For the ninth year Global Reinsurance takes a look at the developments in the Bermuda market
To download a PDF of this article as it appears in the magazine click here
IntroductionAfter the whirlwind of formations in late 2001 and early 2002, and the final death rattle of soft market victims during the course of 2002, last year proved a 'bedding in' period for new and old Bermuda players alike. Right at the turn of the year, the Gog and Magog of Hamilton - ACE and XL - poured substantial sums into back-year reserves. ACE announced a $354m charge as part of its Q4 2002 figures, while XL strengthened its US casualty reserves to the tune of $215m. Alas, this wasn't to be XL's last foray into the land of deteriorating portfolios, and by the end of last year it added a further $647m to reserves, under the watchful eye of XL supremo Brian O'Hara, who had decided to personally oversee the analysis of the problem.The sheer size of these Bermudian behemoths meant that these problems, while by no means trivial, were in no way life threatening. The same could not be said for several of their now deceased Bermuda brethren. During the course of 2003, Trenwick initially ceased underwriting in the US, then shut down all its operations, with the exception of its Lloyd's business, which it sold to its management. During the course of the year, as well, a long-awaited Pennsylvania court decision finally put failed carriers Legion and Villanova into liquidation, and allowed the formation of a creditors scheme of arrangement at Bermuda-based parent Mutual Risk Management.In the meantime, Annuity Life & Re has been putting up a truly Lazarene display, surviving the threat of a trading suspension and delisting to continue to see some interest in its stock, albeit around the 20-40 marker, rather than the 160 it was trading at right at the beginning of last year.Later in the year, specialty life reinsurer Hampton Re went into liquidation, apparently leaving fairly substantial losses in its wake, and the once stellar Centre Solutions crept under a bushel and quietly slipped into run-off.The class of 2001 were, however, on a roll. In the first few months of the year, AXIS spread its operations into the US by acquiring Royal & SunAlliance Personal Insurance Co, as well as acquiring the renewal rights to Kemper's D&O business; Arch boosted its hull and liability business by buying renewal rights from CNA; Endurance IPOed on the New York Stock Exchange and bought Hartford's in-force US property/casualty reinsurance business; and almost newby White Mountains went to market with a $700m senior note offering.In fact, fund-raising, listing and generally flirting with the markets were very much the flavour of the year in 2003. AXIS and Aspen (the rebranded Wellington Re, a breakaway from the semi-eponymous Lloyd's agency) both IPOed on the New York Stock Exchange in the course of the year, and a plethora of their Bermuda big brothers, including ACE, XL, RenaissanceRe and PXRE raised funds from hungry investors. Indeed, the appetite seemed so good for Bermudian re/insurance stock that some of the class of 2001 boys were soon back for another round of fund or debt raising.On the IPO side, the year was very neatly rounded off by ACE Guaranty floating, with Dominic Frederico at the helm. Frederico's move away from the bosom of ACE appeared concurrent with the rise of Evan Greenberg, who by mid-year had apparently cemented himself in the very heart of the organisation as President and COO. This, however, was somewhat of a feint, since he has now taken the sceptre of ACE CEO, as the ultimate ACE man, Brian Duperreault, gradually hands over the regalia.Diversification has been a strong theme during the course of 2003, and only the purists have resisted the urge to spread the reach of their operations while the market's hard. Max Re, originally set up to take on life portfolios and play an original investment strategy (a business plan stymied by severely underperforming investment markets) in the summer received a license for non-life insurance business through its Dublin-based Max Insurance Europe Ltd, to write excess casualty and professional lines. In the meantime, Imagine, originally set up as a finite reinsurer, bought into Lloyd's, both into an existing agency, Greenwich, and a UK liability start-up, Illium. Lloyd's was also looking in Bermuda's direction. Wellington Re, a breakaway from the famous Lloyd's agency, renamed itself Aspen, while GoshawK failed at Lloyd's but continued successfully with its Bermuda reinsurance outfit, recently renamed Rosemont Re. Interestingly, Bermuda's investment in Lloyd's is currently dropping in both relative and absolute terms. Particularly for 2004, Bermuda's contributions to the coffeehouse coffers have tumbled to around half the capacity provided last year. With some of the heavy-handedness apparently being brought to bear on Lloyd's-based businesses by the powers that be, demanding that large profits continue to be made in what is undoubtedly an at least stabilising market - and one with continuing issues around cost - it may just be that the Bermudian bucks can be put to better use elsewhere.Although the post-9/11 captive feeding frenzy died down somewhat in the course of 2003, there was still a steady stream of new incorporations in Bermuda, and figures from the Captive Insurance Companies Association indicate that the island is still way ahead of its nearest rivals. Although Bermuda has been keeping a wary eye on the Cayman Islands, which have developed a strong reputation for hospital and physicians' captives, it still seems to be attracting new start-ups. Towards the end of 2003, Assurex Global broker network set up a new segregated cell captive, and Novus Management opened up on the island about the same time. As the genesis of Bermuda's affair with the re/insurance business back in the 1950s, the island retains a particular fondness for the captive concept, and there is little batting of eyelids that the creditors' scheme of arrangement for Mutual Risk Management has enabled the captive management and insurance brokerage operations of the failed company to continue carrying on business as an independent company.
Hurricane FabianJust over a decade since Hurricane Andrew ripped through Florida, creating $16bn in insured losses, a gaping crater in capacity available to write property catastrophe business and a huge uplift in insurance premiums for said business, it was somewhat ironic that Bermuda was struck by Hurricane Fabian. Bearing in mind that some of the most famous names on the island landed on its shores to start writing property cat business in the wake of Andrew - and a few continue to cover that business - the way the island dealt with Fabian would be closely watched by competing markets. In fact, many of the great and the good of the Bermuda market were visiting the Rendez-Vous in Monte Carlo when Fabian struck. News of roofs lifted, windows smashed, boats in trees and cars in the harbour soon was circulating round Rendez-Vous delegates, but what became increasingly clear was that news was getting out from this somewhat isolated island. The business district - Hamilton - never lost power, and few of the buildings in the city were damaged. Roads, trees and buildings in more exposed parts of the island were washed or blown away, and four people lost their lives on a causeway leading to the airport, but soon the island was pretty much back to usual. Although Fabian doesn't feature on Swiss Re's table of the 20 costliest insurance losses last year, any interruption of business process could have had long-term ramifications for Bermuda as a risk location.Catastrophe business still forms a significant proportion of Bermuda's business, and some of the original post-Andrew re/insurers - the 'cat pack' - continue to write the business. Man-made catastrophes reached a close to all-time low in 2003, though the fairly benign experience on the nat cat side in 2002 saw somewhat of an uplift last year. Thunderstorms with hail in North America took particular toll on re/insurers, with the largest single loss being a May thunder/hail storm, costing $3.2bn. That the wind blows in places aside from the Atlantic was brought home by Typhoon Maemi, who followed hot on the heels of Hurricane Isabel, a September storm which made US landfall. Isabel herself came close behind Bermuda's own storm, Fabian.The property cat writers generally are seeing fairly stable conditions, judging by their 2003 accounts, though XL Re has been suffering. In general, premium volumes increased, while the combined ratios remained around the level of the previous year. Endurance's purchase of LaSalle Re's property cat business in 2002 has brought a new player into the field, and there is some suggestion that premium rates are beginning to come off.As a generalisation, Bermudian re/insurers listed on the New York Stock Exchange have fared pretty much in line with the market. Annuity & Life Re has proved a somewhat obvious exception to this rule, though the fact that it stopped accepting new business and received a delisting warning from the NYSE in the spring of last year probably didn't help its pricing. For many of the players, though, the upwards movement in stock prices has strengthened their capitalisation quite considerably, and the ease with which listed companies recently have been able to access sources of funding would indicate that the investment markets feel them to be an interesting option. Unlike 2002, last year saw no particularly outstanding players, though the uplifts in capitalisations surpassed the 65% mark for both Arch and Everest Re. Only XL languished in the single digit increases for capitalisation, perhaps not surprising bearing in mind the reserving issues it was facing at both ends of the year.
A telling periodNow that the post-9/11 start-ups have settled in, inevitably thoughts are turning to mergers and acquisitions. Few people would dispute that the market currently has reached its pinnacle, and Bermuda is pretty much on the top of the wave. Falling premiums and conditions may push some players towards the old game of buying in books in order to maintain premium. So far, though, discipline seems to have been pretty much maintained. But the next few months could well be the telling time, particularly as we enter the hurricane season.To download a PDF of this article as it appears in the magazine click here