With a tug of war triangle over IPC/Max, and the viability of business models called into question, the Bermudian market finds itself in uncharted waters, writes Roger Crombie.

2008 was not a great year for the industry. Estimates of net losses last year in Bermuda run around $10bn, due to a significant number of relatively small catastrophes and, unusually, losses incurred on the other side of the balance sheet, following the collapse of some major names in the investment management world.

The simultaneous loss of faith in the credit markets mean that affordable capital has all but dried up. The name of the game in 2009 is managing the existing capital base on the assumption that more would be hard, or impossible, to come by.

This situation calls into question the viability of the business model operated by most of the Bermuda companies. The post-catastrophe refunding model requires companies that lose a significant portion of their capital in a Hurricane Katrina or 9/11-sized event to look to the capital markets to make good their losses. Without the ability to recharge their capital base, re/insurance companies that were to suffer major losses — as happened in 2001 and 2005 — would almost certainly be forced into run-off.

That scenario is doubtless a concern, but right now all that companies can do is to look to their aggregates to minimise the possibility and hope that the current minority view, that such extreme circumstances would pry loose the necessary capital, would prevail.

Such concerns are among the drivers of the tug-of-war that IPC’s marriage to Max Capital Group became this spring. Consolidation in the Bermuda market is overdue, many feel. The Class of 1993 was reduced to a rump within five years of its foundation, yet the 2001 brigade has not, until now, eight years later, been the subject of consolidation. The events of 2004 and 2005 are thought to have delayed the process.

If Max succeeds, IPC would be the surviving entity, and would then change its name to Max Capital Group, under which rubric it would proceed as one of Bermuda’s largest reinsurers. Max’s Marty Becker would run the show — the only executive director on a proposed board of 12 — while IPC’s Jim Bryce would retire in due course after 40 years in the industry. All was proceeding according to plan when, from nowhere, Validus Holdings crashed the party with a bid of its own for IPC.

The question now is whether the odd man out in the IPC tussle — and at this writing, Max’s head start seems to have given it the upper hand — will look elsewhere to achieve the diversification and scale the market now demands.

THE BIG THREE

It is normally possible to analyse the Bermuda market in tranches, companies of a like size sharing a similar outlook, but even that has changed in these unprecedented times. Almost every Bermuda company is a special case today, whether by mix of business, prospects, or individual circumstances.

Take, for example, the big three: ACE, XL Capital and AIG.

ACE is no longer a Bermuda-headquartered company, having become a Swiss citizen with Bermuda insurance and reinsurance operations. Management is keen to stress that the redomestication has meant no real change in Bermuda, but that is belied by the word on the street, which has headcount diminishing significantly as foreign staff on work permits reportedly show less interest in renewing their papers. Net premiums earned at ACE Bermuda have fallen to 6% of the group total, or less than $800m, according to the company’s 2008 annual report.

XL Capital has shrunk both its complement and its business in Bermuda, as part of a survival strategy that appears to be working. Six months ago, with the share price all but evaporated and fourth quarter losses — once again — of epic proportions, the

betting was that XL would not make it. Indeed, in the teeth of winter, when internal activity reached fever pitch at Max Capital Group and IPC Holdings in the same week, the outside guess was that both were preparing for a dogfight of their own over the acquisition of XL’s property/casualty operations. We know now that such was not the case.

XL all but admitted that despite its best efforts to entice a buyer, none was to be found. The Max/IPC rumours supplanted similar views of an Arch/AXIS bidding war for XL, predicated on either’s need for a global franchise. The reality, that both Arch and AXIS already had one, did not affect the hearsay at the time.

As it turns out, XL looks to have survived on its own two feet, wiser but smaller. Mike McGavick, parachuted in from Seattle, will earn the credit for a job well done. If you’re looking for office accommodation in Hamilton, XL has rather a lot going begging. It persuaded the Bermuda Government to let it offer this space to others, but the asking price has, to date, proved too steep.

AIG in Bermuda is an altogether different story. The official line is that the giant’s travails elsewhere have not yet affected the Bermuda operation, and there is as yet no reason to think otherwise. The AIG Building on Richmond Road does have one fewer occupant; Ernie Stempel died in March, in his 90s. If AIG in Bermuda can be said to have had a face, it would have been Stempel’s.

DISCIPLINE

Muddying the normally crystal-clear Bermuda waters, first quarter results were mixed, with a few companies — such as Aspen, Montpelier and PartnerRe — improving on their 2008 Q1 scorecard, while some others had a tougher quarter and reported lower earnings.

Two rare areas of consensus related to the often surreal quantity of hot air emanating from London and Washington about the jurisdiction, and about competition from elsewhere. Almost no one, off the record, evinces any real concern about either topic.

It wasn’t even plain whether the market was neutral but firming, slipping sideways, or just impossible to call. The Bermuda companies’ business mix is so varied these days that one man’s relatively firm market in property catastrophe reinsurance — with increases of 10 to 15% expected in the summer renewal season — is another man’s much harder market in D&O.

Normally, internal politics in Bermuda raise questions over the insurance sector, with work permit time limits and excessive rents the most recent local headaches. Fear of a recession, which has not yet taken a serious hold on the island beyond the overheated construction industry, has driven rents down. Government has privately suggested that its views on time limits may be flexible, although it is politically incapable of publicly reversing policy in this regard.

Without doubt, the capital crunch remains the greatest concern. The Bermuda insurance industry, like its competitors, has to find a way to husband what it has, and this has produced an unparalleled wave of underwriting discipline. Just about every company’s first quarter earnings comments contained words about “declining to renew business that did not meet our criteria.”

Such behaviour is more than welcome in an industry that has for too long concentrated on the top line, and it’s sad that it has taken a historic credit crunch to make what are often empty words a reality.

The prospects for the Bermuda market are inextricably interwoven with those of the global economy. The dominant business profile right now is a slightly bemused look and firmly crossed fingers.

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