‘The reports of my death have been greatly exaggerated’

Mark Twain’s famous comment on his premature obituary echoes sentiments felt by many in the Bermuda market, as the Island faces suggestions from some quarters that its hey-day is at an end.  However, despite talk of Bermuda’s star being on the wane, the Island continues to attract enviable levels of new capital, with 2012-2013 ushering in a raft of new entrants.

While the form of that capital may well have changed – evolving from classes of traditional rated re/insurers to special purpose vehicles such as sidecars and insurance-linked securities (ILS) - the strength of the Bermuda market and its involvement in the market’s ongoing evolution, suggest reports of its death have been greatly exaggerated.

According to figures from the Bermuda Monetary Authority (BMA) the market wrote over $100 billion in premiums in 2012, with capital held reaching $168 billion in 2012 and total assets topping $452 billion for that year. Statistics from the Association of Bermuda Insurers and Reinsurers (ABIR) paint a similarly compelling picture of ongoing success, with the total capital and surplus base of its 19-strong bench of surveyed members reaching $95 billion—the highest level achieved since the ABIR began its survey seven years ago.  And this is in spite of near-record cat losses suffered by the industry in 2011.

Traditional rated players continued to perform well, with premiums written by the ABIR group rising to $66.4 billion in 2012, although market income for the period was perhaps the most telling statistic. Net income for the ABIR group rose from $1.5 billion to $9.4 billion in 2012—hardly an industry on its last legs.

And despite suggestions that another class of reinsurers is unlikely, Bermuda also experienced growth among bricks and mortar players. The formation of a number of hedge-fund backed players - SAC Re, Third Point Re and PaCRe - in recent months, as well as a move onto the Island by Qatar-based Q-Re, suggest alternative capital isn’t the only new game in town. Reinsurers continue to seek out the Island’s shores as the home for their international business.

A welcome alternative

2012 registrations were markedly up on 2011 and 2010, with Bermuda’s special purpose insurer legislation proving a particular boon to the Island’s burgeoning alternative reinsurance market. 27 were established in 2012—11 in December alone—and it seems likely that the trend will continue in 2013 as companies continue to establish special purpose vehicles as an adjunct to more permanent capital.  But formations were not limited only to the alternative space, with formations of hedge-fund backed reinsurers, Class C long-term players and captive formations all achieving a strong 2012.

Source: Bermuda Monetary Authority

Further complementing the Bermuda offering—particularly in the ILS space—has been the ongoing success achieved by the Bermuda Stock Exchange. Market capitalisation has steadily climbed, with Bermuda’s SPI legislation helping to build the Island’s leading role in the ILS space. The exchange boasts 38 ILS with a market capitalisation of $5.81 billion in 2012. And Bermuda’s recent success in the ILS space meant that 40 percent of global issuance—$2.5 billion of the $6.4 billion globally—opted to list on the BSX and call Bermuda home in 2012.

Florida Citizens’ record–breaking Everglades Re cat bond was among those that opted for Bermuda’s shores in 2012, with Citizens looking to repeat the move this year, once again domiciling their transaction in Bermuda. Other major deals last year included Hannover Re’s Eurus III, which provides coverage for European windstorm; Blue Danube, a cat bond issued by Allianz that covers a host of North and Central American perils; and Embarcadero, a cat bond issued by the California Earthquake Authority to providing coverage for California earthquake risk.

Bermuda players also took advantage of SPI legislation to establish a number of sidecars, which offer further bolt-on capacity to traditional rated paper. 11 sidecars were established in 2012, injecting a further $1.9 billion of capital into the market, with Alterra, Argo, Everest Re, Lancashire, RenaissanceRe and Validus all getting in on the act, and in a number of instances, more than once.  It seems likely that further sidecars may well be considered this year – with entities having recently been established by both PartnerRe and ACE – as the rated market looks to streamline its balance sheet and extend additional capacity for peak peril risk.

Threats muted

Two leading threats to the Bermuda market do however remain. The first is the threat posed by protectionist tax policies emanating from the US, with the recent Obama budget having resuscitated that particular concern. Talking with Brad Kading, president and executive director of the Bermuda Insurers and Reinsurers Association—who has played an active role in opposing discriminatory tax measures and defended the ability of reinsurers to pool risk globally for the past seven years—it seems likely that political intransigence in Washington will delay and potentially derail a move to increase taxes on offshore reinsurance. Kading warned however that the industry needs to remain vigilant to potentially discriminatory tax measures, which he described as a “direct attack” on international re/insurance. Bermuda and the ABIR will be watching developments in Washington with interest, with the possible advancement of additional tax measures tied into the ‘grand bargain’ being struck over the financial recovery.

The second serious danger to the Bermuda market is the threat of redomestications, but that particular tap appears to have been turned off. Following the redomestication of Allied World to Switzerland and Flagstone to Luxembourg in 2010 there were suggestions in some quarters that others would follow suit. However, there have no further prominent moves and—if anything—the addition of new hedge-fund backed players and the arrival of Q-Re suggest that Bermuda is adding more players rather than losing existing ones.

Challenges undoubtedly remain for the Bermuda market—from regulation, from other domiciles and from a potential dulling of its competitive edge—but an examination of market essentials hardly paint a picture of a market in decline. Far from it, the Bermuda market continues to grow in its leading global role, adapting its offering as it takes on increasing levels of alternative capital, while continuing to build its presence in the traditional reinsurance space. Bermuda continues to remain a centre for excellence in global underwriting; a few unsubstantiated barbs are unlikely to take this away.