Some of the major market events in Bermuda over the past year.
The rate of change in the Bermuda reinsurance sector has quickened in the past twelve months, buoyed by confirmation of firming in the global market. Bermuda reinsurers have generally taken the view that if their core business is on track, the time might be right for expansion into new lines. The result has been a shift into uncharted waters: life, annuity and health insurance. The herd instinct, for which the reinsurance sector is famous, guaranteed that where one went, others would follow.
Bermuda has had domestic life insurers for almost 100 years – Bermuda Fire & Marine was incorporated at the start of the 20th century – but its international reinsurance sector has traditionally focused on the property and casualty market.
More than 25 years ago, the Bermuda Government turned down the Harvard medical malpractice programme, for reasons largely veiled in the mists of time but probably having to do with fear of the unknown. That programme went to the Cayman Islands and led to that jurisdiction becoming, over the years, Bermuda's only meaningful offshore competitor. Until recently, the Caymans' largest physical presence company was Scottish Annuity & Life Holdings Ltd (SAL), founded in 1988 with $250m of seed capital to reinsure annuities and life insurance products, and issue customised variable life and annuity products for the high net worth market.
Commenting late in April this year that “Bermuda is the capital of the global insurance industry”, SAL chairman Michael C. French announced that his company had applied to the Bermuda Government for permission to conduct its holding company operations from Bermuda. In addition, SAL is to redomesticate its flagship subsidiary, Scottish Annuity & Life Insurance Co (Cayman), to Bermuda.
A year ago, SAL announced it was joining forces with Crown World Services of Bermuda, a designer and marketer of variable life insurance products, to form Scottish Crown (Bermuda) Group. Crown's principal focus is on international tax law, insurance product design, private banking and investment management. “Scottish Crown will be one of the largest global issuers of offshore variable insurance policies to high net worth world citizens,” French said at the time.
SAL will provide a boost to a growing Bermuda life reinsurance sector. The market leader, Annuity and Life Re (Holdings), has been growing by leaps and bounds since its formation in March 1998. The company's face amount of life reinsurance in force escalated by 68% to $77.0bn at 31 December 2000, compared with $45.4bn a year earlier. Net operating income grew by 21% for the year ended 31 December 2000 to $44.8m; net income was $40.0m for the year.
Lawrence S. Doyle, president and chief executive officer of Annuity & Life Re, said: “We have completed over 50 life reinsurance transactions in less than three years. Our large client base provides an excellent growth platform. Our revenue is driven by business written in the current year as well as continuous business written in prior years. Our franchise is in an excellent position to meet our earnings growth target of 20%+ through 2001.” XL Capital and Overseas Partners have 13% and 8% interests in Annuity & Life Re, respectively.
The WMA Corporation has experienced a similarly robust growth pattern. Its business increased by more than a third in 2000. The company, with executive offices located in Duluth, Georgia, is the parent of WMA Life Insurance, a Bermuda life reinsurer. WMA Life Insurance had nearly $9.4bn of life reinsurance in force and over $310m of annuity contract benefits in force at 31 December 2000. WMA Life reinsures over 340,000 life insurance policies, riders and annuity contracts.
Growth in revenues at WMA was primarily attributable to the growth in reinsurance premiums on WMA Life's variable universal life reinsurance business. WMA Life reinsures life insurance policies and annuities sold by a network of independent agents associated with World Marketing Alliance, which operates an international financial services sales and marketing organisation. WMA Life realised a 14% increase in life insurance policies and riders reinsured during 2000, and a 79% increase in the number of annuity policies in force.
“While 2000 has proven to be a challenging year for business, the start of this new millennium may go down as one of the most exciting and profitable times in WMA Corporation history,” said chairman and chief executive officer S. Hubert Humphrey, Jr.
The lure of new lines has tempted others into the life net. Stating that the organisation “is in the process of strategic diversification aimed at building a leading global multiline reinsurance business”, ACE subsidiary Tempest Reinsurance expanded into life, health and annuity reinsurance last year. With former London-based life reinsurer M&G Re's head John Engeström now at the helm of Tempest Re, it was little surprise when Kin K. Gee was appointed to the new position of chief life and health officer last June. ACE Tempest Life Reinsurance, as the life division is named, then hired Ari Lindner as its life actuary. ACE says it has already begun working towards offering primary life and health insurance products itself in 2002, when its agreement not to compete with Cigna – the US insurer from which it bought its property and casualty operations in July 1999 – expires. ACE is looking forward to “hitting the ground running”, developing strategies and carrying out analysis in preparation for the new insurance offerings, says a company spokesman. Kingsley Schubert will head the new life operations; his title has yet to be confirmed. Life and health insurance products will maintain ACE's strategy of “continued diversification,” chairman and chief executive officer Brian Duperreault said.
More than half the book at Max Re, which is barely 18 months old, is life and health reinsurance-related. Another Bermuda start-up, Imagine Re, says it intends to write contracts in both the life and annuity and property and casualty sectors, and Hampton Re set up a the end of March to write in-force blocks of life business, primarily on a retrocession basis. IN general, term life, variable annuities, universal life, corporate owned life and disability products are the likeliest areas of focus on the life and annuity side.
“I don't want to speak for any of the other life reinsurance companies that have set up (in Bermuda),” said Tempest Life Re's Lindner, “but it seems to me that everyone has come here with a different plan. Nobody is going to come here and be a Swiss Re, or a Transamerica – the huge shops with massive back office support. We all seem to be trying to cash in on niche markets with a very specialised type of life, health and annuity business.”
Bermuda knows about specialised markets. Most of its existing large property and casualty reinsurers service them, in one form or another.
ACE, XL Capital and PartnerRe have become multiline insurers. ACE is continuing to digest Cigna and prepare for the consolidation of its Bermuda operations in its new building on the site of the former Bermudiana Hotel. The loss of John Charman, which caused greater uproar in London than it did in Bermuda, was evidence that the company has yet to fully settle.
XL Capital's purchase of Winterthur, and the move to XL House – 464,000 square feet next door to the smaller ACE Building – will keep management occupied, but probably not for long. As XL employees were packing boxes and loading them onto trucks for the cross-town move late in April, the company extended a helping hand to a troubled Mutual Risk Management.
Within the last year, XL has restructured itself. Led by Nicholas Brown, XL's insurance operations reported almost $2bn of gross premiums for the year to 31 December 2000. By way of comparison, the reinsurance arm, under Henry Keeling, reported gross premiums of $1.2bn, and its nascent financial products and services division, led by Robert Lusardi, is as yet comparatively tiny; its 2000 revenues were just $55.4m.
PartnerRe has restructured its global operations in the half-year since Patrick Thiele succeeded Herbert Haag, but remains focussed on sensible and attainable growth. Haag remains a consultant, with the lion's share of his personal fortune invested in the continuing success of the company he founded.
Overseas Partners is, in chief executive officer Mary Hennessy's words, “wildly over-capitalised,” despite swallowing Stockton Re's finite team a few months ago and forming OPCat, a strategic partnership to write catastrophe reinsurance with RenaissanceRe. Hennessy and her team are considering a variety of options, among them life insurance, but without much enthusiasm, as yet: writing long-tail business would be a significant break with the company's past.
RenaissanceRe, more than most, has concentrated on its knitting, or, more specifically, its catastrophe modelling. Its ventures with Overseas Partners and Top Layer Re have added to an underwriting performance that appears unaffected by the relative firmness of the market. Managed catastrophe premiums at Ren Re grew by 40% in 2000, and early results for 2001 confirmed the trend. “A successful January renewal season has provided us with a very attractive portfolio of catastrophe reinsurance in 2001, leading us to expect another year of excellent performance,” said James N. Stanard, chairman, president and chief executive officer.
The real story of 2000 may turn out to be the move to Bermuda from Connecticut of Arch Capital Group, a merchant bank of sorts for insurance and reinsurance companies, led by Harvard whiz Peter Appel and chairman Robert Clements. Clements founded, or had a hand in the establishment of, ACE, XL, Stockton Re, Centre Re, Scuul and others; who's to say that Arch Capital, on the cutting edge of convergence for more than five years (in a former life, the company was Risk Capital Holdings), won't show equally dramatic growth in the year ahead?
This time last year, the hot topics in the insurance industry were whether the 13-year soft market was really ending (rates have firmed somewhat, but have farther to climb); how the OECD and the other alphabet soup initiatives might impact Bermuda's performance (the Scottish Annuity & Life move suggests the news is not all bad for Bermuda); globalisation; consolidation (the consensus view is that this horse has not yet run the course); whether or not convergence would bite (it has), and the over-capitalisation of the insurance market, which remains an issue, albeit less critically than it was a year ago.
One thing is for sure: the last twelve months in Bermuda have been anything but dull.