The Bermuda Stock Exchange provides the ideal listing environment for insurance-linked securities.
With an insurance market comprising nearly 1,400 companies, total assets of $442 billion and gross premiums of $142 billion, Bermuda, regarded as a pioneer and leader of the offshore insurance industry, has the third-largest insurance market in the world.
At the heart of this insurance market sits the Bermuda Stock Exchange (BSX). Founded in 1971, and with listed insurance companies and insurance-linked securities worth $39 billion, the BSX is becoming the exchange centre for the listing of these products. The exchange provides sophisticated and institutional investors with a single location to obtain access to, and information on, this developing market segment.
Regulating both the insurance and capital markets in Bermuda is the Bermuda Monetary Authority (BMA), under whose auspices the Insurance Amendment Act 2008 (Insurance Amendment Act) came into effect, in October 2009.
Described as an “exciting development for Bermuda” by Andre Perez, chief executive officer of Horseshoe Group, the Insurance Amendment Act provides specific risk-based regulations for the establishment of special purpose insurers (SPIs) as a new class of insurer within Bermuda’s insurance class system. The new legislation recognises and facilitates the structure of insurance-linked securities (ILS), such as catastrophe bonds. A listing on an internationally recognised stock exchange makes these securities significantly more attractive for potential investors.
This article explores the effect that the Insurance Amendment Act will have on the insurance industry and Bermuda’s capital markets. It argues that Bermuda’s ability to remain at the forefront of insurance product innovation, its commercially sensible regulatory regime, its international stock exchange, wider financial and legal services sector, and geographical position between the US and European markets, make it the logical jurisdiction in which the insurance world and capital markets should converge.
Insurance-linked securities: BSX’s experience and regulation
The BSX is the world’s leading fully electronic offshore stock market. It has nearly 700 listed securities and a combined market capitalisation of approximately $200 billion.
Unlike other exchanges, the BSX sits at the centre of this market, making this exchange one of the few with the unique opportunity to play a significant role in the convergence of the insurance and capital markets. The Royal Gazette/BSX Bermuda Insurance Index has become a bellwether indicator of the market performance of publicly listed reinsurance and insurance companies that maintain both mind and management in Bermuda.
The BSX has already successfully listed nine cat bonds with a combined value of nearly $900 million, and more are in the pipeline. The most recent cat bond listed was Merna Reinsurance II Ltd.’s Principal-at-Risk Variable Rate Notes, due April 8, 2013.
How specifically does Bermuda’s Amendment Act and the BSX support this market?
As mentioned earlier, under the Amendment Act, SPIs may be established as a special class of insurer. This makes the vehicle creation far quicker, more cost-effective and more efficient. Once an SPI is licensed, attention is placed on the original insured, shifting the focus from the SPI to the ceding entity. This is because the SPI is, by definition, fully funded and therefore perpetually solvent. For example, the minimum capital requirement for an SPI incorporated in Bermuda is just $1, and it no longer has the same financial reporting and audit obligations as under the previous classification system, provided the issuer has met all of its own regulatory obligations. If all documents are presented correctly to the BMA, the SPI approval process can be completed within a week.
In addition, the BSX has specific regulations for ILS listings, which are not always mirrored by other jurisdictions. These focus particularly on transparency, something that has become even more important to the end investors, who in the wake of the current financial market crisis, are looking for higher levels of comfort through enhanced disclosure.
Why cat bonds?
Cat bonds are an alternative asset class and a compelling diversification tool due to their low correlation with global stock and real estate markets, being linked instead to natural disasters. It is generally felt that they are likely to be used more frequently as a mechanism for capital-raising to ensure sufficient levels of coverage for catastrophic events.
Like every other asset class, cat bonds were affected as a result of the global financial market dislocation in 2007/08. Since then, however, the cat bond market has recovered significantly, with the Swiss Re All US Dollar cat bond total return coming in at 13.85 percent for 2009, compared to 2.31 percent in 2008. Some experts believe that there is easily enough risk transferred in the market today to fuel a $50 billion per year market.
In a post-Lehman world, however, jurisdictions need to be noted for their high standards of regulation and transparency if they are to attract new listings and bring investors back to the capital markets. Investors and issuers will find this at the BSX.
Regulated by the BMA, the exchange’s rules are conducive, not prohibitive, to innovative products. The BMA was recently commended by Michael Foot in his Final Report of the Independent Review of British Offshore Financial Centres, and has been appointed as a member of the Executive Committee of the International Association of Insurance Supervisors. The BMA has also set itself a roadmap for achieving Solvency II equivalence and aims to ensure equivalence under the US Reinsurance Modernisation Initiative.
The BSX, a full member of the World Federation of Exchanges, is also a ‘Recognised Stock Exchange’ of the UK’s HM Revenue & Customs, considered a ‘Designated Offshore Securities Exchange’ by the US Securities and Exchange Commission, and is recognised as a ‘Designated Investment Exchange’ by the UK’s Financial Services Authority.
Bermuda: strong economic outlook and robust corporate culture
Bermuda stands out not only as a leader in risk-based solvency regulation for the global insurance and reinsurance sectors, but also as an economic success story, with a solid track record of macroeconomic stability at a time when many other countries are experiencing economic problems.
Because of this, Bermuda’s indigenous re/insurance industry has developed strongly and now supports the global insurance industry, particularly in the US. Bermuda presently provides about 40 percent of US and EU broker-placed catastrophe cover, and is now the most important offshore supplier of insurance and reinsurance, and payer of property and casualty losses to the US.
Perez supports this sentiment. “Since Hurricane Andrew, Bermuda has emerged as the foremost property catastrophe reinsurance market in the world, and this new SPI regulation is a step towards consolidating this lead by making it easier for cat bonds to be done out of Bermuda,” he says.
Bermuda has a high per capita income of more than $97,000 and its public debt ratios compare quite favourably with those of its ‘AA’-rated peers.
Those suspicious of offshore jurisdictions should be comforted by the BMA’s strengthened regulations governing money laundering and terrorism financing. An independent Financial Intelligence Agency has also been established to monitor suspicious transactions.
After signing 19 tax information treaties, Bermuda has not only secured its place on the OECD’s ‘white list’—a high-profile recognition that the country is committed to tax transparency and to fully implementing established international standards—but it also has a vice chair position on the steering group of the OECD’s new Global Forum on Tax Transparency.
Stable economic growth and high per capita incomes, combined with easy access to the North American and European markets, has proved a catalyst for attracting not just business, but intellectual capital to the Island. “In addition to a tailor-made regulatory regime for cat bonds, Bermuda has an ideal geographical location and world-class service providers—law firms, insurance managers and accounting firms—to ensure top-of-the-line service,” Perez continues.
Its close ties to the US markets mean that Bermuda hasn’t been completely unaffected by the recent global financial turmoil, but this has given the Bermuda government and private sector the opportunity to prove their ability to succeed in difficult as well as good times. Unlike some other British Overseas Territories, Bermuda is financially independent from the UK and has remained so throughout the recent international financial upheaval.
The Bank of Butterfield’s successful $200 million preference share offering and the consequent successful BSX listing last year, guaranteed by the Bermuda government, is a perfect example of the Island’s ability to cope on its own and also demonstrates a healthy investor appetite.
Guy Carpenter, which says that transaction activity is always difficult to predict, sees between five and 10 transactions as possible in the second quarter of 2010, “with total issuance for the year ranging from $3 billion to $5 billion”.
Bermuda can play an important role in supporting this dynamic and growing market by providing listing services for these securities on an internationally recognised stock exchange, a regulatory environment overseen by a well-respected regulator with insurance focus, and some of the largest players in the re/insurance market, all in one place.
Although each of the above in isolation is noteworthy, when combined, they create a unique synergy and proposition, which results in a very exciting opportunity for Bermuda in the convergence of the capital and insurance markets.
“While we realise that the Cayman Islands has been a leader on cat bonds, we are confident that Bermuda now provides a viable alternative,” Perez concludes.
Greg Wojciechowski is president and chief executive officer of the Bermuda Stock Exchange. He can be contacted at: firstname.lastname@example.org
BSX, Bermuda, capital management, ILS, alternative capital, reinsurance