IPC Re, La Salle Re, Mid Ocean Re, Partner Re, Renaissance Re and Tempest Re. AIG added Starr Excess to the Bermuda liability club the same year. The Cat Pack had mixed outcomes, but most sent dividends to their sponsors.
If you pay too much tax, you can move your holding company to Bermuda. So many reinsurers did this that the word `redomicile' was invented in the late 1990s. Everest Re, PXRE, Trenwick, Willis and others all made the move (following in the footsteps of liability-enhanced captive dumping ground Emlico, General Electric's Energy Mutual Liability Insurance Co, which was used conveniently to walk away from pollution liabilities, while continuing to collect reinsurance assets). Recently, the California Earthquake Authority has informed the redomiciled Bermuda companies that they shouldn't bother seeking to renew their share of the CEA programme.
Bermuda is tiny, distant and populated by people with unique dress sense. Nonetheless, the class of `01 - Arch, AWAC, Axis, DaVinci, Endurance, Montpelier and Wellington - prove that it remains the domicile of choice. It is a great place for investors to launch a risk carrier, then set up an exit route to use when the market softens a bit. Provided the US Congress doesn't get too excited about lost revenues and easy licences (just as the EU is comfy with Hamilton's old-world pen-pal Dublin), Bermuda will thrive.