Bermuda has created what appears to be the most hospitable regulatory and fiscal environment for the evolution of professional (re)insurance business.
It is here that we see new (re)insurance life forms developing which will influence the development of other ventures elsewhere. In addition, the island will be a beneficiary of the growing personal wealth and ageing population in developed countries, particularly the United States, through the development of life reassurance.
This edition of Global Reinsurance marks our fifth collaboration with the insurance team led by Richard Patching at PricewaterhouseCoopers (PwC) in Bermuda. The report provides an in-depth discussion of developments in Bermuda and detailed analysis of the financial results of the major players in the market. Each year the PwC team has revised its approach to analysing the companies in the market because of the continuous change of the island's industry. This year is no exception.
Two ventures illustrating the developmental progress of reinsurance are Maximus Reinsurance Holdings (Max Re) and Tokio Millennium Re. Max Re's aim is to enhance return to shareholders, which include the Moore Holdings hedge fund, by shifting more of the risk on its balance sheet from the liability to the asset side. Concentrating on low volatility life and health business, Max Re can be more adventurous with its investments. An attraction to cedants will be that they can share the gains from this strategy.
Tokio Millennium Re is an even more radical concept - a reinsurance company set up to trade the catastrophe risks of its parent company, Tokio Marine and Fire Insurance Co with other insurers. (More information on both new ventures is contained in the PwC report and in our roundtable discussion.)
At the same time, the two former excess liability insurers which were the foundation of the island's commercial insurance market are metamorphosing into much more complex organisms, mainly through acquisitions. From the end of 1996 to the end of 1999, the total assets of ACE and XL Capital increased dramatically, primarily as a result of acquisitions: ACE from $4.6 billion to $30.1 billion (up 554%) and XL from $5.0 billion to $15.1 billion (up 202%). The island's third “billion dollar writer”, PartnerRe, also diversified through acquisition and its assets increased from $1.5 billion to $7.6 billion (up 407%).
Other markets have often had an ambivalent view of Bermuda's companies, glad of the capacity they contributed but suspicious of the lithe and swiftly moving creatures when they were burdened with losses from old years, heavy cost bases and cumbersome regulation. Most vexing to them, however, is that Bermuda does not have corporation or personal income tax. Old years will eventually be settled, cost bases can over time be reduced and some of the most unhelpful aspects of regulation reduced by negotiation, but getting governments to reduce taxes that do not affect voters directly is rather like trying to diverting the attention of the Tyrannosaurus Rex. It works best by offering alternative prey.
Thus, as ACE and XL have acquired substantial onshore business and US companies, such as PXRE and Everest Re, have relocated their holding company headquarters to Bermuda, part of the US industry has seen its opportunity. A number of US based companies, including Chubb, Hartford Financial Services Group, Liberty Mutual and Kemper Insurance have persuaded three members of the House of Representatives to sponsor a bill that would impose extra taxes on the insurers and reinsurers who reinsure US business they write into affiliated firms in domiciles that have tax rates of 7% or less - ie Bermuda.
Leaving aside the free trade issue and appetite of the US Congress for extraterritorial legislation, the mistrust of a zero tax regime is such that supporters of this measure do not acknowledge the other costs of doing business in Bermuda, which are high.
Space is at a premium and qualified staff even more so. Given the size of island's population it is probably a statistical aberration that the chairman and chief executive of one of the island's two largest companies, Brian Duperreault of ACE, is Bermudian.
However, if for no other reason than the costs of bringing in expatriate executives, it makes good sense for Bermuda international (re)insurance companies to hire Bermudians.
Numbers alone do not tell the story. Bermuda companies are in the vanguard of developments in the (re)insurance industry and one corollary is that they need, even more than their counterparts elsewhere, people with specific skills, mostly quantitative. Those people are not in over-supply even in the big city markets of the US, London and continental Europe. Non-life actuaries, for example, can demand very high salaries in London, part qualified. The developing life reinsurance market in Bermuda, which holds the promise of real growth, will only exacerbate this demand for people with mathematical skills.
The Bermuda industry's response has been to grow its own. In September 1996, several of the island's leading insurance executives set up the Bermuda Foundation for Insurance Studies (BFIS) to support Bermuda students to train for careers in insurance, and the first scholarship students have already begun to work in the industry. Nineteen students have received scholarships so far, and 11 have graduated with degrees in insurance or actuarial science. (For more on the BFI, see page 61.)
Along with other property/casualty companies, Bermuda's quoted (re)insurers have suffered from the stock market's enthusiasm for new economy stocks and bearish views of the insurance sector. The FT-Bermuda Stock Exchange insurance index had at one point actually fallen below half its July 1999 launch rate of 1000. However, by the time we prepared this report, a shift in sentiment and some good first quarter results had pushed the index back to around 650. In theory, lower stock prices diminished the ability of (re)insurers to make acquisitions for paper, but in practice they are likely to be buying companies in the same industry, which will have similar valuations, and not dot.coms. There is a dearth of non-insurance groups seeking to scoop up apparently under-priced (re)insurance companies, so although the market performance may discourage investors, their independence is apparently not under threat.
It might also make raising new capital difficult, although the success of Max Re in raising $500 million shows that there is money available if the story is good, and evidence of a real shift in rates would also probably have the same effect.
The most immediate impact is actually on the value of executives' options and this could be a factor in Bermuda's ability in the short term to attract/retain top quality senior executives. It is another reason for hiring local people. Economics and a shortage of the right skills are a great spur for persuading business to take people from the widest possible catchment pool.
Not without reason is Bermuda marketed as the world's insurance laboratory. The island is also host to the development of new products which offer the prospect of real growth, such as political risk and financial guarantee. In addition, economic growth and the ageing population in the developed world is increasing demand for asset protection and long-term saving products, which can flourish under Bermuda's tax and regulatory regime.
Bermuda is an attractive place and among offshore domiciles it offers sophisticated professional services and infrastructure. An interesting question is whether the features which have made it so successful over the last 15 years could be repeated onshore in cities where the choice of banks, accounting and law firms and accommodation is wider, and it would be easier to hire qualified staff.
No country playing host to a major insurance industry has so far been prepared to do so. Dublin, perhaps, comes the closest and it has a number of the same physical constraints as Bermuda. As a result, Bermuda seems set to continue its remarkable evolution in something that looks remarkably like natural selection.