The recent additions to the Bermuda ART market.
Despite general overcapacity in the property and casualty sector, new capital continues to be drawn to Bermuda. Incorporations for 2000 were at a record rate, with the insurance segment well represented. Having seen off KPMG's investigation into financial regulation – the last of the recent crop of international initiatives putting offshore territories under the spotlight – it will take a hard landing in the US economy before Bermuda's continued growth as an insurance and reinsurance marketplace begins to slow down.
Bermuda has emerged from the international reviews of the past three years with its reputation intact, while other offshore jurisdictions have had to expend a greater part of their energies, and legislative time, playing catch-up. The market for offshore re/insurance has not slowed because the OECD cannot collect its own taxes; indeed there are even those who argue that the focus on the offshore world has only enhanced its attractions. Bermuda, like those few other jurisdictions which have passed muster, is seeing enhanced activities.
If there is one cloud on Bermuda's horizon, it is Congressional moves to bring the global operations of Bermuda-based re/insurers under US taxation requirements. The issue of unfair competition was raised in Congress by a group of US insurers last year, before the presidential elections in November. Many thought it dead and buried, until ACE announced in February that its Philadelphia-based subsidiary ACE INA Holdings had appointed Lawrence Owen, the former US Consul General to Bermuda, to a new post as senior vice-president for external affairs. “My post includes all the relationships with external audiences for the company, including public affairs and government affairs,” Owen says. Asked if he would be dealing with the Bermuda US tax issue, he replies: “Oh, I am sure I will. Evidently the proponents of change in US law believe they should re-raise the issue in this new Congress and with the new administration and so consequently I am sure we will be involved in addressing it.”
Bermuda has always been a P&C market, but there are signs of a life reinsurance market beginning to take shape, albeit gradually, as convergence and low-cost internet distribution redefine the shape of the global re/insurance markets.
Since it turned down Harvard Medical's malpractice captive 30 years ago, which formed in Cayman instead, Bermuda has garnered relatively little life reinsurance experience. Individual companies have underwritten life reinsurance on a programme basis, but no discernible market can be said to have formed, yet.
The one exception is Annuity & Life Re, which is well established in Bermuda. It provides annuity and life reinsurance to insurers through its wholly owned subsidiaries, Annuity & Life Reassurance and Annuity & Life Re America.
“We now have over 30 major clients that presently purchase reinsurance from our company,” says Lawrence S. Doyle, president and chief executive officer. “Our mortality experience has come in as expected, as our overall mix of business now provides increased stability of earnings. We expect our customer base will continue to accelerate, as many buyers of reinsurance would prefer to do business with an independent public company. Annuity & Life Re is one of a few independent reinsurers specialising in life and annuity reinsurance.”
Others are feeling the draw of life business Kingsley Schubert, president of ACE International, is to “lead a strategic initiative to prepare ACE for its ultimate entry into the life insurance and related financial products markets,” the company says. Schubert will report directly to ACE president Brian Duperreault.
WMA Life Insurance, a Bermuda life reinsurer, recently amended several of its reinsurance agreements with Western Reserve Life Assurance of Ohio, broadening WMA Life's opportunity to increase its reinsurance on variable universal life and variable annuity policies. To exercise these options, WMA Life says it will need substantially greater amounts of cash to support the increased reinsurance it wants to write. WMA Life has $9.3bn of life reinsurance in force.
The latest entrant in the Bermuda market, ironically enough, is a medical malpractice insurer, Futuro Insurance. Structured as a rent-a-captive, Futuro is capitalised at $1.25m and managed through Bermuda-based PowersCourt Management Ltd. Futuro is part of Physicians Reciprocal Insurers (PRI), one of the largest malpractice carriers in New York State.
“The breadth of reinsurance capacity on the island is staggering and we hope to take advantage of that capacity,” says Jeanne Pores, senior vice-president, hospitals and special programmes. Initially, Futuro will write programmes on a no retained risk basis.
P&C reinsurance, particularly catastrophe, remains Bermuda's bread and butter. During the first half of last year, it was the turn of the largest reinsurers in the world to open Bermuda operations, with Allianz Re and Tokio Millennium Re settling into the business of alternative risk transfer, and Swiss Re New Markets beefing up its presence.
The start-up market has been active, with the range of several recent additions to the Bermuda reinsurance market showing the extent to which the notion of Bermuda as an ‘insurance laboratory' appears to be taking hold.
Arch Capital Group
The redomestication of the Arch Capital Group (formerly Risk Capital Holdings) brings Robert Clements to Bermuda in a new capacity. Clements, together with Robert Newhouse, was responsible for establishing ACE and XL; he is a former director of ACE and Mid-Ocean Re and remains on the board of XL Capital and the board of Annuity & Life Re.
Arch Capital, of which Clements is chairman, disposed of Arch Reinsurance, which constituted its entire reinsurance business, to Folksamerica Reinsurance in May 2000 in order to reinvent itself. Later in the year, Arch reorganised the company to become a wholly-owned subsidiary of a Bermuda holding company, moving its headquarters from Delaware to Bermuda in the process.
“The establishment of a Bermuda holding company for Arch Capital should allow us to benefit from a more favourable business, tax, regulatory and financing environment,” Clements told shareholders.
Arch provides risk services to multinational clients in the form of reinsurance and investment capital for insurance concerns. It is, essentially, a convergence play, turning a holding company that was incorporated in March 1995 as Risk Capital Reinsurance into something approaching a venture capitalist for the insurance and reinsurance sector.
Arch Capital is led by Peter Appel, an attorney formerly with the New York firm of Wilkie Farr & Gallagher.
Bermuda-based insurance and reinsurance companies are marketing new types of weather index insurance to local governments and large corporations which have substantial sensitivity to weather fluctuation. Until now, such business has generally been on an indemnity basis.
New products being marketed by Commercial Risk and Ace Tempest Reinsurance are index-linked, the index being statistics provided by registered weather stations. Cover is guaranteed to cut in at a level predetermined in the insurance contract and reported by the weather station, regardless of the degree of loss.
“In an extreme winter, local government bodies may have to spend more money to heat their buildings or remove snow from the roads, and so forth,” says Christopher Phelan, managing director of Commercial Risk. “If we can wrap all these eventualities into one insurance product then they can guarantee their budgets, instead of having to raise money to pay for them retrospectively.”
As a result of deregulation in the US, utility and energy companies have been able to make use of these index-linked products and Commercial Risk expects this pattern to be followed Europe as deregulation is applied there.
“Utilities were the quickest to embrace this product as it is easier for them to understand their risks. They know exactly what a degree change in temperature will cost them,” Phelan explains.
Brock Webel, manager of the weather desk at Ace Tempest Reinsurance, says: “The focus has been with utilities so far. But we are getting inquiries from government bodies outside the US. For instance, there is beginning to be a heightened profile for these products in the UK, where events such as the large amounts of rainfall and flooding this winter may spur them on. Another area of interest is sports-related businesses, such as operators of ski resorts who rely on levels of snowfall.”
Utilities have also been the initial focus for Element Re, a business started by XL Capital, which also writes direct weather risk alongside its derivative portfolio.
“Until now, businesses have had a limited choice in terms of how they managed their weather-related risk – to date, derivatives have been the primary mechanism,” says Element Re's chief executive officer, Michael Bortniker. “We have identified a growing demand for weather protection in insurance form, something that is more appealing to corporations around the world.”
The Element Re team Bortniker leads includes chief operating officer Lynda Clemmons, executive vice presidents Michael Corbally, who will operate from the UK, and Martin Malinow, and vice president Coi Dang. The team previously formed the core of the weather derivatives group at Enron North America, and some of them have worked together for as long as eight years.
“Our initial concentration has also been on the energy industry, particularly electric and gas utilities. That's the area in the greatest need of the product and the furthest along in the learning curve,” Clemmons says. “That is changing, however, as companies from far-ranging sectors including agriculture, construction, retail, transportation and entertainment realise the effects weather can have on the bottom line.” Element Re intends to operate worldwide, with its main focus on the US and Canada, followed by Europe and Japan.
In essence, Element Re is a convergence company, as Lusardi points out. “Increasingly, our customers have been looking for sophisticated insurance and financial solutions to their weather risk management challenges,” he says. “Element Re presents an opportunity to leverage the capital markets' experience of the principals with the financial and organisational strength of XL Capital to provide these solutions. XL believes that the integration of insurance and capital markets will become increasingly common.”
Under the guidance of former Centre executives Tom Gleeson and Brad Huntington, Imagine Re has been formed in Bermuda to invest some $200m in finite reinsurance.
Trilon Financial Corporation, of Toronto, Canada, has backed the start-up to the tune of 90% of its capital, regarding its investment in the Imagine Group as “a return to the reinsurance business, in which Trilon acquired extensive experience through its former investment in London Insurance Group.”
The Imagine Group is a second-generation finite-risk reinsurance enterprise whose goal is to become the leading provider of structured insurance and reinsurance capital to the global insurance marketplace.
George Myhal, president and chief executive officer of Trilon says: “We are excited about being back in the finite risk marketplace and are proud to have associated ourselves with a management team which brings with it tremendous depth and experience in the area.”
The Imagine Group has initial subscribed capital of $200m, with a stated goal to substantially increase its capital base in the next two years to over $1bn in consolidated shareholders' equity. “Plans and discussions for the secondary infusion of our equity capital are positively advancing and will allow us to build within a short time frame a world class capital platform without historic business or organisational constraints,” says Brad Huntington, co-chief executive officer of the
Imagine will offer products to both the property and casualty, and life and annuity sectors. Imagine's structured insurance and reinsurance products will be individually customised, capital-intensive contracts, typically written over a multi-year period to provide more predictable revenue and claim payment streams. These contracts may cover multiple lines of business.
Imagine Reinsurance Holdings, a Bermuda company, will serve as the primary holding company, with a principal office in Barbados and another planned for Ireland before year's end.
“People talk about the insurance market as if it were a uniform animal, which it is not,” Huntington says. “Some sectors are indeed over-capitalised, but others have capital constraints caused by recent losses or the effects of consolidation or growth. The latter forces are our target client base, because companies with excess capital are less incentivised to use reinsurance in any capacity.”
“A lot of capital is inefficiently compiled or not effectively deployed,” Gleeson says. “Ours is not a competitive model. We're not oriented to go out and beat everyone else. We're not going to be all things to all people.”
Imagine Re's strategy will be to limit the company's exposure to both investment and underwriting risk. “We don't want to expose ourselves too much to any market, be it capital or reinsurance,” Gleeson says.
Bermuda's alternative risk transfer market is sufficiently active to attract what might be described as alternative sponsors. The African Methodist Episcopal church has decided to channel all its worldwide insurance through its own Bermuda-based reinsurance company, AME Reinsurance, which is being managed by Marsh Management Services.
“The AME church operates throughout the continental US, parts of Canada, Bermuda and the Caribbean, England and central and southern Africa. Within 19 episcopal districts of the church, we have assets in excess of $5bn and that is what we will be working to insure and reinsure. Currently we are insured with separate carriers,” explains the Reverend Dr Leonard Santucci, provisional secretary to the new company.
Nalton Brangman, a church member and provisional vice-chairman of the new company, adds: “There are various portfolios of insurance that the church now carries. By moving them under the umbrella of the church's own insurance company we will be able to better manage the programme, and exact savings for the church.”
AME Re has been set up as a captive. Insurance will be channelled to the captive through a main US insurance company yet to be named.