The ‘alt re’ renaissance
Bermuda is poised to continue its domination of the reinsurance market as it enters its post-convergence era, as billions of dollars in alternative capital blaze a trail to the Island.
A record volume of $9.7 billion in insurance-linked securities (ILS)—an estimated 44 percent of the worldwide stock—was listed on the Bermuda Stock Exchange during 2013, with issuance value predicted to soar higher through this year and beyond. Myriad other forms of alternative reinsurance ventures have also established their headquarters in Hamilton—several just in the past few months.
The trend is changing the reinsurance industry and promises to boost the Island’s economy through jobs and its support of a host of auxiliary businesses, including accountancy and legal firms, banks and other financial services.
The movement towards new reinsurance vehicles is embraced by the Bermuda Business Development Agency (BDA), which is working collaboratively with local industry to attract the so-called ‘alt re’ pioneers and champion the growth of what it terms the “new species in Bermuda’s increasingly rich reinsurance ecosystem”.
“It is very clear the reinsurance industry is on the cusp of reinventing itself yet again,” said David Cash, the BDA’s interim CEO and the former CEO of Endurance Specialty, who personally has experienced the Bermuda market’s dynamic evolution over more than two decades.
“This happened in 1993 after Hurricane Andrew, and then more recently in 2001 after 9/11. Now the emergence of alternative reinsurers with business models that place a greater emphasis on balanced risk-taking on both sides of the balance sheet—asset and liability—has the potential, once again, to be a game-changer.”
Innovative companies such as hedge fund-backed reinsurers led by highly respected veterans—examples include Third Point Re (John Berger), Hamilton Re (Brian Duperreault), AQR Re (John Lumis), and most recently Pine River Re (Bill Jewett)—are forging a new-look industry, says Cash, one that blends the best of the investment world (high-performing, actively-managed investing) with the best of the established reinsurance world. There’s no better place for corporate entities to do that, he believes, than Bermuda, the global reinsurance centre long known as ‘the world’s risk capital’.
ILS firms and hedge fund-backed insurers are not the only types of insurance-related companies attracted to the Island’s well-respected regulatory environment, low-tax regime and easy access to international markets for capital formation. For more than 60 years, Bermuda has been the jurisdiction of choice for captive companies, with 860 of the more than 5,700 total worldwide entities registered on the Island.
Commercial insurers ACE and XL put down roots in the mid-1980s, joined by successive waves of catastrophe reinsurers, such as PartnerRe and RenaissanceRe, from the early 1990s onwards. These were followed by the Class of 2001, a group of companies formed in the aftermath of the World Trade Center tragedy.
More recently Bermuda has seen a significant growth in the number of collateralised asset managers and reinsurers, as well as special purpose insurers (SPIs) used to transform insurance risk into financial instruments such as catastrophe bonds.
Over the last few years, Bermuda has seen incorporations of big-name sidecars such as Alpha Cat (Validus), Blue Capital (Montpelier), and Watford Re (Arch Capital), joining entities such as DaVinci Re and Top Layer Re (RenRe). The market has also witnessed the arrival of a slew of collateralised and cat bond entities, including ILS pioneers Nephila Capital, Credit Suisse Asset Management, Aeolus Capital Management, Kalista Global and, just this year, Horseshoe Re, a partnership between Argo Re and the Horseshoe Group.
Additionally, there are now some 30-plus life and annuity reinsurers incorporated on the Island, members of the Bermuda International Long Term Insurers and Reinsurers association (BILTIR). An example is Athene Life Re, launched by investment firm Apollo Global Management, which is focused on the growing need for new capital to support the annuity insurance market.
Yet another group of companies consists of credit-focused reinsurers serving the post-recession housing finance industry—entities such as Assured Guaranty, a former ACE subsidiary, and Essent Group, a holding company whose founding investors include PartnerRe and RenRe.
“All these companies are drawn to Bermuda both as a marketplace and for its tax-neutral environment,” noted Cash, who lauds the Bermuda Monetary Authority (BMA) for progressively expanding the types of re/insurance entities it oversees.
“The BMA deserves significant credit for ensuring Bermuda is a leader in new company formations, and for that matter, re/insurance innovation in general,” said Cash. “This leading-edge regulation is a major reason for the new class of ‘alt re’ companies setting up here. Bermuda is well ahead of other regulatory regimes when it comes to embracing reinsurance companies that mix cutting-edge asset management with traditional reinsurance.
“The result is a new wave of companies that presents an important new business segment for the Island, and the industry in general. To that end, we at the BDA are doing all we can to enable its success in driving job and GDP growth.”
This year’s Convergence 2014 conference in Bermuda, slated for November 12 and 13, looks set to be a telling showcase for many of the new players driving the ILS boom. Last year’s inaugural event attracted more than 300 attendees.
“Bermuda has long been recognised as the leader in the field of reinsurance innovation,” agreed Jason Carne, co-chair of Convergence organiser ILS Bermuda. “The latest example is the increasing number of hedge fund property and casualty reinsurers that have been established in Bermuda, as well as other vehicles underwriting life and annuity and the credit and mortgage business. These formations have brought not only significant additional capital to the marketplace, but also new jobs with the promise of more to come.”
The BDA, which moved into expanded financial district headquarters and unveiled a new team this spring, has positioned itself to provide a one-stop shop concierge service to help all types of companies looking to establish operations on the Island. It connects them with the BMA or the Bermuda government where needed and leverages its extensive array of contacts in professional services firms, offering access to everything from IT, realtors and recruiting expertise, through to independent directors, accountants and lawyers.
“The BDA works with companies to ensure they have access to the full range of services, relationships and opportunities the Bermuda market can offer,” said BDA chair, Caroline Foulger. “Our goal is to capitalise on these regulatory, market and other advantages by also making the process of establishing in Bermuda for these companies as smooth and friction-free as possible. We have the support of our stakeholders—public and private—to deliver on that goal.”
The BDA is starting to see interest from other industries, too—notably the asset management sector, where investment managers are looking to use Bermuda to incorporate funds and new investment structures. One of the biggest catalysts has been a concerted effort by industry, regulatory and government stakeholders to work closely to actively market the Bermuda message, as well as to enact several progressive legislative and regulatory reforms aimed at this sector.
“Other non-insurance companies are also considering Bermuda as the domicile of choice for new international operations,” Foulger said. “We have seen this for one life-science company looking to expand outside the US, and we are confident that over time we will see a steady growth in the number of international holding companies that are set up here.”
Cash agreed the recent influx could be the tip of a lucrative iceberg, a win-win scenario for both Bermuda and those corporations that choose to make their domicile here.
“Bermuda is already the most important re/insurance hub in the world with a full ecosystem of insurers, reinsurers and special purpose players,” he said. “Looking to the next 10 years, I think it is exciting that Bermuda will see the emergence of other business sectors that value its legal, tax and regulatory environment—be it investment management, offshore finance, international trading and holding companies, or non-traditional assets such as intellectual property. Bermuda can make these businesses better and more profitable. All it takes is some imagination, and the sky is the limit for Bermuda.”