Despite a quadruple hurricane hit, the devastating Indian Ocean tsunami and the ongoing investigation into insurance industry practices, Bermuda has emerged relatively unmarked from 2004, says Mairi Mallon
No one will forget 2004 because of the terrible storms that raged across the globe leaving a trail of death and destruction in their wake.
From typhoons in Japan to one of the worst hurricane seasons in memory, to the devastating Indian Ocean tsunami, the year will be indelibly marked on the psyche of a generation. But even this year of unprecedented catastrophe levels has not sunk a single Bermuda insurer. Even the 'Class of 2001' came away not just in tact, but almost unscathed.
The self-titled "risk capital of the world", Bermuda now rivals London and New York in size. It has nearly 1,300 insurers and reinsurers with $63bn in gross premiums and capital and surplus of more than $75bn. And the strength of this market has been demonstrated by the small dent made by these huge events despite the billions of dollars in insured losses logged so far.
What appears will have a more lasting if not damaging impact on the island is an inquiry into bid-rigging seven hundred miles away in New York, as Attorney General Elliot Spitzer and the US Securities and Exchange Commission investigate allegations of price-fixing and kickbacks in the insurance industry.
"The hurricanes cost a lot of money, profits are less than they would have been and that is always a downside," said David Ezekiel, chairman of the Association of Bermuda International Companies. "There was a feeling it would flush out some weaker players, but what it has done is emphasise the strength of the companies that operate in the Bermuda market."
While each of the four hurricanes in the third quarter was not of the same magnitude as Hurricane Andrew in 1992, they all feature in the top ten most costly. The estimated cumulative loss is around $25bn, which exceeds Andrew and is surpassed only by 9/11.
The Benfield report "The Pitiless Storms" on the impact on Bermuda of Charley, Frances, Ivan and Jeanne and the typhoons that hit Japan stated: "Analysis of the results of the global reinsurers in general and the Bermudians in particular indicate that the losses were an earnings event with little or no damage to the balance sheets."
Despite the impact of the hurricanes, net income for the top reinsurers in Bermuda in the third quarter was $3.3bn, although this was down 26% on 2003. Only three companies, RenaissanceRe, Quanta and PXRE, reported negative results, and only five reported combined ratios over 100% with the average combined ratio at 95.6% (2003: 88.4%).
"It is not so much that the hurricanes had no impact," said Mr Ezekiel.
"They certainly had an impact on profits, but not on capital. For a number of companies it did wipe out the quarter's profit. I don't think any of them expected four in a row. Certainly after the first and the second one, the impact was not much on profits. The last two were not only unexpected but also expensive. But we have had a number of catastrophe-free years and everyone had a lot in reserve."
In fact, he said the combined catastrophes gave companies more leeway in keeping reserves by staving off pressure to reduce them from shareholders and analysts.
"One thing it emphasised was that you need to go to the bigger players with substantial capital and good ratings. This means that claims are paid promptly and paid fairly. It proved the strength of big players and it certainly proved the strength of the Bermuda players," said Mr Ezekiel.
No single company was hit hard at the end of the day and market worries about single new companies being unable to cope proved unfounded.
Mr Ezekiel added: "So we have come out and put the record straight on that. The company whose profit was hit the most was RenaissanceRe, but that is the focus of what they do. They are very much a high severity low frequency business."
RenassanceRe had a projected loss of $100m for each hurricane and reported a loss of $520m for the third quarter.
Benfield said: "The minimal impact of the storms on the Bermudian's balance sheets confirms that the unprecedented frequency of storms was an earnings event. Even if the full after-tax losses had burned through to the companies' capita, the effect in most cases would have been painful only for a handful of companies."
As property catastrophe specialists, RenaissanceRe and PXRE have the highest exposure of capital to losses at 19% and 15% respectively.
Benfield said that this lack of damage to reinsurer's balance sheets suggested that any positive impact on pricing may be muted despite the generally bullish remarks of industry leaders.
When the earthquake and tsunami struck on 26 December, no one could believe the scale of the disaster. As the estimates of the dead rose by tens of thousand each day, it became clear that while the cost in terms of death and suffering were unimaginable, very little of the region was either insured or adequately insured.
The disaster caused billions of dollars worth of damage but is not expected to result in significant losses for the insurance industry. It is a harsh reminder of the desperate poverty in the hardest-hit areas.
While economic losses are set to top $13bn, insured losses are estimated at between $2.5bn to $3bn. Swiss Re said it expects its losses from the tsunami to remain below 100m Swiss francs (£45.25m), while Munich Re estimates its damage claims to be less than 100m euros (£70m). In January, PartnerRe Ltd estimated claims relating to its exposure to be between $25m-$35m.
"It will be costly, but one of the tragic things about loss in Asia is that while the damage is widespread, there is a lot of uninsured damage," said Mr Ezekiel. "If you are talking about the east coast of India, you have very large insured costs, but in the poorer areas of Sri Lanka, insurance isn't one of the things they have. It is way less than the accumulated cost of the Florida hurricanes. One of the things when it comes to this area either things are uninsured or underinsured."
But he did say that South Asia may be seen as an emerging market as governments reassessed the way they insured their property. He said: "It is a tough one. How does one insure for what appears to be a once in a lifetime event?"
The Spitzer investigation
The real storm for the industry in general and as a consequence in Bermuda is the Spitzer investigation. The investigation has drawn attention to the world's three largest brokerages, Marsh & McLennan Cos, Aon Corp, and Willis Group Holdings Ltd. In October, Spitzer filed a lawsuit against Marsh, alleging price fixing and kickbacks. The allegations have seen a number of Bermuda companies receive subpoenas from his offices and all three brokerage firms have large offices in Bermuda. Marsh, Aon and Willis have stopped accepting fees from insurance companies after Spitzer likened them to kickbacks. The fees produced $845m of annual revenue for Marsh, which is seeking to settle Spitzer's allegations. Spitzer hasn't sued Willis or Aon.
Ace was named in the Marsh complaint with three other companies whose employees participated in the alleged practices, though Ace was not named as a defendant in the same suit. Other companies in Bermuda included statements in their Q3 2004 announcements stating they either had no involvement in premium service agreements or where they had, these had now been cancelled.
"The impact is just not good for the industry," said Mr Ezekiel. "Clearly it is not good for the companies involved. On the plus side all companies it affects are financially very strong. Notwithstanding the cost of any fines, there will certainly be damage to the businesses, some permanent due to loss of income from business or some short term due to losing clients."
And he said that the investigation included some of the biggest names in the market, and when they had finished their house cleaning following the investigation they would come back stronger.
"I don't know if there will be a specific impact on Bermuda. Three or four players have large operations in Bermuda. If they downsize their global operations I am sure it will have an impact," he said. "The industry will come out different in the end, but it is probably not over yet, it feels as if there is more to come. Once the box gets opened it sets the scene for the disgruntled employee or customer to come out with something."
12 month forecast
The catastrophe losses seen in 2004 are the most costly in history and there is a general consensus that this will slow any softening in catastrophe pricing. Some suggest that rates will hold, with lines such as medical malpractice and even Directors' & Officers', potentially increasing.
That, combined with a more stable investment outlook - the 2004 bond market was much better than everyone expected - would mean that the market would be able to hold its own well into 2005.
Benfield was not so optimistic "In the short term, with balance sheets in tact and robust, the more bullish remarks from the market may appear optimistic as rates are still expected to decline outside the storm affected region in the forthcoming renewal season and into 2005."
Among the more bullish forecasts were the remarks of Jeffrey L Radke, president and chief executive officer of PXRE Group. He said: "We believe the hurricane losses will create additional opportunities for us in our core lines of business. For 2005, we expect rate increases of 10% to 15% on our entire premium base. Specifically, by line of business, we expect rate increases of 10% to 15% in our worldwide retrocessional business."
Anthony Taylor, president and chief executive officer of Montpelier Re, was also optimistic about US pricing prospects: "Overall property renewal rates in January are expected to be higher than seen in 2004 as a consequence of the four large hurricanes. The largest increases are expected in property catastrophe programs in Florida and Southeast US but modest increases could be experienced over the wider property market."
John Charman, president and chief executive officer of AXIS Capital, commented: "Overall, I expect the recent catastrophe activity will impact industry pricing positively, particularly for property catastrophe business ... I also expect that recent market dislocation will accelerate the flight to quality in the reinsurance market, which will remain broadly healthy."
The prognosis from James N Stanard, chairman and chief executive officer of RenaissanceRe Holdings Ltd, was more muted. He said: "For 2005, we project roughly flat premium in catastrophe and specialty reinsurance.
We continue to see strong growth in the individual risk market."
Patrick Thiele, president chief executive officer of PartnerRe, offered a somewhat more bearish view. He said, "As we enter the important 1 January renewal season, we remain realistic about the state of the global reinsurance market. While we expect the recent natural catastrophes and competitive dislocations to have a steadying influence on pricing in some lines, we continue to expect prices and terms and conditions to be more competitive at 1 January."
'Class of 2001'
There had been speculation that some of the 'Class of 2001' would fall by the wayside, merge or be bought out by bigger fish. And while there appears to be no sign of this happening, speculation continues, partly fuelled by many of the original investors pulling out and some of the seasoned chief executives stepping to one side to be replaced by younger guns.
A recent KPMG report on Bermuda suggested it was time for changes in this new group of companies: "While larger, older Bermuda firms such as ACE and XL are still digesting acquisitions, some of the smaller monoline island firms might be ready to broaden their business lines through acquisition, or sell and cash out," it said. "Some of the Class of 2001 may grow through mergers in order to get large enough for an initial public offering.
"Still other companies may be on the hunt for talent. There are some very good underwriting teams here that might be very attractive. And an acquisition is a way to buy the team."
But Mr Ezekiel disagrees there will be consolidation. "It is tough to see that. There don't seem to be any that need partners. Each is headed up by pretty strong individuals, from Scott Carmelani, to Tony Taylor.
"None of them are ready to exit the market or to be number two to someone else. I would be very surprised to see consolidation in 2005. They are all at the very early stages of their business plans as they were set up at the end of 2001 or the beginning of 2002, and I personally don't see it."
The attraction of setting up shop in Bermuda has not waned - and as a testament to that, life reinsurer Wilton Re set up its operations in January.
The start-up has raised more than $600m in capital backing via a private placement of common stock. The main backer for the Bermudian venture is Trident III, a private equity fund managed by Marsh & McLennan Cos' MMC Capital. Other investors include Wilton Re Holdings chairman Chris Stroup and several private equity funds managed by Vestar Capital Partners and Friedman Fleischer & Lowe, among others. Wilton Re Group's reinsurance business will focus on US traditional mortality business and life insurance run-off solutions.
Also in Bermuda, recently set up Quanta Capital Holdings, which provides specialty insurance, reinsurance and risk consulting services through its subsidiaries, has announced the completion of a private placement of $40m of trust-preferred securities as part of a pool transaction.
Chief executive Tobey Russ said: "Securing this capital provides Quanta with the additional resources to expand our premium writings in 2005 and to facilitate our business strategy to grow the core specialty lines insurance business."
"Bermuda has become a center of excellence for the placement of insurance and reinsurance and that differentiates it from the other islands trying to build offshore business," said Laline Carvalho, a director and insurance analyst with Standard & Poor's. "Bermuda will continue to be seen as an insurance market that companies want to go to."
With more than 1,600 exempted companies, a skilled workforce and substantial insurance assets of more than $200bn at the end of 2002, Bermuda's 50-year-old insurance market is the most economically significant sector of the Island's expanding international business industry.
Bermuda is a self-governing, British territory approximately 570 miles east of North Carolina - less than two-hours from New York, by air.
Bermuda has a population of about 65,000 and is 22 square miles in size, made up of eight major islands.
It is in the Atlantic Time Zone, one hour ahead of Eastern Standard Time in the US and four hours behind Greenwich Mean Time in the UK.
Mairi Mallon is a freelance contributor to Global Reinsurance.