Bermudians flocked to Lloyd’s last year, driven by the need to diversify into new markets. Given the two-way traffic between the jurisdictions, do Bermudians and Londoners make a natural fit? Or are Bermuda shorts proving a chilly option for Lloyd’s? Mairi Mallon investigates.
The interest shown by Bermudians in Lloyd’s of London in the past year is unlikely to abate, according to leading industry figures. Many Bermudian reinsurers have been busy sniffing out the right syndicates and then snapping them up. They have been paying top dollar for platforms that will give them global licences and enable them to improve their distribution networks. Others have opted to set up their own syndicates or London insurance operations.
Reforms at Lloyd’s, the Equitas/Berkshire Hathaway deal and a few years of stellar results have also made it a very attractive platform for the Bermudians, cash rich after several years without hurricanes hitting the US coast.
Time to diversify
“Pressure from the rating agencies to write a diversified business mean that Bermuda re/insurers are looking towards Lloyd’s as an option to create a more diverse portfolio of business,” said James Kent, vice president of Willis Re Bermuda. “Many Bermuda reinsurers do not have an S&P ‘A+’ rating, and therefore will benefit from the higher rating that applies to Lloyd’s syndicates. There is also a perception that some international business is shown to Lloyd’s syndicates that doesn’t normally get shown to Bermuda re/insurers.”
Those Bermuda firms that have made the leap include Montpelier Re, Validus Re, Ariel Re, Tokio Marine and most recently, Argo Group. Rumour has it that Ironshore is among other Bermudians still looking for a London operation, so more deals may happen in 2008. No one really knows yet how well these companies are going to integrate, as none have even made it to the 12 month mark. All of them are still in a honeymoon period, despite a difficult market.
John Andre, vice president of the property casualty division at rating agency AM Best says: “It has only been a few months, so I don’t know if it is too soon to say how they are doing. It will be a while before we see what the pluses and minuses are. We see it at the moment as a strategic move, but we need over a year and then we can evaluate the true impact.”
Mergers and acquisitions for diversification and growth are nothing new. “ACE and XL have done this a long time ago,” says Tim Johnson, director of specialist recruiters EJS Search. “They had to diversify to keep shareholders happy. Insurance is all about spreading the risk and that is what they are doing.”
A good fit
Don Kramer chief executive officer of Ariel Re says their London operation is proving to be a good fit. “For us it is going very well. The culture of these guys works very well with us.” Last summer, the Class of 2005 Bermudian start-up paid £193m for the Lloyd’s re/insurer and managing agent Atrium. Kramer says the timing couldn’t have been better. “We are in a tough market and they are the right guys to team up with in this climate. They are not afraid to turn business down.”
“Reforms at Lloydâ€™s, the Equitas/Berkshire Hathaway deal and a few yearsâ€™ of stellar results have made Lloydâ€™s a very attractive platform for the Bermudians
Kramer has not found any problems with cultural differences between the way they work in Bermuda and London. “In very many ways they look like us,” he explains. Ariel was pipped at the post to become the first Bermudian to buy into Lloyd’s by Validus Holdings buying up Talbot Holdings on 2 July 2007 for $382m. The acquisition doubled the size of Validus Re, another 2005 start-up, overnight. Similar to Validus, Talbot writes primarily short-tail lines of business but, as a complement to Validus, focuses mostly on insurance, as opposed to reinsurance risks and on specialty lines.
“With Talbot we got everything we thought we were getting and in fact their performance has been spectacular since we acquired them,” said Ed Noonan, chief executive officer of Validus Re. “In the first six months we have made $81m on the $382m we paid for the company. Only $182m of that was equity, so generating an $81m return against six months is pretty good by anybody’s standards.”
He is full of praise for the London market and sees Lloyd’s as a natural platform for not just Bermuda-based companies, but as an attractive market in general. “I think that everybody else has figured out that the London market – and Lloyd’s in particular – is an extremely attractive place to do business.” Noonan is very bullish about the acquisition, pointing to the syndicate opening an office in Singapore and Miami. It has also added a construction product to its lines in Talbot.
Other strategic mergers
In December last year, Millea Holdings Inc, Japan’s largest insurer, said its Bermuda-based Tokio Marine & Nichido Fire Insurance Co was going to buy Kiln for £442.2m. Kiln, which provides energy, marine, property and aviation coverage, was at the time the fourth-largest insurer by underwriting capacity in Lloyd’s. Kiln also created a new parent company in Bermuda in 2007.
2006 Bermuda start-up Ironshore confirmed on 6 December that it had approached Heritage Underwriting Agency Plc about a potential cash offer, but Ironshore’s chief executive officer Robert Deutsch said later that the asking price had been too high. Argo Group International Holdings Ltd, which was formed by the merger of the Argonaut Group and PXRE Group Ltd, did not think so. On 6 April, Argo made a £136m cash offer.
Argo chief executive officer Mark Watson told Global Reinsurance: “I think it is a pretty good fit. I see the business as complementary but not identical, so frankly we won’t change very much about how Heritage is organised.” Watson explains that while reforms in London had been spectacular, companies like his have always known the value of Lloyd’s and said Argonaut had already owned part of a syndicate five years ago.
“I think there is more value placed on the reforms at Lloyd’s in the public capital markets,” says Watson. “The capital providers are far more focused on return on capital today than they were a few years ago. Part of that has to do with reforms at Lloyd’s but part of that has to do with the expectations of capital providers. I think it is the combination of both of those things that makes Lloyd’s a very attractive marketplace to trade in today.”
In 2007, Montpelier Re opted to set up its own syndicate, Montpelier Syndicate 5151, rather than buy something ready-made. The syndicate underwrites a book of non-marine property and engineering classes and a limited amount of specialty casualty business sourced from the London, US and European markets. The syndicate’s stamp capacity for 2008 is set at £143m.
“The apparently laid-back approach of Bermudians (such as dressing down at work) may not be understood by the City boys
“It is more cost-effective setting up our own syndicate,” says Tom Busher, head of European Operations of Montpelier Re and chief operating officer of the Montpelier Group. “It is also consistent with our style – picking the people first and then growing out from there – and we can build out the platform to match their expertise.” He explains that setting up in Lloyd’s has given the company access to EU licences as well as giving it better distribution channels for its products.
“We had been thinking about it for quite a long time before we did it,” adds Busher. “You have to remember that Lloyd’s is very careful about new admissions, so some of the applications you are seeing coming to fruition now may actually have been in the pipeline for a little while.”
Bermudian companies are aiming to create “an optimised platform that gives them access to all the key markets and the Lloyd’s EU licence is a very useful thing to have,” according to Busher. The fact Lloyd’s also has licences around the world is also very helpful. “It is a fantastic platform from which to trade. It does not mean you use them all straight out of the box, but they are there and there is a big infrastructure there which is available to help you get your distribution in good shape.”
While everyone says the fit is perfect, some of the softer business issues may see some conflict, explains EJS Search’s Johnson. Long Friday lunches do not sit well with very corporate American companies, for instance, and the apparently laid-back approach of Bermudians (such as dressing down at work) may not be understood by the City boys. “But these are easily overcome,” he adds.
Now that the traffic between Bermuda and London is both ways, does this mean the London versus Bermuda debate is somewhat irrelevant? “I think that the rivalry is dying down a bit now,” says Kramer. “There is so much cross-fertilisation between Bermuda and London now.” Johnson agrees. “It is settling down. Both have good and bad points.”
The blurring of these lines may continue. There is no doubt that Bermuda’s low taxes and industry expertise are a lure for companies around the world and that London is still being eyed up by Bermudians (Chaucer has been picked out as another prime takeover target). “I think there are still a couple who would like to buy into London and there are a couple of good syndicates that are a size that makes them acquirable,” reveals Noonan. “There are probably a few deals left when it is all said and done.”
Mairi Mallon is a freelance journalist.